Traditional search fund turned self-funded

searcher profile

November 06, 2023

by a searcher from The University of Michigan - Stephen M. Ross School of Business in New York, NY, USA

How would it work if a dual search team were to raise a traditional search fund and then find a deal that would allow them to retain higher equity percentage by leveraging an SBA or other non-dilutive funding? How would this impact the ROFR in place with the initial investors?

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commentor profile
Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA
Return search capital + give investors a "free" stake in the self-funded deal in return for signing a waiver
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Reply by an investor
from University of the Sunshine Coast in Brisbane QLD, Australia
It would come down to the shareholder's agreement. If your motivation to switch to self-funded is to obtain a larger piece of the pie, you wouldn't be acting with the same intentions as the original traditional search fund set out.

You may have to buy out the original traditional investors and establish a new fund.

It's similar to if I was to establish a managed investment fund that stated to all investors that I was going to act in their best interests and I will use the capital to invest 100% in Real Estate. Then I decide that Real Estate isn't the best option and I am going to use 50% of it for early stage startups. The IM clearly says that I will be investing in Real Estate. If I was to then invest in Early State Startups then I would not be aligning actions with the IM. (In Australia, that is illegal)

Basically, it's going to require some conversations with your investors to see if you can strike a deal that is worth it for all parties or not.
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