SPECIFIC QUESTIONS FOR SEARCHERS AND INVESTORS FROM PERSPECTIVE SEARCHERS
A partner and I are currently in the information gathering, planning, and networking phase as we evaluate the prospects of raising a traditional search fund focused on acquiring a business in Canada. We are looking to connect with other prospective searchers, current searchers, former searchers, advisors, and investors as we seek to gather information on a couple specific questions.
We have determined that a traditional search fund would be more appropriate in our situation than a self-funded search to provide access to a group of experienced mentors for guidance (especially valuable for operating expertise given we both have financial backgrounds) and to provide enhanced credibility for transactions.
Below is a list of questions that we would greatly appreciate any perspectives on, along with some thoughts from our research so far. Please feel free to respond directly to this post or we would be happy to jump on a call at your convenience to further discuss.
1) Is an international search fund (specifically Canada in our instance) disadvantaged from a fundraising perspective (specifically from institutional capital or traditional search fund investors)?
- Generally speaking, how important is jurisdiction (specifically Canada vs. US) for the institutional investor base?
- In our research, we have come across discussions that international search funds typically require 50% of the capital to be committed from investors in their home country. In contrary, some of the search funds in Canada that we have researched seem to have a majority of their commitments from the traditional US search fund LPs.
2) As most traditional searchers seem to come from an MBA background, would we be disadvantaged or “filtered” out as individuals without MBA’s? Is this something that investors weigh heavily when evaluating prospective searchers?
3) Thoughts on raising capital amidst the current economic backdrop and are investors actively investing capital during these challenging times?
- Empirically, our research suggests that search fund fundraising activity has dropped substantially with recessionary environments (immediately during the dot-com bubble or in the years following the global financial crisis) that we speculate is due to a number of factors, including: capital constraints, elevated cost of equity, reduced risk appetite, and investors preference for liquid investment alternatives. With that said, we are curious to understand thoughts on the subject given the rather unique macroeconomic landscape we are in?
- Furthermore, we believe that making an acquisition post a recessionary environment actually enhances the attractiveness of search fund as it provides a recent demonstration of the resiliency of the target's earnings, reduces competitiveness given the restricted access to capital (specifically, lower middle market PE firms and family offices shift their focus to assisting their existing portfolio), and moderation of valuations across all asset classes.
4) Thoughts on the composition of the investor base for the search capital in a traditional search fund?
- Our initial thesis is that it would be best to have a majority of the investors as high net worth individuals or institutional investors that are capable of writing a larger cheque for the acquisition capital. Although we recognize that family, friends, and business associates that personally know us will provide validation to other investors, we are curious to know what proportion of the investor base is required to provide this validation vs. balancing the investor base with those who can actually fund their proportion of the acquisition capital (if desired) and add value pre-and-post acquisition.
As a side bar, I am working on gathering summary notes from all of our research along with links to various reports, articles, videos, and other useful information sources. Once complete, I will post the document for the community to help others along with a Google drive aggregating information.
Thank you to everyone in advance.