Unused Search Capital

September 30, 2020

by a searcher from Stanford University - Graduate School of Business in San Francisco Bay Area, CA, USA

Hi all -

Question about search capital committed but unused - suppose a hypothetical situation where a searcher raises $400k to fund a 2yr search, but an acquisition is executed after 6mos. Over those 6mos, $125k of the search capital is spent. How is the remaining $275k of search capital treated? Is it treated as equity contributed by the searcher in the acquisition? Does the searcher keep it? Is it required to be contributed as equity in the acquisition?

Any thoughts on this topic would be great!

Reply by an investor
from IESE Business School in Paris, France

Is it treated as equity contributed by the searcher in the acquisition? The money is in the search fund company created, this company is owned by all investors included the searcher if he/she took some units. It is not the searcher's money. Does the searcher keep it? Then no, you can't keep what's not yours. Is it required to be contributed as equity in the acquisition? It'll reduce the equity needed for the acquisition as you would normally use the search fund company as the vehicle to acquire after more equity raise from investors.It's not a requirement, it just makes sense to raise less in step 2.

Reply by a searcher
from ESADE in Madrid, España

It should be treated as investors capital and reduce the capital increase for the acquisition. Investors won't accept it as an extra remmuneration for the searcher, as you should already have the incentive to maximize investment returns with the common searcher remmuneration scheme

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