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- In the first stage, a small group of investors back operating manager(s) to search for a target company to acquire. A fund may or may not find a target acquisition company. Investors are able to invest a pro-rata share in the target company, subject to their individual liking.
- In the second stage, the General Manager(s) of the Search Fund take operating roles in the acquired company—CEO, President and the like.
Search Funds typically target companies in the $5 million to $30 million price range, requiring $2 million to $10 million of equity capital, in fragmented industries, with sustainable market positions, histories of stable cash flows, and long term opportunities for improvement and growth. Service and light manufacturing companies outside high tech industries are popular targets. Often these companies are under-managed prior to the acquisition.
Most Search Funds are started by entrepreneurs with limited operational experience and possibly no direct experience in the target industry. The goal of the investor is to place promising, motivated managers in an environment with a high probability for success given the oversight and experience of the investors themselves.
The origins of the Search Fund are often traced back to H. Irving Grousbeck, a professor at Stanford University's Graduate School of Business, who originated the concept in 1984. Since then, it is estimated that over 129 funds have been formed, with 41 operating currently. The bulk of successful Search Funds have been raised by alumni of elite MBA programs with access to strong private equity networks.
- SearchFund.org, Empowering Entrepreneurial Acquisitions - Online Directory for Search Fund Entrepreneurship
- Search Fund resources at the Stanford Center for Entrepreneurial Studies, including primers, transcripts and videos of panel discussions, research studies, articles, etc, Stanford Graduate School of Business