SEARCHERS/ RIGHT FOR ME
An aspiring searcher tries to addres two key questions during the pre-search phase:
Is a search fund right for me?
The former is by far harder, more important and personal.
Is a Search Fund Right for Me?
There is no published research establishing the characteristics of a successful searcher. Many professional investors also say there is no evidence of criteria that will lead to a successful search. But they often believe they can avoid the more risky ones at the outset. While there are four distinctive phases -search, acquisition, execution and exit-, the skills needed for the search phase and the execution phase are the most critical ones since searchers can rely heavily on the investors for the other two.
To succeed in finding a good company one needs to understand what makes a good search process and posses a strong ability to execute well. In essence the search phase is a focused, lonely numbers game where most cold calls are followed by rejections. In the few cases where calls are followed up by meetings, the successful searcher will be able to gather interest from the potential seller. Helpful traits for the search phase are: perseverance, self-motivated, hard working, humble, likeable and the ability to take on advice.
Although this phase is hard, it might help explain the success of the search fund model. It both exploits market inefficiencies and helps prepare the searcher for a managerial role within a certain industry.
The ultimate goal of the effort is to purchase a good company at a reasonable price and make it great. This is where investors and searchers take most risk and where consequentially the highest expected return resides. Running and growing a company is exciting and challenging. You will apply your managerial skills to improve the acquired company and create value for stakeholders. Helpful traits during the execution phase are: skilled communication skills, resourcefulness, transparency, motivational skills, critical thinking, willingness to listen, hard-working, humble, focused on execution and strategic thinking.
How do I Convince Investors to Fund my Search?
Once you have decided to start a search, you must now raise capital.
Investing in search funds is the ultimate investment in people. At the time of providing search capital, the investor does not know the industry the potential company will belong to, the characteristics of the company or even if the searcher will find an attractive company at all. The only assessment to make is whether a searcher or pair of searchers has a reasonable chance to be successful.
Central to the investor’s decision will be the meetings she has with the searcher as well as the Private Placement Memorandum (PPM). These will be useful in assessing the fit of the candidate, the geographical potential of the search, and the candidate’s understanding of what has made the search fund model successful. The meeting should equally help the potential searcher to assess what the investor can contribute beyond money and whether he would feel comfortable having the investor on board.
A PPM is a legal document provided to prospective investors when selling securities in a private business. It is normally used in transactions when the securities are not registered under applicable federal or state law; they are sold under the exemptions from registration. It typically contains: legal disclaimer, executive summary, background principals, description of the search fund model, characterization of the geographic target market, investment opportunity, use of proceeds, risk factors, some examples and appendices.