Search Funds Show Strong Performance in Acquisitions and Returns

Investors continue to prosper as funds proliferate, says report.

September 29, 2022

| by GSB Staff
A rocket ship cut out of cardboard paper flies up over a red background, with smoke made of clouds under the rocket ship. iStock/mattjeacock

Search funds had an internal rate of return exceeding 35%. | iStock/mattjeacock

The number of search funds continued to grow over the past two years, rewarding both investors and searchers, according to the recently released biennial study from the Center for Entrepreneurial Studies at Stanford Graduate School of Business that tracks search fund activity.

Search funds, an investment vehicle in which an entrepreneur obtains financing and mentorship from investors to search for, acquire and lead a privately held company, were the brainchild of Stanford GSB professor H. Irving Grousbeck in 1984. Since then, more than 500 search funds have formed in the United States and Canada, generating nearly $10 billion for investors. Investments in search funds reached a record $776 million in 2020 and 2021.

Success regarding search funds is measured in two broad categories: acquisition rates and return on investment. Since 2014, 60% of search funds were able to acquire a company. And since 1986, 73% of search funds yielded positive returns.

Among other observations in this year’s report:

  • Search funds had a return on investment of 5.2x and an internal rate of return of 35.3% for investors.
  • The number of search funds launched by women rose from 10% in 2020 to 13% in 2021.
  • The diversity of searchers was reported on for the first time; 6 of every 10 searchers are white.
  • Acquisition prices increased from a median of $10 million in 2020 to a median of $16.5 million.
  • The typical profile of searchers has remained consistent over the past 20 years. They are usually in their early 30s and earned MBA degrees within the past 1 to 3 years.
  • Technology and business services were the most frequent industries for acquisitions in the last two years.
  • Search funds are booming internationally: 75 new funds were established, and 38 acquisitions were made over the past two years, including first-ever acquisitions in five European countries.

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