The State of the Search Fund: The Investor’s Perspective

When thinking about the search fund, as such, it’s easy to see that both the search community and market as a whole, looks much different than they did 30, 20, even five years ago.

And for all we know, ETA, and specifically search funds, as they exist today might still only be in their nascent years of growth and expansion (ETA doesn’t even have a Wikipedia page yet!). And that might be the best part, the openness and sky’s-the-limit sort of mentality that so many searchers have when approaching their own journey and way of finding a company to acquire.

But, for all we can or can’t say about where the search fund model is going, the Polsky Center wanted to take a minute and reflect on just how far we’ve come. We recently got the chance to sit down with Mark Egan, founder and managing partner at Marion Equity Partners, and chat a bit about the changes (and consistencies) he’s seen in the search fund trends over the years.

Polsky: Tell us a little about any trends you’ve noticed in recent years regarding the kinds of people who are attempting to raise a search fund. What’s changing overall in the search community, if anything?

Mark Egan: If anything is changing right now in the search fund community, it’s the sheer size of the group. We’re seeing more searchers in every category across the board. And as their numbers grow, the variety grows too. From funded to non-funded searches, what their budget is, where they went to business school, how old they are — even what country they’re from — all numbers are trending up. It’s starting to feel like maybe there’s no such thing as a “traditional searcher” or a “traditional search fund” anymore.

At Chicago Booth, we‘ve started to see an uptick in interest from alums who are three to five years out. Is that something you’ve noticed as well?

Yes, definitely. And I think that has a lot to do with what I just mentioned about the increased diversity of the searcher population, but I think it also has to do with the increasing development of search fund specific-infrastructure at many business schools.

When I was younger, it was almost as if the search was actually a three-year process. So many students at Stanford and Harvard (the only schools doing this at the time) were spending their entire second year of school dedicated to planning their search and figuring out what they really needed to do to prepare. Because, there was no sort of pre-existing pathway that they could easily follow and rely on to get them started. So, the students back then had to commit sooner and more completely, usually while they were still in school, because there weren’t as many options available to them after they left.

But now, a lot of the pre-work work is already baked into the system. More schools are helping their students and alums launch search funds, and there are more readily available guidelines and case studies to follow. Business schools are really doing an incredible job of facilitating their searchers, and building a solid infrastructure so students can get exposure to the model early on, stuff it away in their minds for consideration, and come back to it later on if they want –three, five, or even 25 years later. And they know that they’ll still have the same strong network and set of resources available to them.

Do you think there are any challenges that searchers are facing today that perhaps weren’t an issue five or ten years ago?

Maybe, maybe not. The thing is, this is hard. It’s always been hard. It’s still hard. And it will always be hard. I think people assume there are more challenges for searchers today because of the increase in number of searchers; perhaps they think market saturation is becoming an issue. But, if I can dispel any myth today, I want to dispel that.

I understand how that could be the assumption — that in fact, the search is actually getting harder because there are more searchers snatching up all the good companies. But, I would argue that this is just not the case. I believe that the kind of capital that is sent out with searchers as well as the number of searchers out there at any given moment still pales in comparison to the amount of PE firms in existence as well as the number of deals those PE firms complete in any given year. So, I really don’t think it’s possible for an increase in searchers to throw anything out of whack. There will always be a lot of people who want to be entrepreneurs, and there will always be a lot of companies looking for help — whether that help comes from a searcher or a PE firm.

However, it is true that the number of searchers acquiring companies is going down. Though, I’d also like to dispel the notion that this signifies any kind of failure on the searchers’ parts. Because for many, they raise their search fund, they try it, and it just doesn’t work out. They don’t find a business, or they decide to do something else. And, I think that’s actually a very thoughtful decision. Because that decision is not a loss; for investors, the search capital is almost just overhead. It’s the cost of doing business.

The real loss would be the loss of invested capital; it’s the difference between writing a $30K check to a searcher and a $5M investment in a bad company. Anyone who says, “I don’t think this is a good opportunity, so I’m not going to take your money” — that’s a really respectable person. And I will never consider that decision a failure.

Have you found that more of searchers are becoming more specific in how they approach their search?

I think it’s actually always been that way. Everyone should and usually does eventually get specific about it — but it’s a process. You start with a big broad bucket with all sorts of boxes checked as options. But as you go on, and as your search continues, you start to realize more and more about not just what kind of company you want, but what you want your life to look like, and slowly the search becomes tighter and tighter. This can mean everything from location to size of the company to industry — all of these factors matter and they all slowly start to become more and more defined as the searcher goes on.

In my opinion, the most important lesson for the searcher today is to learn how to differentiate themselves — both in terms of what they’re looking for in a company, but also who they are as searchers.

My advice to anyone considering this career path is think about what makes up your “secret sauce” — what makes you different from all your peers, how can you use the tools that everyone’s given in business school and modify them to best fit you and your strengths.

Mark is a founder and Managing Partner at Marion Equity Partners, a Boston-based investment firm. Prior to Marion, he focused on growth equity investments in the technology, media and business services industries at Polaris Venture Partners. Before Polaris, Mark began his career at Alta Communications where he executed investments in the media and telecommunications sectors. Mark has been working with search fund entrepreneurs over the last 15 years both in the US and abroad. He serves on the Boards of Directors of Worldwide Security, InCharge Electrical Services, LLC, and Subatomic Digital, Inc.
 Mark received a degree in Finance from Fairfield University and an MBA from the Wharton School at the University of Pennsylvania.