Private Equity vs Search Fund: A Private Equity company typically acquires an established business with the aim of improving performance, whereas a Search Fund is led by entrepreneurs who wish to acquire, grow, and at times run their own business.
Private equity and search funds are both investment vehicles that helps capital to businesses. But they operate in different ways and cater to different types of investors. In this blog post, we will delve into the differences between private equity and search funds to help you understand which option may be more suitable for your investment goals.
What is Private Equity?
Private equity firms raise funds from institutional investors and high-net-worth individuals to acquire established companies with the aim of improving their performance and ultimately selling them for a profit. These firms typically take a majority stake in the companies they invest in and actively participate in their management.
Key characteristics of private equity include:
- Long-term investment horizon: Private equity investments are typically held for several years, with the goal of maximizing value over time.
- Active management: Private equity firms often take a hands-on approach to managing their portfolio companies, implementing strategic changes to drive growth and profitability.
- Diversified portfolio: Private equity firms typically invest in a range of industries and sectors to spread risk and maximize returns.
Pros and Cons
- Pros: Access to significant capital, experienced teams, proven track record of creating value.
- Cons: Large investments can be daunting for smaller companies, potential for over-leveraging, focus on short-term returns.
What is Search Fund?
A search fund is a unique investment model where an entrepreneur, known as the searcher, raises capital from investors to finance the search for and acquisition of a single, privately-held company. Once the target company is acquired, the searcher takes on an operational role within the business to drive growth and value creation.
Key characteristics of search funds include:
- Entrepreneurial focus: Search funds are typically led by individuals with a strong entrepreneurial drive who are looking to acquire and grow a business.
- Limited diversification: Unlike private equity firms, search funds are focused on acquiring a single company, which can lead to higher risk but also potentially higher returns.
- Hands-on involvement: Search fund entrepreneurs are actively involved in the day-to-day operations of the acquired company, working closely with management to implement growth strategies.
Pros and Cons
- Pros: Entrepreneurial approach, dedicated team focused on the company’s success, potential for sustained growth driven by hands-on management.
- Cons: smaller investments compared to private equity, lack of established network and resources, potential for limited industry expertise.
Private Equity vs Search Fund
| Aspect | Private Equity (PE) | Search Funds |
|---|---|---|
| Definition and Purpose | PE firms raise capital from institutional investors to acquire and operate private companies. | Search fund entrepreneurs raise capital to search for and acquire a single privately held business. |
| Investment Approach | Acquire multiple companies across various industries, aiming for diversification. | Focus on a single company, allowing for deeper involvement and influence in its operations. |
| Investor Involvement | Investors typically take a more passive role. | Investors actively participate, leveraging their expertise to enhance the company’s performance. |
| Risk and Return | Generally lower risk due to diversification but may have lower returns. | Higher risk (single-company focus) but potentially higher returns due to active involvement and operational improvements. |
| Exit Strategies | Exit through IPOs, secondary sales, or strategic acquisitions. | Exit typically through a sale to a strategic buyer or another PE firm. |
Choosing Between Private Equity and Search Funds
As a Seller: Consider private equity if you seek a quick sale with a high valuation and are comfortable with potential post-acquisition changes. Choose a search fund if you prioritize finding a buyer who understands your industry and aligns with your long-term vision for the company.
As an Investor: Private equity offers potentially higher returns due to the larger deal sizes and focus on short-term gains. Search funds can provide diversification and a more hands-on investment experience.
Conclusion
In short, while both PE and search funds involve acquiring and operating private companies. Search funds offer an entrepreneurial path with active investor participation, potentially leading to higher returns. Consider your risk appetite and level of involvement when choosing between these two investment options.