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In venture capital and private equity, a home run refers to an exceptionally successful investment that generates significantly higher returns than expected. We are talking about a return of more than 10x the invested capital, which typically allows a single divestment to reimburse the entire fund size. It’s quite rare in private equity, but in venture capital, most of the top funds have had one or more in their history.
The good news for the SF industry is that a few weeks ago, investors in Baluarte Capital achieved one of their most successful exits by divesting from the Spanish software company CTAIMA. They described this exit as the most successful SF investment in Europe to date, citing a net ROI of nearly 11x, which constitutes a home run for many of them.
This kind of deal can transform a firm’s reputation. However, achieving this level of success requires more than just capital. It needs careful selection of the searcher, meticulous due diligence, a deep understanding of the industry and the target company, value creation and strategic execution during the management phase, and a great divestment process. Below are some critical strategies that can help SF investors achieve a great exit.
1/ Select and invest in great searcher(s)
The success of an SF starts with the entrepreneur leading it. Investors must bet on the individual’s ability not only to find a suitable company but also to grow and manage it effectively post-acquisition. Key qualities include strong leadership skills, a great track record, strategic vision, and operational expertise. Attributes such as resilience, humility, adaptability, strong communication, and sales skills are also essential.
2/ Focus on high-growth sectors and under-managed family-owned businesses
The best opportunities often come from industries experiencing technological disruption, demographic shifts, or regulatory changes—such as tech, healthcare, industrial automation, or renewable energy.
Look for deals too small for traditional private equity players, especially in sectors where larger firms show an appetite. You can unlock value by professionalizing the company and guiding it through its next growth phase. Companies lacking professional management, formalized processes, or capital for growth are the most attractive.
3/ Identify the right business at the right price and manage risk with careful capital allocation
Stick to the criteria that have made SF the most profitable alternative asset class. The target should be a small to mid-sized profitable company with strong cash flow, recurring revenue, and low customer concentration. Companies in fragmented industries, where consolidation or operational improvements can drive growth, are particularly attractive.
Buy at the right price, typically between 3x-6x EBITDA, using at least 50% leverage. Prioritize industries where buyers are trading at 10x-15x EBITDA to benefit from multiple arbitrage if you succeed in growing the company.
One of the biggest risks in SFs is over-leveraging the acquired company. Over-burdening the business with debt can lead to cash flow challenges and hinder the ability to reinvest in growth.
4/ Prioritize operational improvements, digitalization, and technology & build a strong team
Financial engineering used to be a key driver of PE success, but today’s success depends on operational improvements. Searchers, with help from their investors, should excel at identifying inefficiencies, reducing costs, and optimizing production processes for scalability. This includes modernizing the supply chain, improving logistics, upgrading technology, integrating ERP and data analytics tools, enhancing customer experience, and streamlining back-office processes.
Strengthening the management team by recruiting experienced industry professionals can accelerate growth, ensure smooth transitions, and make the company more attractive for a future exit. Moreover, a successful tech transformation not only improves efficiency but also increases the valuation multiple at exit.
5/ Drive organic and inorganic growth
Hitting a home run in an SF requires more than just maintaining the status quo; it’s about growing the business significantly. Growth strategies should include both organic initiatives (expanding products or services, entering new geographic markets, etc.) and inorganic opportunities, such as add-on acquisitions (smaller competitors or complementary businesses). These can quickly increase the company’s scale and market share, making it more attractive to future buyers.
In recent years, some searchers have included clauses in their shareholder agreements to evaluate and discuss in good faith with their boards the acquisition of additional companies through capital increases.
6/ Mentor the searcher and maximize stakeholder alignment
A successful investment depends on a strong, collaborative relationship between the searcher and the investors. Investors should serve as mentors during the management phase, offering strategic advice, industry connections, and operational expertise.
Generally, investors include private individuals, family offices, and institutions. Aligning the interests of all stakeholders—including management—is crucial and often more challenging than expected, particularly when balancing timelines and return expectations.
7/ Prepare for a strategic exit
The ultimate measure of maximizing value is preparing for the exit. A clear, well-timed exit strategy is essential to capturing the value created during ownership. This requires a well-planned strategy, selecting the best investment bank to create a competitive process, and identifying strategic buyers or private equity firms. Timing is key: exiting when the company has reached a high valuation and market conditions are favorable can significantly increase ROI.
Conclusion
Achieving a home run is no easy feat, but the study by Stanford Graduate School of Business demonstrates that 11% of searchers achieve a 10x ROI. Success hinges on selecting the right entrepreneur, acquiring the right under-managed company in a high-growth sector, driving operational improvements, leveraging digitalization, and executing a well-planned growth strategy. Strong collaboration between the searcher and investors, combined with a focus on long-term value creation, is the foundation for turning a SF into a major success story.
