The concept of “Long Term Hold” (LTH) represents an innovative approach to the traditional SF model, emphasizing long-term company ownership and strategic growth through acquisitions. LTHs, which fall under the broader category of Committed Capital Vehicles (CCV), differ significantly from core search funds in several key aspects.
One of the main distinctions is the larger pool of committed capital, typically ranging from $15 to $25M, which is secured at the fund’s launch and deployed over 4 to 6 years with board approval. Unlike traditional blind funds, LTHs involve initial capital calls to fund the search process and subsequent calls to finance multiple acquisitions or new ventures, all governed by the board of directors.
LTHs focus on highly specialized, enduring industry segments, with an intended holding period of 10 to 20 years or more. This long-term horizon aims to generate high net ROIs for investors, rather than focusing solely on IRR. The growth trajectory of LTHs often begins slowly, with initial revenue and profit growth being modest, but accelerates over time as the company expands.
Growth within an LTH is primarily driven by inorganic methods, such as acquisitions or the establishment of new units. However, organic growth also plays a crucial role. The first acquisition in an LTH strategy is often relatively small but occurs in a sector with highly attractive qualities, such as strong growth potential, high customer retention, and a large addressable market. Investors and entrepreneurs must exhibit patience and confidence in the chosen industry.
The governance structure of LTHs is also distinct, with a board of directors established from the outset, typically including 2-3 investor directors. Major capital allocation decisions require unanimous or super-majority consent from these directors. The emphasis is on capital efficiency, with significant growth funded through cash flow and debt rather than continual equity raises.
For entrepreneurs, the role within an LTH evolves over time, shifting from operational management to a stronger focus on capital allocation. The incentive structures are long-term and heavily performance-based, with less upfront vesting compared to core search funds. This approach is designed for a “go-slow-early to go-fast-later” strategy, offering better rewards for long-term success but potentially lower returns in the medium term.
LTH strategies come in various forms, including Vertical Consolidators, which focus on acquiring multiple businesses within a specific industry and potentially integrating them into a single operating company, and Horizontal Holdcos, which acquire businesses across related industries, often managing them independently.
While growth through acquisition and long-term ownership are not new concepts, the LTH model is differentiated by its upfront intent, structured capital commitments, and long-term acquisition strategy. Success in an LTH requires a unique set of skills, including expertise in operations, acquisition strategy, and capital allocation, as well as the ability to learn and adapt from early deals.
As the LTH concept continues to evolve, further research is planned to explore the skills and outcomes associated with this model, as well as the experiences of the entrepreneurs and investors who are pioneering this approach. Though still in its early stages, LTH represents a promising and flexible strategy for long-term business growth and value creation.
This article is based on a note published by Peter Kelly, Lecturer in Management, and Sara Heston, Assistant Director of the Search Fund Project at Stanford Graduate School of Business.
