By Alfonso Osorio Núñez-Lagos, Investment Director at ONEtoONE Asset Management
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Is it possible to know which Search Fund is going to be successful? The answer is quite simple: it’s not possible. If investors could predict with certainty who would successfully find and acquire a promising company and who wouldn’t, we’d be able to control almost 100% of our risk. It’s similar to an equity investor knowing exactly when the stock market will rise or fall.
Search Fund investors rely on certain procedures and techniques to try to identify who is likely to succeed in finding a company and closing a deal. According to a study by IESE Business School, 56% of searchers come from backgrounds in Private Equity, Investment Banking, or Consulting. Furthermore, 70% are under 35 years old, 59% have three years or less of post-MBA experience, and 93% are men.
These are just metrics and trends. They don’t mean that people outside these statistics cannot succeed in finding and acquiring a great company. Each investor has their own experience and beliefs about what makes a successful searcher. Beyond these metrics, there are other critical aspects to consider before investing in a Search Fund.
From an investor’s perspective, a prospective searcher must have a deep understanding of the Search Fund model—its peculiarities and how the industry operates—and show genuine passion for it. Investors want to assess the opportunity cost for searchers and be confident in their entrepreneurial path.
One of the key qualities investors look for is resilience. The search phase typically lasts two years and requires immense effort. We look for searchers with demonstrated grit. The process is lonely and emotionally challenging, even for Duo Search Funds. Despite regular communication with investors, setbacks and negative news can take a toll. Maintaining a positive mindset and the determination to persevere are essential.
Searchers will face many hurdles: few responses from companies or business owners, deals under LOI (Letter of Intent) that fall apart after money has been spent on advisors, or even losing deals that seemed almost closed. These challenges are psychologically tough, and resilience is critical to overcome them. It’s easier said than done, especially in increasingly competitive markets. Investors need to identify this resilience, knowing firsthand how hard the search phase can be and having seen numerous cases.
We assess these qualities through an analysis of the searcher’s professional and academic background, personal interviews, and internal evaluations. Additional factors, such as industry selection, financial expertise, and the preparation of the PPM (Private Placement Memorandum), also play a significant role. (Tip for searchers: Avoid simply copy-pasting a generic PPM and focusing on how successful the Search Fund model is. Stand out by persuading investors why you will be successful.) Naturally, every investor has their own preferences; we’re not all looking for the same profiles.
Once the investment is made, the search phase begins. Here, investor support is crucial. This includes providing adequate tools, a strong team, experience in analyzing companies, knowledge of Private Equity, etc. These elements help searchers find a “diamond in the rough” company—not just any company.
Effective communication between investors and searchers is vital. Searchers must listen and be open to feedback, while investors should provide guidance, pointing out areas for improvement.
When executed effectively, this collaboration significantly increases the likelihood of finding a great company.
During the search phase, certain indicators reveal whether a searcher is on the right track. A good searcher stays true to their criteria and aims to acquire a standout company. The process is not about collecting LOIs but about identifying the right opportunity. Signing too many LOIs often signals a lack of focus. Signing an LOI is easy but signing an LOI for a quality company requires time—building relationships, analyzing industries, and thoroughly evaluating the companies. Rushing into LOIs or finding a seller too eager to sell can raise red flags. Signing an LOI is a serious commitment.
In my Private Equity experience, we only signed an LOI when we were truly committed to the company, ready to allocate resources, and prepared for in-depth analysis. Casual LOI signing damages credibility, as has been observed in certain markets where the Search Fund model is more developed. As investors, beyond providing support, we must also guide searchers in following best practices to maintain the integrity and reputation of the market.
Once a searcher identifies a potentially attractive company, several key factors can help close the transaction. When conversing with a business owner considering selling, it is crucial to understand which stage of the process you are in. Negotiation is essential when dealing with a business owner, and there should be no fear of it. Both parties are in that phase and will use their best resources to achieve their objectives. It is far worse to avoid negotiating out of fear that the seller might walk away, only to present the potential acquisition to investors, and have them point out that the terms are not optimal, but the company looks promising, forcing you to renegotiate specific points. Returning to the negotiating table without a clear reason, when the seller is no longer in a negotiation mindset, significantly increases the risk of the deal falling apart compared to negotiating effectively at the right moment.
Involving investors early, before incurring advisor costs, is also essential. This allows for early feedback on whether the deal is promising. If handled well, this leads to the next step: Financial Due Diligence (FDD)
Lately, I’ve seen FDDs that are poorly structured and fail to address or analyze the real issues within a company or the key areas that require thorough understanding. The problem is not with the firms conducting the work (most of them generally do a good job), but rather with the scope of the FDDs.
Poorly scoped FDDs are a recurring issue in Search Funds, often due to budget constraints. However, going back to my previous points, if negotiations have been handled correctly, the opportunity has been presented to investors in advance, and there is reasonable confidence in the deal, there should be no hesitation in spending more capital. What´s the reasoning behind saving a few thousand € in a deal worth tens of millions? Investing in a comprehensive FDD increases the chances of closing the deal and provides confidence. If red flags emerge that halt the transaction, it’s money well spent.
Search Fund transactions take months, and ensuring the most up-to-date current trading data before closing is vital; this should be covered in the scope of the FDD. If this step is not taken, the transaction should not proceed. Current trading provides reassurance that the conclusions drawn from the analysis of the company’s trajectory remain valid. If there have been any changes or new developments, it is critical to ask why and wait until clear answers are available before closing.
Ultimately, these points—and many others—are critical to finding a great company and closing a successful transaction. Investors strive to equip searchers with the necessary resources to make confident decisions. It’s better to walk away from a deal that isn’t materializing and refocus than to force a flawed transaction, which wastes both time and resources.
In conclusion, it’s impossible to predict success with certainty, but processes can provide a high level of confidence. Luck and momentum also play significant roles, though I’m not a big fan of relying on them.
However, finding a company and satisfactorily closing a transaction doesn’t guarantee anything. For investors, the most crucial aspect of the searcher journey is identifying future exceptional CEOs who will manage, lead, and successfully grow an SME. This is vital. Managing and scaling an SME with €10 million in revenue, lacking professionalization, operating in multiple countries, and overseeing a team of around 50 employees is complex. It requires experience and skills that not everyone possesses.
Once the deal closes, the real challenge begins. Within a month, the searcher transitions into the CEO role, reports to seasoned Board of Directors, and manages the expectations of investors who’ve committed significant capital. The searcher cannot afford to fail—but that’s an interesting topic for another article.
