Search Funds: 5x investment generators that transform small businesses
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In this interview, Brendan Mullen of Secha Capital introduces us to the concept of Search Funds, the rapidly growing alternative to Private Equity and Venture Capital. Focused on supporting young entrepreneurs keen to get their teeth into an existing small businesses, they leverage funds and energy to deliver vastly superior returns from small businesses.
Mullen says this little-known investment model is perfectly suited to solving the management gap in SMEs and can also produce multiplier effects: a Search Fund, or “entrepreneurship through acquisition” delivers not only outside capital, but also the self-confidence and self-reliance of local business people.
A Search Fund is a vehicle for young, aspiring entrepreneurs to raise funds, search for, acquire, manage, and grow an established SME and are increasingly popular in the US and Europe. They deliver superior returns (5x increase in the profits of his portfolio of businesses) and address four key components of our economic ecosystem:
1) Entrepreneurs: A Search Fund is a low-risk path for entrepreneurship and management skills. It’s a viable alternative for Africa’s best, young human capital to bypass corporate life and to instead gain skills by growing a local business.
2) SMEs: “Searchers” do not acquire start-ups, they invest in “boring”, fragmented industries - the heartbeat of the economy - that is often ignored by private capital. SMEs need growth capital, but they also need high-powered human capital and this vehicle creates a shortcut bridge to accessing this talent. Also, these are the companies that create local, reliable jobs!
3) Financial returns: The Search Fund asset class does not require “unicorns” and it does not invest in winner-take-all industries. Instead, it encourages “Zebras” in industries where we already have precedent for listings and strategic acquirers.
4) Cost and scale-ability: The money raised for a Search Fund goes only to the aspiring entrepreneur or the SME. It’s a small amount, slightly larger than what we define as “angel investing”.
Mullens reckons the Search Fund asset class has not made its way to Africa because it does not fit with institutional capital providers’ mandates; the check size is too small and too diffuse. But when you strip away all the finance jargon and the Search Fund is the most natural of transactions: Someone invests in your business, then they work with the business to grow it.
He was interviewed on this week's episode of Rational Radio.
Mullen says this little-known investment model is perfectly suited to solving the management gap in SMEs and can also produce multiplier effects: a Search Fund, or “entrepreneurship through acquisition” delivers not only outside capital, but also the self-confidence and self-reliance of local business people.
A Search Fund is a vehicle for young, aspiring entrepreneurs to raise funds, search for, acquire, manage, and grow an established SME and are increasingly popular in the US and Europe. They deliver superior returns (5x increase in the profits of his portfolio of businesses) and address four key components of our economic ecosystem:
1) Entrepreneurs: A Search Fund is a low-risk path for entrepreneurship and management skills. It’s a viable alternative for Africa’s best, young human capital to bypass corporate life and to instead gain skills by growing a local business.
2) SMEs: “Searchers” do not acquire start-ups, they invest in “boring”, fragmented industries - the heartbeat of the economy - that is often ignored by private capital. SMEs need growth capital, but they also need high-powered human capital and this vehicle creates a shortcut bridge to accessing this talent. Also, these are the companies that create local, reliable jobs!
3) Financial returns: The Search Fund asset class does not require “unicorns” and it does not invest in winner-take-all industries. Instead, it encourages “Zebras” in industries where we already have precedent for listings and strategic acquirers.
4) Cost and scale-ability: The money raised for a Search Fund goes only to the aspiring entrepreneur or the SME. It’s a small amount, slightly larger than what we define as “angel investing”.
Mullens reckons the Search Fund asset class has not made its way to Africa because it does not fit with institutional capital providers’ mandates; the check size is too small and too diffuse. But when you strip away all the finance jargon and the Search Fund is the most natural of transactions: Someone invests in your business, then they work with the business to grow it.
He was interviewed on this week's episode of Rational Radio.
