Top 10 Highlights: The 2022 Stanford Search Fund Study
Stanford recently dropped its biannual search fund study with data through 12/31/21. It's the "state of the union" for the traditional search fund community.
1986-2021 - 526 Traditional Search Funds in US/Canada
$2.3bn equity invested: $9.8bn equity value for investors + $2.4bn equity value for entrepreneurs
As a current searcher, I thought I'd share some facts/figures that stood out, along with my predictions for the next round of data two years from now:
120 funds launched in 20+21
This is strong growth, but still seems like there is room for more. I believe it's still too early to be worried about oversaturation in the traditional community.
The rise in popularity of alternative paths (EIRs, CXO programs, self-funded, etc) may be contributing to this number being lower than expected. Axial currently has 400 search fund profiles - extrapolating this out I believe the ratio of traditional to self-funded search funds is approx. 1:5
I do expect the 2024 number to be closer to 80 traditional funds / year.
Median purchase prize increased to $17mm, primarily driven by multiple increase to 7x EBITDA and 2x revenue.
Investors seem more and more willing to pay up for growth and quality.
LMM PE funds are pushing down market, but that isn't pushing traditional searchers down market nor is it impacting acquisition outcomes, at least to date. This is encouraging and a reminder that searchers are differentiated and offer unique solutions to certain sellers.
Return metrics remain stable: 35% IRR + 5x MOIC
Despite growth in the community, searchers are still finding great businesses and scaling them. As entry valuations have increased and with economic challenges potentially looming, we might see some regression here, but I'm optimistic in searchers' ability to deliver world-class returns to investors.
Value creation strategies will be more important to returns as multiples stay high - finding a "bargain" purchase price may be a thing of the past.
Four new deals exited at 10x - 3 of which came from solo searchers.
The ability to achieve a "homerun" outcome is still out there, and solo searchers may be closing the return gap between solo vs. partner searchers.
10x returns have an average hold period of 10 years. I expect the trend towards longer-term holds will continue.
The "Failure" metric holds steady: 11% have acquired and exited at a loss.
It's nice to see this number hold constant despite COVID challenges. If we push into a recession, it will be interesting to see the trends here.
Overall, searchers and investors appear to be staying disciplined to the "model" and the operating metrics reflect it.
37% of new searchers in 20+21 took an ETA class at MBA.
I'm shocked it is this low…this will be >50% in the next study with significant growth in ETA curricula across MBA programs.
Median $425k raised / searcher with $115k median salary
Both of these figures will go up substantially with inflation and job market pressures.
Given the growth of investor community, I see an opportunity for high-demand searchers to get creative on compensation packages (perhaps relocation fees or signing bonus to get into the fund?).
Median time to acquisition decreased to 17 months from 20 months.
Lots of deal flow built up after COVID. COVID fatigue and recession looming creating more sellers?
Perhaps searchers are more prepared when they start the search due to expanded MBA resources and internships.
19 of 66 acquisitions focused on revenue multiples vs EBITDA multiples.
Investors are willing to pay up for growth, and software is gaining lots of traction.
Of the average 16 investors in a deal, 12 were in the original search and 4 were "gap" investors.
Build your network thoughtfully during fundraising. You can and should have a rolodex of investors on-deck ready to plug a gap.