Are Search Funds the New SPACs? A Growing Trend in the Investment World
Recently, special purpose acquisition companies (SPACs) became very popular among investors. SPACs are like shortcuts that help private companies become public companies by merging. They often involve really big deals worth hundreds of millions of dollars. But lately, this trend has cooled down. A lot of these companies ended up giving money back to their investors or had a hard time finding other companies to merge with. Now, a new type of investor, Search Funds, is starting to become popular, possibly taking over the role of SPACs.
Highlights:
Rapid Growth of Search Funds: Unlike SPACs, search funds require less capital and are easier to establish. This has led to their rapid proliferation, potentially outpacing the growth of SPACs during their peak.
Key Differences: Search funds are similar to SPACs because they both get money from investors to acquire one company. However, search funds usually operate more like private equity funds or independent sponsors. This means they often take a more hands-on approach to managing the company they buy.
Aggressive Deal Approach: Search funds are noted for their aggressive approach to securing deals. They often sign letters of intent (LOIs) and engage in exploratory due diligence rather than waiting for confirmatory due diligence after securing deals.
Pros & Cons: Search funds can offer founders significant benefits, such as capital for growth or a way to sell their business. However, like SPACs, many search funds face challenges. They might not always complete deals or find the funding to do so. Additionally, the fact that many search fund managers lack experience in acquiring businesses increases the risk.
Unique Terms:
Special Purpose Acquisition Companies (SPACs): SPACs are companies that are publicly traded for the sole purpose of acquiring or merging with a private company. This allows the private company to become public by merging with the SPAC.
Search Funds: These are investment groups set up by entrepreneurs who aim to find, buy, and manage one private company. Supported by investors, search funds work on a smaller scale compared to larger entities like SPACs or private equity funds.
Letter of Intent (LOI): A non-binding agreement that outlines the preliminary terms of a deal between a buyer and a seller. It indicates a commitment to move forward with due diligence and negotiation.
Exploratory Due Diligence: This is the first step in checking out a company that an investor may buy. It involves quick, basic research to see if the company looks promising enough to consider further. This step helps decide if it's worth spending more time and effort on deeper investigation.
Confirmatory Due Diligence: This happens after the exploratory phase, usually when there's serious interest and an agreement, like a Letter of Intent (LOI), is in place. It involves a thorough review of the company’s finances, legal matters, and operations to confirm everything the seller has claimed.
Search funds are carving out a niche in the investment landscape, offering a new avenue for business growth and exits. As they continue to evolve, their success and impact on the market will be closely watched.
