Search Funds 101
The Panel
G ro u sb ec k mo d e r a te d p a n el i st s Fowler, Rafael Somoza, gsb ’96; Barry Reynolds, gsb ’92; and John Moran, hbs.The panelists had a nice diversity of experience and were in different stages of their searches (from start to industry consolidation).
Fowler raised the money for his search fund, Montebello Capital, with a partner.The funding took less than five months and currently Montebello is in the heat of looking for an acquisition in the Western u.s. with $1–5 million ebitda parameters. Fowler found the n e t wo r k o f ot he r s e arc h f un d er s a helpful guide for advice and for investor names. When asked about the necessity of having private equity or deal experience, Fowler said that lack of such experience was not a disadvantage (he was previously a consultant).
Somoza’s fund, Quest Management Corporation,is focused on Puerto Rico. He talked about the difficulties of the search process when targets that looked attractive had either cooked books or the founders walked away at the last minute. Such is what happened to a deal in the outdoor advertising space, so he decided to found his own company in this space—an atypical result for a search fund. The investors were on board, and his company now has 22 employees.
Reynolds represented the investor p e rs p e c t ive. S e a rch f un d s ma ke u p 25 percent of his private equity fund, Housatonic Partners, which currently has seven portfolio companies that originated as search funds. One of their i nve s t m e n t s , A s u ri o n , i s by so me accounts the most successful search fund ever. Kevin Taweel, gsb ’92, and Jim Ellis, gsb ’93, bought Road Rescue in 1 99 5 . T he c o mp any, n ow ca ll ed Asurion, has grown 40 times and was named E&Y’s Entrepreneur of the Year in Northern California.
Reynolds shed light on what makes a successful search fund. The primary factor, in his view, is the quality of the businesses. “As we look back, it is very clear that a poor business is going to overwhelm even the greatest manager.” He evaluates a potential entrepreneur by assessing the way he/she in turn evalu- ates businesses. He also stressed that b eyon d eco no mic s, a se arc h fu nd e r should find a business that he/she is passionate about.
And that is what the last panelist, Moran, did: “I had a passion for party- ing.” He bought Classic Party Rentals in 1996 through a search fund and since then has begun to consolidate the party rental industry. Classic Party Rentals has cracked the $30 million revenue mark and has 400 employees.They have com- pleted six acquisitions to date. Moran talked about the acquisition process and the need to build trust with the seller.
He, like the other panelists, found that attractive valuations and lack of s t r a t e g i c player i nitiative combine t o make it a good time to buy if one can find hard-to-get debt financing.
So, should you go start your own search fund or do you need some indus- try experience? Most panelists felt that industry experience was not necessary. Somoza’s perspective is that once you take a traditional job, it is that much harder to take the risk to start a fund. Fowler said no investor turned down Montebello because of lack of experi- e n c e. R ey no l d s s ai d t h a t a lt ho u gh Housatonic does look for seasoned indi- viduals for second- or third-time funds, first-time funds are still a good invest- ment. In fact, the ces study found a blended irr on the first-time funds in its survey to be 36 percent based on original purchase price multiple.
Shuddering at the thought of going b2b (back to banking) or b2c (back to consulting)? Start searching!