Search Funds - 2009: Selected Observations
H. Grousbeck, Aimee LaFont Leifer, Tjarko Leifer, Lisa Sweeney. (2010)
Stanford GSB Case E-386, 17 pp
Dated 7/21/2010; data as of December 31, 2009. Sample: "129 known funds have raised search capital for the first time" (p1); 41 (32%) still searching, 69 (53%) acquired, 19 (15%) "ended their searches without making an acquisition" (p11); returns on 79 funds, with 50 not included (41 searching, 7 acquired within 12 months, 2 insufficient data) (p12). Survey mechanics are given: 154 searchers contacted, 115 completed Part 1 "representing 88 funds" (p9). Headline, and the first edition to report a multiple: "As an asset class, Search Funds have achieved a 13.5x multiple of investment and a 37.3% IRR. However, when the top three funds are excluded, the remainder of the asset class returned a 2.4x multiple of investment and a 20.2% IRR. When the top five funds are removed, the asset class multiple of investment and IRR drop to 1.9x and 19.0%" (p14); "The median fund returned only 0.5x (50%) of investors' capital, whereas the top-performing fund returned well over 200 times" (p14); "Of these 79 funds, 59% suffered a partial or complete loss of capital" (p13); median purchase price $8.0 M, purchase price / EBITDA 5.1x (p6 to p7). Method change: operating companies now valued at the principal's own estimate of enterprise value instead of the purchase multiple, and the asset-class IRR is now weighted "in proportion to the amount of capital raised by each fund" (p12); the study warns precise cash flow data are hard to obtain and asks readers to "take these limitations into account" (p13).