Deal Sourcing for Search Funds

Search funds have gained significant popularity in recent years, attracting investors seeking to capitalize on the potential for high returns. However, a notable challenge remains: successfully acquiring target companies. Stanford University’s annual study on search funds highlights that only 36% of search funds manage to acquire a company. This article delves into the underlying reasons for this acquisition hurdle and offers insights into overcoming it.

The Search Fund Acquisition Challenge

Our firm has witnessed a surge in mandates from search funds, with new search funds joining our platform almost weekly. Despite their diverse backgrounds, these search funds consistently encounter similar challenges, particularly in generating interest from potential acquisition targets.

A primary obstacle lies in the broad search focus adopted by many search funds. Often described as “industry agnostic,” this approach fails to capture the specific value proposition that search funds can offer to target companies. This lack of a targeted approach makes it difficult to connect with potential targets and pique their interest.

The absence of a compelling buyer story further exacerbates the acquisition challenge. Without a clear vision for the target company’s future, search funds struggle to articulate their value proposition to sellers. This lack of clarity leaves potential targets hesitant to engage in acquisition discussions.

In an attempt to overcome these challenges, many search funds resort to mass email campaigns and AI-powered lead generation tools. However, in today’s era of email overload, these tactics often prove ineffective, failing to generate meaningful engagement with potential targets.

Addressing the Acquisition Challenge

While the acquisition challenge poses a significant hurdle for search funds, there are effective strategies to overcome it. Our firm can assist search funds in addressing these challenges through tailored guidance and support.

1. Define a Focused Search Strategy

Moving away from a broad, industry-agnostic approach, search funds should develop a focused search strategy that identifies specific industries, subsectors, or company characteristics that align with their expertise and investment criteria. This targeted approach allows search funds to tailor their communication and value proposition to resonate with relevant targets.

2. Craft a Compelling Buyer Story

Articulating a clear buyer story is crucial for capturing the attention of potential targets. Search funds should develop a narrative that highlights their unique strengths, experience, and vision for the target company’s future. This buyer story should demonstrate how the search fund can add value to the target company and its stakeholders.

3. Leverage Strategic Outreach

Instead of relying on mass email campaigns, search funds should adopt a more strategic outreach approach. This involves identifying key decision-makers within target companies and engaging them in personalized, value-driven conversations. Networking, industry events, and targeted referrals can be effective channels for identifying and connecting with potential targets.