Justin McGee-Odger, Second Squared
Published 29th October 2020
Throughout this series, we have explored that to win a war, a warrior must effectively use the tools of patience and time. Similarly, an investor uses patience and time to create long-term wealth for generations to come. An entrepreneur must also leverage these tools to build a resilient and sustainably growing business.
Patient capital leverages patience and time. Investors and entrepreneurs use it to thrive in economic uncertainty with combined arms.
There is potentially no better way to do so than through a search fund.
Search funds are relatively new to Australia but have found success globally since 1984. Conceived at Stanford’s Graduate School of Business, search funds are investment vehicles “through which investors financially support an entrepreneur’s efforts to locate, acquire, manage, and grow a privately held company”.
Over the past 36 years, search funds have grown to an estimated value of $8.7 billion (USD) in the United States and Canada alone. Over this period, investors in search funds have enjoyed a stupendous 32.6% pre-tax internal rate of return.
Search funds are more than an investment vehicle. They rely upon an active and vibrant community of like-minded entrepreneurs, educators and investors who all contribute both time and patience.
By leveraging patient capital through search funds, patience pays.
The investment is first in the entrepreneur. In this way, search funds are private equity’s more patient cousin. Over time, the entrepreneurial investment pays off as the ideal business is acquired, grown and exited.
Private equity investors have taken notice and it is no wonder why. The ROI of search funds is regularly in the neighbourhood of 3x to 5x. This explains why, based on a recent Palico survey, 1 in 3 US based private equity investors are taking stakes in private companies through search funds or similar vehicles.
There is also the benefit of loyalty from the entrepreneur, having a voice in the business, and the risk management that loyalty and voice provide. You won’t be losing sleep over earnings results tomorrow when you can pick up the phone and chat with your CEO today.
An effective business leader considers the long term.
Imagine an investor base that has confidence in the leader to the point of not expecting realised returns until years into the future. They know the strategic positioning and series of actions required to take a stable business and grow it into something more.
This is the beauty of search funds. A searching entrepreneur is not looking for a business that has faced hardship for a few years and is approaching a make it or break it moment, they are looking to take over a resilient business with stability in the marketplace, that is poised to make moves that will keep it growing into the future.
The process of growing a business, even a strong one, requires hard work and sweat from the entrepreneur. With the backing of patient capital and the alignment of your investors’ interests, this process becomes supercharged.
The Opportunity in Australia
There is no arguing that we are in an unprecedented time.
There is currently a transfer of private business ownership occurring to the tune of $3.5 trillion in Australia. Over $2 trillion of this is unaccounted for and yearns for partnerships involving energetic business leaders and savvy investors.
The search fund community is growing in Australia and is poised for significant growth. Opportunities abound, and the best enterprises to acquire will not last in the market for long.
Searchers are already on their way to finding these businesses, selecting the cream of the crop, and striking when the price is right. These searchers are warriors, trained in the art of patience and time.
The war has begun. Now it is time to win.