{"id":178720,"date":"2025-06-12T15:42:09","date_gmt":"2025-06-12T15:42:09","guid":{"rendered":"https:\/\/www.europesays.com\/uk\/178720\/"},"modified":"2025-06-12T15:42:09","modified_gmt":"2025-06-12T15:42:09","slug":"search-funds-a-rising-asset-class-outperforming-pe-and-vc","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/uk\/178720\/","title":{"rendered":"Search Funds: A Rising Asset Class Outperforming PE and VC"},"content":{"rendered":"

\u201cIn search funds, we get\u00a0similar or\u00a0better returns at\u00a0a fraction of the risk we\u00a0take on in VC portfolios,\u201d says\u00a0Jos\u00e9 Mart\u00edn Cabiedes<\/strong><\/a>, a seasoned VC and search fund investor. \u201cWe buy healthy businesses with leverage. The beauty is that even\u00a0if enterprise value\u00a0remains flat, strong cash flow can double equity in just a few years. Try\u00a0doing that\u00a0in VC.\u201d<\/p>\n

Put another way, search funds buy profitability and stable cash flows whereas VC trades in the promise of future growth (often tolerating sustained losses). Cash flow not only de-risks the search fund investment but also creates a compounding advantage over time. In the current environment, where VC-backed unicorns face compressed valuations and exit freezes, search funds continue to\u00a0quietly deliver double-digit IRRs, or internal rate of returns.<\/p>\n

That\u2019s not to say search funds are risk-free. As Eisinger cautions, \u201cThey target smaller\u00a0firms that often\u00a0lack mature management layers. That\u2019s why operational\u00a0capability and a strong board are so\u00a0important. Similarly experienced investment judgement and pattern recognition is critical to choose the right target company and structure the transaction.\u201d<\/p>\n

Governance and alignment<\/strong><\/p>\n

In VC, investors often hold aggressive control rights and complex equity structures. \u201cYou might own 40 percent on paper but walk away with 10 percent of the exit, or a VC might own only 10 percent of a company but still control it entirely,\u201d says Cabiedes.\u00a0<\/p>\n

By contrast, search funds are built on a simpler and more transparent foundation. \u201cThe governance and economic rights are much more proportionate to the actual equity held. So, the investor’s influence is more aligned with their percentage of ownership,\u201d Cabiedes adds. \u201cThere\u2019s a proper corporate governance structure, but the CEO enjoys a very high level of independence in day-to-day operations.\u201d\u00a0<\/p>\n

Still, since most searchers are\u00a0first-time CEOs in\u00a0unfamiliar industries, having\u00a0experienced boards and value-adding investors is critical. Coaching, governance and operational\u00a0support all help flatten the\u00a0learning curve and boost the odds of success.<\/p>\n

This underscores the importance of choosing the right investors. Searchers should prioritise those who bring strategic value, not just capital. In a world where capital is increasingly commoditised, the true differentiator lies in the investor\u2019s ability to add value throughout the journey: from the search, acquisition, operations to the exit.<\/p>\n

Time horizons and exit flexibility<\/strong><\/p>\n

When it comes to the timeline to profitability, PE is under pressure to return capital quickly, and VC timelines are often distorted by long-delayed exits. Search funds operate with more flexibility, typically aiming for a four- to six-year hold period. Exit takes on various forms: full sale, partial recapitalisations, secondaries (sale to a secondary buyer), or long-term holds.\u00a0<\/p>\n

Interestingly, search fund exits are now attracting\u00a0PE\u00a0buyers. \u201cPE\u00a0firms\u00a0see\u00a0search-backed companies as\u00a0growth-oriented, profitable and\u00a0de-risked,\u201d notes Cabiedes. \u201cIn Spain alone, we\u2019ve seen multiple\u00a0such\u00a0acquisitions\u00a0recently.\u201d<\/p>\n

This trend marks the maturation of the search fund model; it is no longer seen an exotic niche but a validated route to value creation, liquidity and scale.\u00a0<\/p>\n

A maturing model sharing key traits with PE\u00a0<\/strong><\/p>\n

Moreover, the crossover between search funds and PE could play a vital role in further professionalising the search fund ecosystem. As Eisinger puts it, \u201cSearch funds and PE represent different paths to approaching the same goal of buying and growing a healthy business. Each has its unique advantages, and both are often mutually reinforcing.\u201d\u00a0<\/p>\n

He identifies several ways PE complements search funds:<\/p>\n