Is the Search Fund Acquisition Rate Falling? With Jim Edmunds, Badge Stone & Kent Weaver
Feb 27, 2025
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Join industry veterans Jim Edmunds, partner at Search Fund Partners, Badge Stone, co-founder of WSC, and Kent Weaver, investor in over 150 search funds, as they explore the declining acquisition rates in the search fund landscape. They analyze factors like increased competition from private equity and evolving valuation dynamics, particularly in software acquisitions. The discussion also highlights the importance of authenticity in building trust, confronting 'searcher fatigue,' and navigating the complexities of today’s market while remaining optimistic about future opportunities.
The acquisition rate among search funds has notably decreased to around 57% since 2014, highlighting a significant shift in the market dynamics.
Increased competition from private equity firms expanding into the search fund territory presents challenges, necessitating unique strategies for successful acquisitions.
Searchers must adapt their outreach methods beyond traditional emails, focusing on personal relationships and alternative communication strategies to improve engagement with sellers.
Deep dives
Declining Acquisition Rates
The episode addresses the notable decrease in acquisition rates among search funds over the past decade, revealing that only about 57% of funds have successfully acquired a company since 2014. This decline prompts an exploration of various hypotheses regarding its causes, including an influx of new search funds, increased email challenges, and the notion of searcher fatigue. The discussion emphasizes the importance of understanding these trends for both potential searchers and investors to navigate the complexities of the search fund landscape. The panelists highlight the significance of adapting strategies to counter these challenges and remain competitive in an evolving market.
Impact of Private Equity
The conversation delves into the competition posed by private equity firms, which have gradually stepped further into the market that search funds typically target. While there is some consensus that increased competition exists, the panelists contend that personal connections and unique industry insights can still lead to successful acquisitions regardless of the growing presence of institutional buyers. They debate the nuances of private equity motivations, noting that many larger funds struggle to justify investing in smaller businesses, suggesting opportunities for search funds to thrive if they maintain strategic focus. Overall, this dynamic illustrates the importance of differentiating one's approach in a crowded marketplace.
Resources and Support for Searchers
The discussion shifts towards the perceived exhaustion of personalized mentorship within the search fund community, as more searchers access a wealth of resources and support systems compared to earlier years. Despite concerns about the dilution of mentorship quality, the panelists argue that various platforms available today provide valuable assistance for searchers to navigate their journeys. They highlight the importance of maintaining authentic relationships and suggest that searchers should utilize both experienced mentors and modern technological resources effectively. This balanced approach can strengthen their chances of success as they cultivate their own unique pathways in the search process.
Navigating Market Conditions
As the conversation progresses, the panelists emphasize a proactive mindset when approaching market fluctuations and seller expectations. They discuss how external factors, such as economic conditions and upcoming elections, can affect seller behavior and market dynamics. The discussion underscores the potential of adjustments in strategies to exploit emerging opportunities amidst market challenges, drawing attention to maintaining optimism and resilience. The searchers' ability to recognize market nuances and adapt their tactics will influence their long-term success in acquiring quality businesses.
Evolving Outreach Methods
The episode concludes with an insightful examination of changing outreach methods, particularly the diminishing effectiveness of email communication in initiating seller conversations. The panelists stress the need for searchers to diversify their approach, incorporating personal relationships and alternative communication strategies, while emphasizing quality outreach over sheer volume. They share experiences of successful outreach efforts that transcend conventional tactics, reinforcing the notion that effective engagement with potential sellers requires adaptability and creativity. By embracing new methods and fostering genuine connections, searchers can enhance their acquisition prospects significantly.
Across all known search funds since the inception of the model in the 1980s, ~63% of funds have gone on to acquire a company. However, since 2014, the acquisition rate has decreased, hovering around ~57% over the past 10 years.
Today I'm joined by three of the most experienced and respected investors within the search fund ecosystem to discuss A) Why the acquisition rate among search funds has fallen over the past 10 years; and B) Whether the rate of acquisition is likely to fall further in the years to come.
Joining me today are Jim Edmunds (Search Fund Partners), Badge Stone (WSC), and Kent Weaver (Granite Point Partners).
Today's episode revolves around the testing of 8 hypotheses, submitted to us via a survey of 1,000+ searchers & CEOs. Those hypotheses include:
Encroachment: PE moving further down market?
Capacity: Investors with too many searchers in their portfolios?
Competition: Too many search funds in the market?
Dilution of Talent/Commitment: Too many part-time searchers?
Valuation Expectations: Sellers no longer willing to transact at palatable multiples?
Cost of Capital: Search funds have a higher cost of capital relative to other buyers?
Searcher Fatigue: Sellers and intermediaries becoming disillusioned with the value proposition of search funds?
Email: Deliverability challenges too much to overcome?
Please enjoy!
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