Search Funds

1
Search Funds

• An Overview

2
What is a Search Fund?

• Capital raised to help an entrepreneur to search
  for and acquire a business
• The entrepreneur is usually a young MBA
• Most Search Funds have a 3 to 5 year outlook
• Investors and principals receive a return after
  dividends are issued, the company is acquired by
  another, or an IPO event

3
Advantages of Search Funds

• Offer new entrepreneurs a quick path to capital
  and owning a small business
• Generate significant returns to principals
• Investors can serve as advisors to the
  entrepreneur

4
The Main Advantage of a Search Fund Is

• The experience provided by the investors
• Investors acting as advisors can steer the
  business and entrepreneur down the right path
• Psychic benefit to investors working with young
  entrepreneurs

5
Stages of a Search Fund

• Stage 1 Raising the Fund
• Stage 2 Searching for and Making an Acquisition
• Stage 3 Operation
• Stage 4 Exit

6
Raising the Fund

• A business plan is created
• Principals look to a wide variety of potential
  investors
• Each investor typically purchases one or several
  units at about 20,000 to 35,000
• Entrepreneurs look for investors who can act as
  advisors

7
Searching for an Acquisition

• Search by either location or industry
• Searching geographically can help a principal
  logistically, but limits opportunities
• Target 2 to 4 industries, taking less time
• Generally target industries that are not subject
  to rapid technological change and are in
  fragmented geographic or product markets
• Searching for a company to buy usually takes from
  4-8 months

8
Making an Acquisition

• Each investor is given the right of first refusal
  on any acquisition
• The investment is stepped up in the acquisition
  round
• The business will often sell for a multiple
  equivalent to 70 to 130 of revenues
• If the initial capital is exhausted principals
  may close the fund or find additional capital

9
Operation and Exit

• Principals recruit a board of directors
• Initial investors are often included
• Principals create value by improving revenue
  growth, operating efficiency, or expansion, often
  in conjunction
• Search funds have a 3 to 5 year outlook
• Investors receive a return via an acquisition,
  selling investor equity, or dividends may be
  issued

10
Search Fund IRRs to Original Investors
2001 Study Figures 2003 2005
Individual IRRs
Minimum (100) (100) (100)
25th Percentile (100) (100)
Median 17.6 (23.7) (16.1)
75th Percentile 21.9 24.8
Maximum 98.3 84.8 215.0
(100) 26.5
(51) to (99) 12.2
(1) to (50) 14.3
0 to 25 22.4
26 to 50 14.3
50 to 75 4.1
76 to 100 2.0
gt100 4.1

Aggregate IRRs with Same Starting Dates
Actual Cash Flows with Original EBITDA Multiples 37.6 31.7 37.3
Actual Cash Flows with Estimated Current Multiples Minus 30 Discount 35.7 33.0 37.7
11
Comparison of Search Fund Acquisitions
Categories All AcquisitionsMedian Statistics Top Quartile PerformersMedian Statistics
Purchase Price 5.7 M 8.5 M
Search Fund Investor Capital Raised for Company Purchase 2.2 M 2.3 M
Company Revenues at Purchase 7.0 M 6.5 M
Company EBITDA at Purchase 1.0 M 1.4 M
Company EBITDA margin at Purchase 17.0 22.0
Purchase Price / Revenue Multiple 0.9x 0.95x
Purchase Price / EBITDA Multiple 4.6x 5.6x
Company Employees at Purchase 57 65
12
Search Funds in Alaska

• Working with Native Corporations
• Alaska InvestNet
• Opportunities for growth
• Previous attempts to assist entrepreneurs
• Business plan competition

13
Working With Native Corporations

• Opportunities for new entrepreneurs
• Structure of native corporations allows for
  growth and expansion

14
New Innovative ANCSA 8(a) Business Model
Business Opportunity
Capital Investor
Entrepreneurial Manager
Technical and Professional Services
Provide the entrepreneurial manager with
access to opportunities
Facilitate access to capital and management
expertise
Identify and develop entrepreneurial
opportunities
YIELD
15
ANCSA 8(a), LLC

• Potential Investors Participants
• Collaborative, non-majoritive LLC

Founding ANCSA Corp.(s)
Lead Active Capital

• Private investors and AIN
• Provide facilitate capital
• Identify capture management expertise
• Help identify deal flow

• Facilitate 8(a) process
• Help identify deal flow
• Minimum capital/bonding reqs
• Sponsor individuals to develop internal expertise

ANCs with Opportunity Based Core Competencies

• Capital in-flow coupled with project-based
  expertise

Board of Directors

• 3 member board

Lead Active Manager
Counsel
3rd Party Experts

• Primary deal hunter identify validate deal
  flow
• Identify capture necessary 3rd party expertise
• Interface in government procurement
• Multiple sub-ordinate active managers in various
  fields
• Performance based compensation

• Technical professional services
• Project-specific competencies
• Little or no ownership stake

• Expertise in 8(a) procurement process
• Legal procedural advice

The Projects

• SBA 8(a) contracts
• OMB A-76 contracts
• Focus on profits over revenues