Search Fund vs. Private Equity

Meow Technologies, Inc.

Meow Technologies, Inc.

Search Fund vs Private Equity

Search funds and private equity firms are both involved in acquiring and operating private companies, but they differ significantly in their approach, investment criteria, and objectives. In this blog post, we'll explore the key distinctions between these two investment models.

What is a Search Fund?

A search fund is an entrepreneurial investment vehicle where an individual or a team (known as "searchers") raises capital from a group of investors to acquire and operate a single privately-held company. The search fund model was pioneered at Stanford University in the 1980s and has since gained popularity as an alternative path to entrepreneurship.The search fund process typically involves the following steps:

  1. Raising Capital: Searchers raise capital, typically between $400,000 and $500,000, from a group of 10-20 investors (e.g., high-net-worth individuals, family offices, or institutional investors).
  2. Searching for a Target Company: With the raised capital, searchers spend 1-2 years searching for a suitable business to acquire within predetermined criteria, such as industry, size, and growth potential.
  3. Acquiring the Target Company: Once a target company is identified, searchers use a combination of the raised capital and debt financing to acquire the business.
  4. Operating the Acquired Company: After the acquisition, the searcher(s) assume the role of CEO or President and operate the acquired business, implementing growth strategies and driving value creation.
  5. Potential Exit: After 5-7 years of operating the business, searchers may consider an exit strategy, such as selling the company to another buyer, providing returns to the initial investors.

What is Private Equity?

Private equity firms are investment firms that pool capital from various sources (e.g., pension funds, endowments, high-net-worth individuals) to acquire and restructure private companies with the goal of generating significant returns for their investors.The private equity investment process typically involves the following steps:

  1. Raising a Fund: Private equity firms raise capital from limited partners (investors) to create a fund with a specific investment strategy and target size.
  2. Sourcing and Acquiring Companies: The firm identifies and acquires private companies that fit their investment criteria, often using a combination of equity and debt financing.
  3. Value Creation: The private equity firm works closely with the acquired company's management team to implement operational improvements, cost-cutting measures, and growth strategies to increase the company's value.
  4. Exit: After a predetermined investment horizon (typically 3-7 years), the private equity firm seeks to exit the investment by selling the company to another buyer, such as a strategic acquirer or another private equity firm.

Key Differences Between Search Funds and Private Equity

While both search funds and private equity firms are involved in acquiring and operating private companies, there are several key differences:

1. Investment Focus

Search funds focus on acquiring a single company that the searcher(s) will operate and grow over an extended period (5-7 years). In contrast, private equity firms typically acquire multiple companies across various industries to build a diversified portfolio.

2. Investment Size

Search funds typically target smaller companies with enterprise values ranging from $5 million to $30 million. Private equity firms, on the other hand, often target larger companies with enterprise values ranging from $100 million to billions of dollars.

3. Management Approach

In a search fund, the searcher(s) become the CEO or President of the acquired company and are directly responsible for its management and growth. Private equity firms, however, typically rely on existing or newly hired management teams to oversee the day-to-day operations of their portfolio companies.

4. Investment Horizon

Search funds have a more flexible investment horizon, with searchers often operating the acquired business for 5-7 years or longer. Private equity firms, on the other hand, typically have a fixed investment horizon of 3-7 years, after which they must exit their investments and return capital to their limited partners.

5. Investor Involvement

Search funds typically have a smaller group of investors (10-20) who are often more actively involved in the acquired company, providing mentorship and guidance to the searcher(s). Private equity firms, in contrast, have a larger and more diverse investor base (limited partners) who are generally more passive and less involved in the day-to-day operations of the portfolio companies.

6. Acquisition Financing

Search funds often rely on a combination of the raised capital and debt financing (e.g., SBA loans) to acquire their target companies. Private equity firms, on the other hand, typically use a higher proportion of debt financing (leveraged buyouts) to acquire their portfolio companies.

7. Exit Strategies

While search funds may consider an exit strategy after 5-7 years of operating the acquired business, they are not bound by a fixed investment horizon and may choose to continue operating the company for an extended period. Private equity firms, however, are typically required to exit their investments within a predetermined timeframe to return capital to their limited partners.

Conclusion

While search funds and private equity firms share some similarities in acquiring and operating private companies, they differ significantly in their investment focus, size, management approach, investment horizon, investor involvement, acquisition financing, and exit strategies.Search funds offer an entrepreneurial path for individuals to acquire and operate a single company over an extended period, with the support and guidance of a small group of investors. Private equity firms, on the other hand, are focused on building diversified portfolios of companies, implementing operational improvements, and generating returns for their limited partners within a fixed investment horizon.Both investment models have their advantages and drawbacks, and the choice between them depends on an individual's or firm's investment objectives, risk tolerance, and entrepreneurial aspirations.


Meow Technologies is a financial technology company, not a bank or FDIC-depository insured institution. Likewise, Meow Technologies is not an investment adviser and none of the information presented herein should be relied upon as financial advice or a recommendation to make any financial decision nor should it be considered to be tax or legal advice. The information is the opinion of Meow Technologies for educational purposes and may not be suitable for all companies. Products, like the one described herein, are offered through Meow Technologies and are not advisory services which are only offered through Meow Advisory, LLC.** The FDICs deposit insurance coverage only protects against the failure of an FDIC-insured bank.**

Get started with Meow

*Disclaimer: Meow Advisory LLC is a registered investment adviser. Registration as an investment adviser does not imply any level of skill or training.
For accounts opened through Atomic Brokerage LLC: Meow Advisory LLC has an engagement with Atomic Brokerage LLC (“Atomic Brokerage”), a registered broker-dealer and member of FINRA and SIPC , to bring you the opportunity to open a brokerage account. Brokerage services for customers of Meow Advisory LLC are provided by Atomic Brokerage. For more details about Atomic Brokerage, please see the Form CRS, General Disclosures, and the Privacy Policy. Check the background of Atomic Brokerage on FINRA’s BrokerCheck.
For subadvisory services for accounts opened through Atomic Invest LLC: Meow Advisory LLC has an engagement with Atomic Invest, LLC (“Atomic Invest”), an SEC-registered investment adviser, to bring you the opportunity to open an investment advisory account. Investment advisory services are provided by Atomic Invest. Companies which are engaged by Atomic Invest receive compensation of 0% to 0.85% annualized, payable monthly, based upon assets under management for each referred client who establishes an account with Atomic Invest (i.e., exact payment will differ). Atomic Invest also shares a percentage of compensation received from margin interest and free cash interest earned by customers with Meow Advisory LLC. Meow Advisory LLC is not a client of Atomic Invest, but our engagement with Atomic invest gives us an incentive to refer you to Atomic Invest instead of another investment adviser. This conflict of interest affects our ability to provide you with unbiased, objective information about the services of Atomic Invest. This could mean that the services of another investment adviser with whom we are not engaged could be more appropriate for you than Atomic invest. Advisory services through Atomic Invest are designed to assist clients in achieving a favorable outcome in their investment portfolio. They are not intended to provide tax advice or financial planning with respect to every aspect of a client’s financial situation and do not include investments that clients may hold outside of Atomic Invest. For more details about Atomic Invest, please see the Form CRS, Form ADV Part 2A, the Privacy Policy, and other disclosures. Brokerage services for Atomic Invest are provided by Pershing Advisor Solutions LLC (“PAS”), a registered broker-dealer and member of FINRA and SIPC.
Neither Atomic Invest nor Atomic Brokerage, nor any of their affiliates, is a bank. Investments in securities are Not FDIC insured, Not Bank Guaranteed, and May Lose Value. Investing involves risk, including the possible loss of principal. Before investing, consider your investment objectives and the fees and expenses charged by Atomic Brokerage and/or Atomic Invest.
See the Legal Section within the Meow website for additional agreements.

U.K. Gilt pricing quoted net of fees. ~5% U.K. Gilt yield is sourced from Investing.com December 2023 6-month United Kingdom 6-Month Bond Yield. ~5% Treasury Bill yield is sourced from treasurydirect.gov December 2023 12-week U.S. Treasury Bill auction.

**Disclaimer: Meow Technologies is a financial technology company, not a depository, bank or credit union, and your account at Meow is not, itself, an FDIC-insured product.

Meow currently partners with three banking providers. Banking services are provided by Third Coast Bank SSB; Member FDIC, Grasshopper Bank, N.A; Member FDIC, and FirstBank, a Tennessee corporation; Member FDIC.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by Grasshopper Bank, N.A, you deposit your funds into a deposit account at Grasshopper Bank, N.A. which sweeps those funds into deposit accounts across a network of Federal Deposit Insurance Corporation (“FDIC”)-insured banks, for up to the current standard maximum deposit insurance amount (“SMDIA”) of $250,000 per eligible depositor, per destination institution, for each ownership capacity or category, subject to applicable terms and conditions, including Grasshopper's ICS Deposit Placement Agreement. Grasshopper Bank, N.A. uses a third-party vendor and agent to help administer this sweep process. Visit https://www.intrafi.com/network-banks/ for a list of the banks and savings associations with which we/Grasshopper, N.A. have a business relationship for the placement of deposits at destination institutions, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by Grasshopper, N.A. or you). The current maximum deposit insurance amount for your funds is up to $125 million in FDIC insurance through the sweep network of Grasshopper Bank, N.A, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and restrictions and refer to the applicable rate sheets for additional information.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by Third Coast Bank SSB, you deposit your funds into a deposit account at Third Coast Bank SSB. If you also hold funds in a sweep program with Third Coast Bank SSB, Third Coast Bank SSB sweeps those funds into deposit accounts across a network of FDIC-insured banks, for up to the current SMDIA of $250,000 per eligible depositor, per receiving bank, for each ownership capacity or category, including any other balances you may hold at that receiving bank directly or indirectly through other intermediaries, including broker-dealers. Third Coast Bank SSB uses a third-party vendor and agent to help administer this sweep process. Visit Third Coast Bank SSB for a list of the banks and savings associations with which we/Third Coast Bank SSB have a business relationship for the placement of deposits at receiving banks, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by Third Coast Bank or you). The current maximum deposit insurance amount for your funds is up to $50 Million in FDIC insurance through the sweep network of Third Coast Bank, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and conditions and refer to the applicable rate sheet for additional information.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by FirstBank, a Tennessee corporation, you deposit your funds into a deposit account at FirstBank, which sweeps those funds into deposit accounts across a network of FDIC-insured banks, for up to the current SMDIA of $250,000 per eligible depositor, per destination institution, for each ownership capacity or category, subject to applicable terms and conditions, including FirstBank's ICS Deposit Placement Agreement. FirstBank uses a third-party vendor and agent to help administer this sweep process. Visit IntraFi for a list of the banks and savings associations with which FirstBank has a business relationship for the placement of deposits at destination institutions, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by FirstBank or you). The current maximum deposit insurance amount for your funds is up to $125 million in FDIC insurance through the sweep network of FirstBank, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and restrictions and refer to the applicable rate sheet for additional information.

***FDIC insurance coverage is only available to protect you against the failure of an FDIC-insured bank that holds your deposits (and does not protect you against the failure of Meow or other third party). Your account with Meow and all services provided to you are subject to the Meow Terms of Service (“Account Agreements”) and other applicable terms and no other representations or warranties, express or implied, are provided to you except as expressly set forth in those written Account Agreements. If you have any questions regarding your account, please contact team@meow.com.

FirstBank Funds Availability Notice

FirstBanks general policy is to allow you to withdraw funds deposited in your account on the first business day after the day we receive your deposit. Funds from electronic deposits will be available on the day we receive the deposit. In some cases, we may delay your ability to withdraw funds beyond the first business day. Then, the funds will generally be available by the SECOND business day after the day of deposit.