MBA hotshots just want a one-off private equity deal
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
MBA graduates do not have time for trainee programmes any more. One of the hottest post-grad options is looking for a small business to buy and run, private equity-style. An entire set of financiers now exists to help them.
The key here may not be that 30-year-old hotshots are brilliant managers. Rather, there are small companies out there which have been largely ignored by Wall Street and are ripe for the picking. With some Management and Strategy 101, along with financial leverage, junior rainmakers can skip the dues-paying portion of career paths.
“Search fund” is the term of art for this deal type. Search funds had originated out of research at the business schools of Harvard and Stanford. The latter now keeps statistics on the investing approach. Stanford’s latest study shows that a record 93 search funds were launched in 2023.
The typical deal involves an acquisition of about $15mn purchased at just seven times ebitda. Among the companies that were acquired and exited over the years that Stanford has been following, annualised equity returns have been well above 30 per cent (although a third of search funds do not find a suitable target).
Several small private capital firms now specialise in backing search fund sponsors with not just money but advice on finding, structuring and exiting these mini-buyouts.
The target universe is large enough. There are almost 200,000 businesses worth between $10mn and $100mn, according to data compiled by the NAICS Association. Search funds often attempt to find companies that have a family founder looking to retire and get liquidity.
Even middle and lower-middle market financial sponsors cannot target companies worth $15mn. They have too much in overhead costs and capital to deploy on bite-size deals. For a single entrepreneur, micro-sizes are not just accessible; there are bargains to scoop up, so much so that specific search PE funds are now sprouting up.
It may be that the best on-the-job business training is no longer found at Goldman Sachs, McKinsey or Google but from jumping into buying and running a small company. But even a successful search exit will not typically be lucrative enough for the fund founder to retire or create generational wealth; they typically draw an annual salary of just $200,000 and then a cut of the eventual deal profits. Regardless, many aspiring magnates like the hustle so much that they launch successive search funds seeking fortunes and fulfilment.
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