Relatively new in the Brazilian domestic market, the Search Fund is a type of fund that is emerging as a promising acquisition model.
But after all, what is a “Search Fund”?
The term “Search Fund” originated at Harvard University in 1984, was popularized at Stanford over the following 10 years, and has been constantly adopted by business schools and entrepreneurs around the world. In Brazil, the first Search Fund emerged in 2015, but we will talk more about that later.
Simply put, this type of acquisition enables entrepreneurs to look for a company to buy and manage while allowing investors to invest in smaller, high-performance companies with significant return potential.
As shown in the chart below, the process of Search Funds consists of up to four stages: capital raising, search and acquisition, operation, and divestment:
The acquired companies typically have revenue between R$ 20 million and R$ 100 million, and the main investors come from the USA, Spain, Mexico, and Brazil. Fundamentally, this investment model allows an entrepreneur to enter the market without opening their own business.
Called a “Searcher,” this professional who sought out the acquired company becomes its CEO and is compensated on a percentage of the returns generated throughout the investment period.
WHAT ARE THESE “SEARCHERS” LOOKING FOR?
The characteristics of the companies sought by Searchers are mid-sized (middle market), already consolidated in the market, with a solid customer base, low churn, accelerated growth, and a positive EBITDA margin. As for the sectors, there is no standard.
The Searcher will face some challenges in implementing the investment, such as structuring the transaction. For the investment to succeed, it is extremely important that the company being acquired has the support of an M&A advisory firm to carry out the transaction.
Compared with Venture Capital and Growth Capital, it is quite clear that Search Funds are one of the highest-performing asset classes, if not the highest, in the Private Equity sector.
GLOBAL AND BRAZILIAN LANDSCAPE
Around the world, Search Fund transactions grew significantly, with a record 79 funds structured and 38 acquisitions closed between 2020 and 2021. Activity in Europe was particularly strong, with 24 acquisitions made in 2020 and 2021, including 11 in Spain and 4 in countries that had their first transaction. The presence of Search Funds reached almost every continent in the world, with operations carried out in Australia, Japan, and Côte d’Ivoire. The first acquisitions were also made in the Netherlands, Peru, Poland, Portugal, and Switzerland.
For comparison, since 1984, more than 400 Search Funds have been raised in the USA. Meanwhile, in Brazil, the first Search Fund emerged in 2015/2016, and by the end of 2021, 12 acquisitions had already been closed in various segments. Of these, 2 were advised by Acorn Advisory!
Despite the difficulty of raising funds in the Brazilian market, the domestic economy presents good possibilities for acquiring companies with the sought-after profile. As the focus is on smaller companies, these operate in specific niches that are difficult for large companies to enter.
INTERNATIONAL “SEARCH FUND” ACQUISITIONS, BY REGION AND COUNTRY
Additional information about “Search Funds” International can be found in the IESE report, International Search Funds – 2022.
*SOURCE: STANFORD GRADUATE SCHOOL OF BUSINESS | Survey, July 2022.
“SUCCESSFUL SEARCH FUNDS” AT ACORN ADVISORY
Acorn’s success stories are the result of our commitment to preserving the values of each client. And this goes far beyond the financial.
Of the 12 operations closed with Search Funds in Brazil through August 2022, Acorn advised on 2 of them: I4Pro with Ângulo and Nexti with Caatinga. Here are some details of these transactions:
In 2019, Acorn acted as exclusive advisor to I4Pro in the sale to Ângulo Capital, a Brazilian Search Fund.
Of the selling shareholders, two remained as shareholders with executive roles, while the other two no longer have ties to the company.
The acquisition by Ângulo Capital, in 2019, made it possible to structure the Company’s governance even better as well as expand its operations.
Recently, in May of this year, we acted as exclusive financial advisor to Nexti – an advanced HR Tech platform – which received growth capital investment and sold a majority stake to Caatinga Capital, the first Search Fund in the Northeast, which has several local and international institutional investors in its base.
The transaction, which involved an inflow of resources into the company’s cash and direct disbursement to the founders, totaled R$ 170 million.
Nexti is expected to open a commercial office in São Paulo soon. The company’s forecast is to reach 500 thousand lives in its base by the end of the year and reach 2 million in two years. One of the growth avenues will be the beginning of operations in the labor recruitment area, a project that is already in the plans of the new management.
According to Rogério Santos of Caatinga Capital, the technology sector for human resources management – so-called “HR Tech” – has great growth expectations due to the fragmentation in the country, offering cost reduction for companies operating in labor-intensive sectors. Among the services provided are overtime control and the consequent reduction in the number of labor lawsuits. “There are 40 million formal (CLT) workers in Brazil, but most companies use Excel and paper,” Santos told Valor Econômico.
For us at Acorn, each story has its value, so we value the interests of each client and find the best solutions for each transaction.
CONCLUSION
The first and perhaps most important reason why investors should consider investing in a Search Fund is that returns for this asset class have been relatively high. Recent studies by Stanford Business School and IESE Business School show that the asset class as a whole has been generating returns well above 30% and, even excluding the top three funds, the average return is 8.4 times the capital invested, higher than that obtained with other investment models.
Want to know more about this type of investment? Get in touch with Acorn, we’d be happy to chat with you!