• Klaus Meitinger

I'll pay. You're looking. You'll find We win.

(Reading time: 10 - 20 minutes)

Investment idea. From the US, an investment alternative is coming to Europe that is perfect for entrepreneurial investors. The participation in Search Funds paves the way for direct investments in the most interesting medium-sized companies.

"When we presented this strategy to our investors, the first reaction was incredulous amazement - can it really be possible to achieve exceptionally high returns, promote entrepreneurship and also bring in our own experience," says Patrick Maurenbrecher, at Family Office Kontora: "We then explained it in more detail and harvested pure enthusiasm: "Wonderful, we'll do that, what can we contribute?

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At the end of 2016, Maurenbrecher came across a niche topic that had fascinated a very small investment community in the USA for 30 years and is now slowly spilling over into Europe.

As a first step, outstanding graduates of first-class universities found a company, a so-called Search Fund. Their goal is to find an established medium-sized company with a succession problem that they can buy - and then continue to run it themselves. The focus is on profitable companies from growth segments with annual sales of between five and 20 million euros.

The search process - usually estimated to take two years - is financed by ten to 15 investors, who each provide 20000 to 30000 euros. "This covers the salary, office and other expenses of the searchers," explains Mourenbrecher.

If the search is successful and a company can actually be bought, the investors have the right to participate in the acquisition of the medium-sized company according to their share in the Search Fund. So it's only at this moment that the big checks are written out.

The young entrepreneur will later receive 25 percent of the company shares if certain predefined targets are achieved. So at the end of the day, he always has the largest share.

In the following years, he will therefore bring in all his knowledge and all his strength to further develop the company. He can fall back on the advice of his investors at any time - a whole choir of business angels helps to drive the business forward.

If the growth strategy is successful, the investors receive their share of the increased profit and - later - of the proceeds from a company sale or IPO.

"It's actually a win-win-win situation," Mourenbrecher sums up. "Family entrepreneurs solve their succession problems. Young people get the rare chance to become entrepreneurs themselves - not in a start-up, where experience shows that only a few survive. But at a company with a proven business model. And investors have the first access to outstanding investments."

A study by Stanford University, one of the pioneers of the search fund idea in the USA, shows what returns are possible. The data of a total of 250 searchers is available. 128 of them have actually found a company, 75 are still searching, 47 have hired them unsuccessfully.

"On average, the entire asset class increased investors' capital by a factor of 8.4," says Maurenbrecher: "The annual return on the capital actually invested by a hypothetical investor who participated equally in all search funds was 36.7 percent. This is of course outstanding - but it has to be provided with a few limitations. Firstly, the sample is very small, because there are not many search funds worldwide yet. Secondly, very few young entrepreneurs have resold their company so far. For the most part, the valuations of the companies therefore had to be roughly estimated. And thirdly, the results were extremely different. While some searchers made losses for their investors, the front runner created a multiplier on invested capital of 200, "But even if the top three investments are removed, there still remains an average multiplier of 3.1 and an annual return on actual invested capital of 28.8 percent," says Maurenbrecher.

"That already shows - Search Funds are in any case a portfolio game", Jürgen Rilling makes clear. 15 years ago, the Munich native had founded a self-financed search fund - Mirablau GmbH - to search for and acquire a company. So he came in contact with the scene and is now involved in a dozen search funds. "Whoever invests in a single fund to see what can be earned in ten years' time is making a mistake. Because of the risks inherent in any direct investment, it is essential to build a portfolio."

Since not every search fund finds a company and the investor does not want to be involved in every transaction, investors with holdings in 30, 40 or more search funds are not uncommon in the USA. "The total capital requirement should therefore not be underestimated," Rilling makes clear. "And because these searchers cannot be found in Germany alone, investors must be prepared to invest at least throughout Europe."

Patrick Maurenbrecher has therefore initially established a fund structure for European investors with experienced American search funds investors for his clients. In this way, clients can now invest in Searcher together with Americans on both sides of the Atlantic: "As a diversified entry, there is now access to many searchers. If the Kontora clients like individual teams, they can usually also buy a share in the respective companies directly. From my point of view, this is a very intelligent way of investing in medium-sized companies."

Investors who are interested in such investments usually entrust their capital to private equity funds. This has advantages, such as professional management, but also some disadvantages. "Firstly, fees are often quite high. And secondly, these funds were capitalised in the last few years of the investment crisis and are now competing for the few attractive companies on the market. For structural reasons, private equity funds are only suitable for companies above a certain size," explains Rilling. "What matters even more to me as an entrepreneurial investor is that I invest in a blind pool with every fund construction. So I buy the pig in a poke. I actually want to be able to choose my investments myself and influence them."

Who pursues this goal, lands fast with the different enterprise brokers. "If I get something offered there, but I'm probably investor number 75, who is introduced to the deal. Then there were 74 reasons why others didn't draw. With the Search Fund, on the other hand, I am always the first to be asked whether he wants to invest. This is the ideal starting position to find really good transactions," Rilling outlines.

"In principle, financing a searcher is comparable to buying an option," explains Thomas Bühler, who manages private equity funds in his company Afinum himself, but has also been investing in search funds for years on his own account with his partner. "If the searcher finds a company, I can participate significantly in it, but I don't have to. If he doesn't find a company, only my first small investment is gone."

Buhler then sketches out, on the basis of the Stanford study, what such a pre-tax calculation could look like in purely theoretical terms. "According to the study, an average young entrepreneur tripled the value of the company. Suppose I participate with 20000 Euro each in 15 Search Funds. If only eight of them make a deal, which is conservatively calculated, I can place another 200,000 euros there each time I buy a company. So now I've raised $1.9 million. If the average multiplier of successful searchers is actually three, my investment portfolio will be worth 4.8 million after a few years. And I also had a lot of fun working with the young entrepreneurs. It's much more satisfying to be there than to just give the capital somewhere to make it work."

But it is not only the return opportunities that are particularly fascinating for the two search fund professionals. "Due to the extraordinary structure, the risks can also be significantly reduced compared to other direct investments," Rilling makes clear. This starts with the cooperation with the searcher himself. "In any investment, the most important thing is the manager. As a rule, however, you hardly know him. In the case of search funds, on the other hand, it is possible to observe the manager for two years before the large cheque has to be signed."

If the searcher finds what he is looking for, he usually first proposes the corporate objective to a search board consisting of those members of the investor circle who are best acquainted with the respective industry and region. "I know exactly who's in there. And if those I hold in high esteem are positive about the deal, they are very likely to be. That's a great quality check," analyzes Thomas Bühler.

For Buhler, therefore, the composition of its investor base is also an important success criterion. "I always make it a point that a third of investors are American professionals. They know from experience how the contracts with the young entrepreneur should be made. And they have known the asset class with its opportunities and risks for a long time. A second third should be local investors, preferably with private equity experience. They are familiar with the legal requirements in the respective country and the economic conditions in various industries. The last third may then be private individuals."

In the further course of the entrepreneurial adventure, the members of the circle of investors will continue to do everything in their power to ensure that the young entrepreneur actually succeeds. They accompany him to negotiations with banks or entrepreneurs willing to sell, contribute their experience in drafting contracts and their experience when it comes to expanding or internationalising. "The fact that all interests here are directed equally towards the success of the company and the investment really fascinated me," explains Patrick Maurenbrecher: "A young entrepreneur does not just create the opportunity to finance a company acquisition at a young age. But also gets free advice from competent people who have a real material interest in his success."

But there is another reason why the returns of a successful search fund are usually higher than those of comparable alternative investments. "The purchase prices tend to be lower," explains the Family Officer: "Acquisition targets are smaller companies that often fly under the radar of private equity funds. Therefore, the competition among potential buyers there is not quite as strong. Besides, the searcher can't accept any price because his investors won't play along."

This of course makes the search for companies more difficult. But not hopeless. Because if he finds the right entrepreneur, the searcher can almost make him an unbeatable offer. "All a private equity firm can do is bid money. The searcher, on the other hand, brings himself as a manager, promises to continue the seller's life's work and can show maximum flexibility in the sales negotiations. On balance, it will be cheaper than a private equity fund."

If it is then possible in the coming years to increase sales and profits organically or through acquisitions, the investment will have a double lever. "For company valuations, the basic rule is that the small ones are cheaper than the large ones. If sales increase, it is not just profit that climbs. At the same time, the company is placed in a different valuation class. The multiplier that can be achieved in a possible resale or IPO in a few years' time is also rising," explains Buhler.

As always with particularly interesting investment ideas there are however also here a few hooks. "On the one hand, there is the issue of liquidity," Jürgen Rilling analyses: "Returns take a very long time to come. The search phase has already lasted two years. Then the greater commitment comes into the found company. It can easily take another five to ten years for this to develop as desired. This is a really long-term business. Investors must not be dependent on capital."

Even more serious is the fact that there are too few searchers in Europe - and especially in Germany. This makes building up a portfolio a lengthy process. "In Germany, this approach is simply still too unknown. It is currently only taught at the IESE in Barcelona, at the Instituto de Empresa in Madrid, at INSEAD in Fontainebleau and at the London Business School. We do not yet have this topic at the universities," Rilling explains.

The type of training in this country also stands in the way of the Search Fund idea. In the USA, students first do their Bachelor's degree, then work for three to four years and then supplement their training with a Master's degree. "They will then be in their late 20s and early 30s and will experience a natural caesura in which they will think again about their careers - this is the ideal time to become active as searchers," explains Thomas Bühler.

In Germany and the majority of Europe, on the other hand, students complete their Master's degree directly after obtaining a Bachelor's degree. "And for all those who have worked for Boston Consulting or Goldman Sachs for five years, seven days a week, 18 hours a day, after graduation, and earned a lot of money, it's hard to go the tough searcher's way again." There is also a typical German problem. "Americans, when they look at statistics: Wow - 75 percent of searchers create a deal. I can do that, too. The Germans say: For God's sake, 25 percent can't find a company. What do I do then?"

Further dissemination of the model would be a blessing for society. "The succession problem is pressing, so the target companies are here. Und Investors can also be found. What we need now are graduates with courage," Buhler makes clear. He himself has already given a lecture at the TU Munich. His partner is driving the issue forward at INSEAD. And Jürgen Rilling is on the organizing committee of the Search Fund Conference at the IESE.

Patrick Maurenbrecher has now decided to launch further initiatives at German universities. "My goal is to establish a kind of search-fund network - universities, entrepreneurs, investors. We could do an event four times a year where Searcher submits their papers. There aren't that many loose ends to tie together. We just have to do it."


How to invest in Search Funds.

// 01. direct investments

For entrepreneurial investors, direct investments in various search funds are the first choice. Those who want to go down this path should be prepared to contribute their entrepreneurial knowledge and invest at least five million euros in this idea. Only in this way can a portfolio of ten to 20 search funds be built up, which then leads to six to ten company acquisitions. The selection of searchers is particularly critical. It therefore makes sense to first attach yourself to experienced investors.

// 02. The fund solution

In order to be able to offer its clients a diversified fund solution starting from an investment sum of one million US dollars, the Kontora Family Office cooperates with the investment company Relay from the USA. The founders have been participating in search funds as funds of funds since 1992. "However, there was a problem to solve", says Patrick Maurenbrecher, "Relay had set up its fund exclusively for US investors. However, the structure chosen was very disadvantageous for European investors from a tax point of view. The challenge was to find a solution that would allow investments to be made jointly with US investors without being tax-disadvantaged. This has been achieved by establishing a parallel structure. In the end, Relay was not only able to absorb Kontora's clients, but also expand its investor base in Europe as a whole".

Maurenbrecher's long-term goal is to further establish the search fund model in Germany and thus contribute to solving the succession problem in Germany.


In Search of Excellence.

"I'm very close to a software company," says Manuel Hein, "the founder is in his late 50s, a tech genius, and would like to work for another two to five years. This could be the perfect combination." A technician who doesn't really like doing business at all. And a marketing and sales talent with an international network. That sounds good. "When the entrepreneur then leaves the company, we jointly catapulted it to the next level. That would be great for both sides."

Hein has been a searcher for 15 months. After studying dual mechanical engineering at Mercedes-Benz, he worked almost daily for medium-sized companies, investigating their value chains and frequently came into contact with business management issues. "Back then, I used to think, "What they can do, you can do. Or better yet." He decides to add a business administration degree in the USA. With the firm goal of becoming an entrepreneur yourself.

Searchers obviously have the entrepreneurial gene in them. And usually also a long-term plan. After his dual studies at Bosch and the subsequent master's degree in management at the commercial school in Leipzig, Kilian Lamprecht, for example, writes his master's thesis on family businesses. Then works for two years at the management consultancy Oliver Wyman. "I was already preoccupied with the issue of succession back then. Always with the idea in mind of being able to take over a company this way."

Through his network, Lamprecht learns about the Search Fund idea from Hein at his university, Columbia Business School. "For someone in our career phase - late 20s, early 30s, with a lot of potential and great results, but still inexperienced - the overall package is unbeatable," says Hein.

Of course, the two also considered whether it would not make more sense to finance the search themselves. "But being accompanied by experienced entrepreneurs at a very early stage is simply a huge opportunity. We have a lot to learn. The investors accompany us to discussions with company owners or banks. That gives credibility. Entrepreneurs want to have the feeling that they are giving their company to someone who knows what they are doing, whom they can trust to continue their life's work. And, of course, we also benefit greatly from the investors' experience in narrowing down the acquisition target. If they find a company good, it gives me a lot of security," explains Lamprecht.

That is why it is so important to have the "right" investors. "Experience with the topic of search finds is crucial here. These are the best sparring partners. Your feedback is razor sharp. To the point," Hein explains. These icons are US funds such as Relay, Pacific Lake and Anacapa. Or private individuals such as Bill Egan and Jamie Turner, Jürgen Rilling or Thomas Bühler - "every searcher wants to win them over".

The search itself had to be experienced by both, but is more difficult than expected. That's actually amazing. A survey conducted by the Kreditanstalt für Wiederaufbau in 2016 shows that 620000 small and medium-sized enterprises in Germany are looking for a successor in the coming years. "You can't be blinded by these figures," Hein relativizes, "because our selection criteria are very strict, we don't really consider more than 1000 companies."

The company should generate between five and 20 million sales, be profitable and active in a growth area and have a high proportion of recurring revenues. In addition, the entrepreneur should have established a strong second level of management and made the organisation largely independent of himself. This is important so that the company can continue to run smoothly during the initial learning phase, which every young entrepreneur certainly needs.

"The strict investment criteria help because they make our success as entrepreneurs more likely. But we also have to distance ourselves from a lot of exciting topics," Hein admits.

The searchers are currently facing an additional challenge. The economic situation in Germany is simply too good. That's why one or the other entrepreneur is already considering whether to sell his company right now. Of course, everyone knows that they will have a cash flow problem after the sale. So far, they've paid a decent salary. After the sale, it is difficult in the zero interest rate era to achieve similarly high current income.

That sounds a bit like looking for a needle in a haystack. Basically the searchers use four channels: Consultants, business exchanges, recommendations - and of course direct acquisition. "That's still the preferred way," says Hein, "it's just a matter of cleaning the door handles. From 100 calls and initial conversations, there are five to ten follow-up conversations with entrepreneurs for whom my offer fits the personal and entrepreneurial situation."

If the interest is aroused, the searchers can score with an "almost unbeatable" value offer. "We are the most flexible buyers. There is no blueprint to guide us, as is the case in the private equity sector. We can respond very individually to the needs of the entrepreneur," Kilian Lamprecht makes clear. Help shape the transition process? No problem. No problem. Stick around for a few more years? I'd love to.

"We don't just bring money, we also take the long view. This is exactly what many financial investors cannot afford. And - we are not employed managing directors, but have 'Skin in the Game' ourselves, so we are significantly involved. Anyone who sells to us gives their company perspective," Hein advertises.

That Searcher could therefore negotiate a particularly favourable price is, however, not entirely correct. "It may well be that the Search Fund does not have to make the highest bid. Because the salesman might want to pass his company on to his younger self. To someone who settles down on the spot. Which he got to know exactly. The one he trusts. But he won't sell the company cheap because he likes the searcher. The price must be fair. And that's okay," Lamprecht explains.

What advice would the other two graduates who are interested in the topic Search Fund give? "You must be aware that this is a long process. A period of life that requires courage. It won't be easy. But it will be worth it," Kilian Lamprecht is convinced.

Manuel Hein is currently negotiating a letter of intent with the "tech genius" regarding a future acquisition of the company. "But my investors have already warned me, don't get excited too soon, it's still a long way to go." What if the deal still goes wrong? "Then I'll keep looking. As entrepreneurs, we show life an edge, take initiative and make something of it. This may not be everyone's cup of tea. But it's great."


Private wealth makes a difference.

The fascinating idea of using von Search to invest funds in medium-sized companies and solve succession problems at the same time deserves every kind of support.

private wealth is very happy to participate in the establishment of a Search Funds network in Germany. If you are an investor interested in this idea or would like to pass on your company in the foreseeable future and can imagine a searcher as a buyer, please contact us This email address is being protected from spambots. You need JavaScript enabled to view it.). We'll join forces.

The third international Search Funds Conference at IESE, which will take place from 4 to 5 October in Barcelona, offers a first, interesting insight into the world of search funds. (More information: http://www.iese.edu/en/faculty-research/events/3-international-search-fund-conference/)



Author: Klaus Meitinger


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