What is a Search Fund?

If you’re here, you are probably wondering the same thing that I was when first introduced to Ellery Partners – what exactly is a Search Fund? You may have seen that “Ellery Partners was founded to identify, acquire, and operate a single, high-quality U.S. small business with potential for substantial organic and inorganic growth.” This gives a great overview, but does not describe how it works or why someone would want to do it. After two weeks of being an Analyst while continuously learning from Jalen & Orlando (principals) as well as the rest of the group of interns, I feel I can shed some more light on the topic.

Search Funds move generally through four stages: fundraise, search, operate, and exit. Fundraising can last between one and six months and consists of identifying a good-fit group of investors to raise capital to begin the search. These funds are used for diligence, broken deal fees, travel, salaries, and any other initial expenses. However, not all firms raise capital for the search process. The search stage can last between one and two years and includes reaching out to business owners, due diligence, and the debt and equity raise for the eventual acquisition at the end of the stage. Without getting too consumed with details, Search Funds will set their own criteria for industries and companies of interest based on growth, size, landscape, and a variety of other factors. This is the stage Ellery is currently in and includes a great deal of due diligence as well as outreach efforts. Once the acquisition is made, principals will operate for four to seven (or more) years. A Search Fund is different from traditional Private Equity firms in that Jalen & Orlando will act as hands-on owner operators. They will utilize their previous experience in IB, Consulting, and Private Equity to grow the firm and benefit everyone involved. After a successful 7+ years of growth, the exit stage includes the sale of the firm to strategic or financial sponsors. Some investors roll into a new deal scenario where searchers continue to manage the company for the long-term.

Overall, this is such an attractive investment vehicle because Search Funds have produced outsized returns over the past 25 years. Since 1985, they have generated 6.9x MOIC and 34% IRR on aggregate. They offer the opportunity for an initial investment with limited downside but large option value. I hope this offers a clearer picture of how a Search Fund operates and what we are trying to accomplish here at Ellery Partners. While only two weeks into the process, I couldn’t be more excited for what is yet to come.