Actual returns in search

investor profile

September 03, 2024

by an investor from Harvard University - Harvard Business School in Cambridge, MA, USA

I'm not sure who needs to hear this, but I think it's important for everyone to know that while search can be a really attractive asset class, the average returns quoted in the Stanford study are very inflated.

I've gotten to see the returns of several blue chip institutional and individual investors who have been doing this for 20+ yrs, and no one is over 30% IRR. These investors are no doubt top quartile, and so my guess is average returns are 10% or so.

Why does this matter? For investors, it's not as though you are cherry picking in a pool that will average 33%, you need to really do the work.

For searchers, there are many examples of businesses that have gone south and the idea that 50% of people who do search will have a good outcome is just not true. You really need to buy the right company, and put the right advisors in place.

I say this after seeing a company blow up this week, searchers bankrupt (and in a very bad state mentally). All of which is avoidable, and IMO probably caused in large part because we see the Stanford avg MOIC/IRR so many times, this stuff starts to seem easy, it's not!

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Reply by a lender
in Stuart, FL, USA
Thanks Phil. This could be the most intelligent post I've seen on this board since I've been involved with it. I've mentioned this before and I'll say it again, one common MO that I see with young search funders is that they can only see the upside and they refuse to look at the downside of things. The fact is you will have more bad news than good on the average deal, especially when taking over an existing company. A lot of searchers simply do not want to put in the work required to take over a company because they've been sold a dream that they can just buy it and the business is going to run itself. I just got pulled into a deal to try to find a searcher (that is with a very well-known fund) working capital because he doesn't have what he needs to move forward with running the business the way he should. Nobody at the fund is willing to step up and help him with the working capital and they probably should have found a better searcher because this person only wants to show up to a brand new acquisition once or twice a week for a few hours and is not taking advantage of any of the training the previous seller is trying to give him. So much so that the seller is dragging the broker back into the deal to try to get everybody back on board to talk some sense into the searcher/new business owner to make sure he doesn't run this business in the ground in no time flat. Running a business, especially a new one (new to you) takes time, effort and resilience. If you are not willing to put everything you have into running your new business, at least initially, you should probably not buy a business.
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Reply by a searcher
from DePaul University in Chicago, IL, USA
Thanks for posting. I posted about this a few weeks ago on an internal Slack channel for Acquisition Lab. I've got the raw files, but am not sure how to include images and other files in a comment here.

>> Some of you might be interested in a post that came up in my LinkedIn feed today via one of my connections. It cites a search fund study from Stanford that just came out in June (looks like these are published every 2-3 years). Some interesting updated stats, even though we're not doing search funds here. I've attached the study.
>> https://www.gsb.stanford.edu/faculty-research/case-studies/2024-search-fund-study
>> https://www.linkedin.com/feed/update/urn:li:activity:7229471896600260609?updateEntityUrn=urn%3Ali%3Afs_updateV2%3A%28urn%3Ali%3Aactivity%3A7229471896600260609%2CFEED_DETAIL%2CEMPTY%2CDEFAULT%2Cfalse%29
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