any risks of being a sole investor to sponsor a searcher?

October 19, 2018

by an investor from University of Pennsylvania - The Wharton School in 中国上海市

I'm thinking about becoming a search investor in China. As currently there is no search investors in China (as far as I know), I likely have to be the sole investor if I find a good searcher whom I want to invest, unless I or the searcher can bring in international investors. Being the sole investor might have some unique risks (e.g. relationship with the searcher is more critical). Can anybody give me some insights or thoughts? Thanks.

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Reply by an investor
from Harvard University in 1113 Spruce St, Boulder, CO 80302, USA

I have enjoyed the search model in North America for all the usual reasons of enjoying the low end of the middle market—power of leverage but lower purchase multiples. The other reasons are diversification, and we have invested in a dozen search acquisitions now, and the power of multiple smart people screening the deal and helping the company. With a sole investor you lose some of that syndicate brain power. So I would say the three risks are more money behind one searcher so that if he doesn’t succeed in finding a company you lose more money, you lose the brain power of the syndicate, and unless you want to put up all the money for the acquisition you take the fundraising risk in the acquisition.

Reply by a searcher
from Dartmouth College in Avinguda de la Granvia, 8, 08075 L'Hospitalet de Llobregat, Barcelona, España

In our experience during our fundraising, local investors usually required that we searchers get foreign investors on our search fund (and foreign investors required local ones). It's not crazy to think that any Chinese searcher should probably look for foreign investors as well, which won't leave you as the sole investor of the search fund. So, a follow-up question would be, do non-Chinese investors have an appetite for investing in China?

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