Community interest in a searcher focused credit fund?

July 18, 2025

by an investor in North Carolina, USA

Posing a question here to gauge the community's interest in this sort of vehicle. Would there be interest from searchers for a non-SBA (no PG) credit fund that services the $1mm-5mm lender space for searchers? So acquisitions would be $1mm+ and there would be a need for 10-20% equity from the searcher. My thought is this would be a 5 year interest only loan, but the interest rate would be in the 12-14% area and the lender would get warrants for a small percentage of the business (at original purchase valuation). This would save searchers from the PG and save cash flow versus the ~16% annual cash payments (amortization + interest) on SBA loans. Would investors be interested in this sort of structure, where the fund is writing a number of $1-5mm checks into small entities, while gaining the upside of equity on these investments? I have a background in both credit and equity investing in the ETA space and thinking this could be a structure that fills a gap in the market. Risks are managing a larger pool of small investments, managing the entities that don't perform and taking action to protect investor capital if needed. Interested in hearing community feedback.

Reply by a searcher
from Syracuse University in Tampa, FL, USA

In my experience this type of debt already exists today. There are a large number of PE sponsors out there using private debt funds for mezzanine-style debt to leverage their deals. This style of debt is particularly popular with SBIC funds (structured debt / equity). In my LMM PE days every one of our deals was underwritten with 10% IO / 2% PIK and usually the fund would get warrants or co-invest for up to a 10% equity stake in the business. I never saw it deployed in a search-fund model, though, which perhaps is an underserved niche of this style of debt.

Reply by a searcher
from University of California, Berkeley in Seattle Metropolitan Area, WA, USA

Happy to chat and hear what you think could work. Conceivably, there should be plenty of demand for this. I think there's a reason the supply isn't as prevalent but if there is investor capital that thinks this is a better way to allocate than direct investments themselves, then it should exist. I think a big challenge is the initial portfolio construction, what arises for those avoiding SBA, and the types that can afford the more expensive capital, as well as vetting the sponsors/acquirers.

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