Is a geographic focus for traditional search necessary in Europe?

November 17, 2020

by a searcher from INSEAD in Sydney NSW, Australia

In the US, traditional search funds largely need to be geography agnostic (within US) to get funded for a traditional search - this makes sense given it's within the same country. How does this translate to Europe, however? I would assume you'd still focus your geography to one country, e.g. Belgium? Or would investors prefer picking a region, e.g. Benelux, Nordics, DACH?

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Reply by an investor
from Harvard University in Vancouver, BC, Canada

Daniel is correct - depth of the SME market probably matters most. If it is a bigger market, with plenty of potential (on target) sellers, a single country makes sense. If a little smaller, a regional play can work too. But that region should still be a cohesive sub-set of countries like you suggest (for example, we've backed and/or liked searchers in Czech & Slovakia; Spain & Portugal (Iberia); Latvia, Lithuania & Estonia (Baltics); and, outside of Europe, the same applies (e.g., Ivory Coast, Senegal & Ghana in West Africa strategy. Importantly, these regional clusters often share deep economic ties, similar business cultures, and common currencies, which allows for some fluidity across borders during the search (and for regional expansion during the operations phase).

That said, perhaps the biggest consideration is legal & tax structuring for the Search Fund. You want to make sure that there are no insurmountable structural issues created by domiciling in one jurisdiction, while intending to search / transact / operate / exit in another. If your selected markets are too "unharmonised", it may be worth considering a "neutral" domicile (e.g., in Europe, Luxembourg, or another) that affords flexibility across markets. All of this adds complexity to your strategy, however, so the regional play better make more sense than a slightly more complicated structure.

Reply by an investor
from University of Colorado at Boulder in Horsham, PA, USA

Generally, investors prefer to see searchers focused on the country they are from and know best. So, for instance, if you are French, why would you add Belgium even though the language is the same? France is a big country, Belgium is different culturally and how business is done, so why would you look outside of France? If, however, you are in the Flemish-speaking region of Belgium (Dutch speaking), then it is too small and you should look at the Netherlands too. The same is true for Germany (no need to look elsewhere, unless you accidentally find something in Switzerland or Austria) and Austria/Switzerland (smaller, so you may need to look at Germany too.) What increases complexity in Europe is also how one nation feels towards the other one. Sometimes they don't like each other or look down upon each other. P.S. There are always exceptions to these rules e.g. a Spanish/Portuguese duo covering all of Iberia etc.

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