Master Thesis on Search Funds - Research Question

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July 04, 2021

by a searcher from University of St. Gallen in Munich, Germany

Dear Searchfunder Community,

I am currently trying to develop a suitable research question for my Master's Thesis that I would like to write on a topic related to Search Funds.
For such a reason, if anyone of you has specific research questions he/she currently wants to investigate or thinks would be interesting to explore, considering also the available data, I would be very happy to receive your inputs and ideas.

I would be glad to get in touch with you and to hear more about all the interesting questions related to Search Funds you might have.

I thank you in advance for your help and wish you all a great day.

Best regards, Joao Brito

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commentor profile
Reply by an investor
in New Jersey, USA
Why do search funds appear to have such high returns from the investor standpoint compared to other equity like investments? https://www.gsb.stanford.edu/faculty-research/case-studies/2020-search-fund-study-selected-observations

Is it because multiples are so low in this space? EV/EBITDA or P/E. P/E is known to be a fairly weak predictor of excess returns in public markets.
Is it an illiquidity premium? Search funds appear to outperform Private Equity which is similarly illiquid.
Is it a size/market cap premium? This is also a weak predictor of excess returns in the public equity market. Likely not big enough.

Maybe a combination of all these things? But it still seems like that is not large enough. Something could be missing from the story. You would learn a lot from studying the topic, and any insight gained would probably be valuable to others.
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Reply by a searcher
from McGill University in Toronto, ON, Canada
I think the “valuation arbitrage” between diversified investors (search investors) and non-diversified investors (small business owners) is an interesting topic. CAPM says that diversified investors don’t need to be compensated for company-specific risk but non-diversified investors do. This means that the exact same business is theoretically “worth more” to a diversified investor than it is to a founder, even without operational improvements. How much of search outperformance is due to this valuation arbitrage?
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