Self-Funded Searchers: Validity of a pledge fund?

August 18, 2022

by a searcher from Stockholm School of Economics in Atlanta, GA, USA

Hey All - For those pursuing a self-funded search that can fund their own search and even invest more funds into a deal, have you explored the idea of an additional layer of "pledged" funds that provide a capital cushion for bigger deals?

I am hearing more stories from self-funded friends/colleagues who are finding sizable opportunities that exceed their capacity to fund it themselves or their current investor base, and then rushing to find other capital at poorer terms, which may include the loss of company control. (This is much less relevant for traditional searchers or independent sponsors with a track record.)

Recently, I have begun to model out and explore frameworks for a "pledge or fundless model" scenario, where potential investors can either pledge future support (doesn't have to be binding) or at least be on the short list of people you shop first with when a deal is present. This can at least start the process early and provide a little more insurance for the unexpected (e.g. you don't wait until the signed LOI to meet great investors).

What are your thoughts? For those knowledgeable about it or variations of such a model, happy to compare notes and market terms and even marketing techniques if interested. Ping me a direct message if so. Thanks, Marc

Reply by a searcher
from University of Calgary in Calgary, AB, Canada

I decided to pursue a self funded search after speaking with a lot of other searchers, advisors, etc. in so doing I met investors along the way. For me the whole point of a self funded search was to provide myself with the flexibility to look at the deals that made sense for me and my family, having a network of people that would look at deals that fall outside my self financing scope gives me more flexibility for sure so I think you are approaching this correctly.

Reply by a searcher
from University of Texas at Austin in Dallas, TX, USA

This is similar to the approach my partner and I are taking. We're self-funded and should be able to finance the majority of the acquisition through a combination of our own funds, family, and SBA/traditional debt. However, just because we're not going the traditional route doesn't mean that we aren't talking to investors. If we end up finding a larger opportunity, we want to be able to go to those investors to help close the gap.

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