Self-funded search economics

searcher profile

December 29, 2021

by a searcher from Northwestern University - Kellogg School of Management in Fort Lauderdale, FL, USA

What does the cap table look like for self- funded or single sponsor searchers. I’ve read 20-30% common equity for traditional search fund management packages, In self-funded model does the searcher also get preferred equity in order to recover the search costs, “step up equity”? Curious what structures investors typically see.

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commentor profile
Reply by a searcher
from Harvard University in Boston, MA, USA
Another way to think about about it is that the amount of equity that a self-funded searcher gets to keep in small deals is often back-calculated from the assumption of 25% IRR for investors.Thus, the % of equity is typically higher for smaller deals where the number of value creation levers is higher, but diminishes to the usual 25-30% as the deal size grows and you introduce complex businesses, increased competition, and sophisticated investors in your cap table.
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Reply by a searcher
from Northwestern University in Milwaukee, WI, USA
I should also note that generally the investors are the ones getting preferred equity, not the searcher. From what I've seen it's typically participating preferred where the investor recovers their full principal plus interest, while also retaining pro rata ownership. There may or may not be a catch-up for the searcher after the investors have received their principal + interest back.
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