Traditional search funds - sector agnostic or sector focused?
October 25, 2023
by a searcher from University of Adelaide in São Paulo, State of São Paulo, Brazil
I've definitely seen sector breakdowns in GSB/IESE studies of the businesses ultimately acquired by search funds, but I'm not sure I've ever seen a breakdown of the proportion of funds that set out with a specific sector focus, versus funds that are broadly sector agnostic at the outset? (usually geographically focused, more-so than sector focused).
Either anecdotally or quantitatively, does anyone have observations about the relative frequency of each approach? (explicitly, strategically, from the outset i.e. in the fundraising stage, not just tactically during the search itself).
from Tufts University in New York, NY, USA
Kevin Oxendine, Pacific Lake; Industry thesis search is the best way to set you up to win. 90% w industry thesis acquire (in contrast to 67% overall). Allows you to show up differently. Allows you to quickly build credibility with the seller, find a connection. Higher quality, faster growing. Sets you up to acquire in an attractive industry. Where there’s a rising tide. Start in a direction that makes sense for you. If can’t find a good target, pivot: 5-10º. Start by talking to industry participants (not owners). This will help you get smarter, with lower stakes. Then going to be more informed when talk w owner. When you do start talking to owner, approach from perspective of trying to learn more about their industry. How? Tools, e.g. Grata, trade assoc list, industry conference. Reach out in an authentic way.
^redacted, TTCER: Industry thesis really helps you avoid wasting time on context switching. Get up to speed on being able to make better judgments quickly about what makes a good target.Question becomes how do I become an industry expert rather than how do I acquire a company. Inverse relationship between success and sexiness of an industry. What’s your professional background? What are you passionate about?
^redacted, Maven: They are constantly working with searchers to determine if a company/industry is a good fit for them. Time management is the hardest part. Which rabbit holes, how far down, when do you decide to pull out. E.g. not enough targets, businesses aren’t good enough, or not a good fit for you.
from University of Virginia in Miami, FL, USA
As for sector focus, this will depend on your own expertise and the value proposition you're pitching to investors - if your background is highly specialized and/or technical and your thesis revolves around applying your background to create outsized returns on the business you will operate, then you should absolutely narrow your sector thesis. If you have a more traditional and generalist background of IB, PE, or Consulting, etc, the more practical approach is to pick a few sectors you like (in your PPM), and prepare yourself to walk investors through your thought process for building a thesis in said sectors. Investors won't hold you accountable to find a business in those sectors but they will want to understand how you approach building a sector thesis, and of course, what your preferences are for sectors you'd like to operate in. Similar to geography, investors will want to ensure you're casting a net wide enough to find a great business they can back (again, unless you're highly specialized and have a reason to be narrow). I wouldn't recommend being too narrow on sectors unless you have a good reason to.
With that said, keep in mind that certain investors have their preferences for the sectors they like to invest in, and by extension, the searchers they choose to back (one common example is Software - some investors like this sector much more than others).