A recent article from FT Adviser discusses recommended changes to the London Stock Exchange, and in particular the Aim market (the LSE’s junior market for small and medium-sized businesses).
This follows recent reports of a number of high-profile de-listings from the Aim market, including two of Britain’s leading biotechnology companies, C4X Discovery and Redx Pharma.
C4X chief executive, Clive Dix, speaking with The Times cites weak valuations as the reason behind their de-listing and this appears to be a theme amongst a number of companies coming off the junior market.
Despite negative reports from the Aim market, there is still a strong appetite to invest in off-market UK businesses and we have seen a spike in off-market investment through search funds.
A search fund is, at its core, an investment in an individual; an individual who is usually experienced in a specific sector, tends to come from a C-suite role in that sector and wants to leverage that experience to raise investment, acquire and grow a business in their specialist sector.
Originally devised by Stanford Business School in the 1980s, the traditional search fund is set up as a limited company (with the entrepreneur as founding shareholder and director) with investors subscribing for equity and, with the funds raised, the entrepreneur pays themself a salary and dedicates their working time to searching for the right business to acquire (hence the name, search fund).
Once the entrepreneur identifies the right business and initial due diligence checks have passed, the entrepreneur would go back to the investors to raise further capital to fund the acquisition.
We are also seeing an increased number of search fund acquisitions with the entrepreneur coming from outside the relevant sector, but still with demonstrable experience in general business operations and, in particular, experience in increasing the value of a business, with new searchers often coming from investment banking or private equity backgrounds.
In fact, London Business School even offers a search fund elective as part of its MBA programme.
The rise of the search fund may also coincide with the so-called ‘silver wave’. In the mergers and acquisitions world, this term refers to the baby boomer generation of business owners who are now approaching retirement age, which has resulted in an increased number of businesses on the market, many of which are too small to attract the attention of private equity funds.
Selling to a search fund is not without its advantages to the sellers themselves. One of the key differences between a private equity fund and a search fund is that private equity would normally require the existing management team to stay on and run the business after the sale, which is generally not the case with a search fund, given it has a ready-made chief executive ready to step in and take over management.
