Search Funds in the Nordics

The Nordic ETA opportunity: Search funds, SF fund-of-funds, etc.

Search funds, a small-business acquisition strategy often referred to as “entrepreneurship through acquisition”, involve an entrepreneur, either self-funded or with the backing of external investors, searching for and acquiring a small, privately held, business. 

The search fund concept originated in the 1980s through Stanford GSB professor H. Irving Grousbeck's idea of providing a structured approach for entrepreneurs to acquire and manage small businesses. Throughout the 1990s, the model gained momentum, expanding to other business schools and attracting both entrepreneurs and investors. As the success stories mounted, the 2010s witnessed significant growth in search fund popularity, reflecting its adaptability to changing economic trends and entrepreneurial preferences.

According to a 2022 study on the topic published by the Stanford GSB, between 1986 and 2021, traditional searchers and search-acquired companies attracted $2.3 billion in equity investments, resulting in around $9.8 billion in returns for investors and $2.4 billion for entrepreneurs. 2020 and 2021 saw a surge in investment, with $776 million deployed into this strategy. The study also states that returns improved slightly compared to 2020, with an aggregate pre-tax IRR of 35.3%.

If you visit a few search fund websites, you’ll notice lots of similarities. Most emphasize their intention to preserve the previous owners’ legacy (which many SMB owners place a high value on) and they also have, more or less, the same investment criteria: at least 10-20% profit margins, recurring revenues, little customer concentration risk, a certain number of years of historical cash flow, and an EBIT range in the single to low double-digit millions of dollars.

Despite the successful and decades-long existence of search funds in the US, this concept hasn't gained substantial traction in Sweden, or the Nordics overall. There are a few active searchers on the Swedish market right now conducting self-funded searches, and there are at least two historical examples of entrepreneurs raising capital in-line with a search fund strategy and successfully completing acquisitions, but the strategy remains incredibly nascent in the Nordic market.

A wave that a lot of US searchers are riding is the “silver tsunami”, i.e. SMB owner/operators nearing the age of retirement and looking to exit their businesses. Sweden’s age demographics don’t vary much compared to the US, so it’s likely reasonable to assume that the same trend should be playing out in Sweden too, i.e. SMB owners who are willing to exit as they reach their late 60s and early 70s. In fact, in Sweden, it has been estimated that the share of small-business owners older than the age of 55 amounts to 43%. Additionally, 17% of the business owners have already passed the age of retirement, which amounts to approximately 47,000 businesses. 

Despite there seemingly being a healthy amount of supply, the model still has not gained traction. Aside from competition from lower-market PE, it's plausible, too, that the lack of search funds might simply stem from a lack of familiarity with the concept. 

In the US, the "search fund ecosystem" plays a significant role in the success of search funds. This ecosystem comprises various fund-of-funds, like Search Fund Partners and Pacific Lake Partners, which specialize in supporting searchers. Additionally, there are service providers skilled in search fund transactions, such as attorneys who may accept equity in acquired companies as part of their compensation. These funds and support networks not only offer financial assistance to searchers, some of whom raise hundreds of thousands of dollars to fund a search that typically lasts about two years, but they also frequently become equity partners in the businesses acquired. Moreover, many successful searchers now mentor and advise new generations of searchers, creating a self-sustaining cycle of success known as the flywheel effect.

Each year, more Swedes—and other Scandinavians—attend US MBA programs, many of which offer dedicated resources and courses on the search fund strategy. As an MBA student at HBS, I’m part of a growing group of Scandinavians considering launching searches in the Nordics after graduation. As this trend continues, the Nordic market will likely experience increased demand for both search capital and equity gap funding from returning searchers. It's only a matter of time before ETA courses are introduced at Nordic business schools.

Positioning yourself as the go-to fund-of-funds (FoF) for Nordic searchers, building strong connections with searchers-to-be at these business schools, and creating a robust pipeline to attract Scandinavians in MBA programs abroad who plan to return for a search remains a wide-open opportunity—but probably not for long.