Posted on: October 10th, 2017

Search equity funds are a growing force in middle market M&A. Search funds, as the name implies, are usually seeking a single company to acquire. The search is based around a big idea or core competency of the team, that they will bring to the acquired entity post-closing.

These funds, are in some respects, like fund less sponsors, but they usually have stronger skill sets and operating expertise to bring to the table. The success of a search fund is based on their ability to find the right company and have the right investor base to back them.

Many search entrepreneurs are younger and in many cases, newly minted MBA’s. What they may lack in sheer age, they make for in energy, networking and focus.

Search funds should articulate a well-crafted investment thesis and deliver a strong presentation to even land a meeting with a prospective investor. Concurrent with this, search funds must create a deal origination platform which involves an enormous amount of effort.

Searchers usually have a finite period of initial funding which forces them to move quickly and find the right deal. Once its signed up, they need to find a lender to supplement the equity investment to be able to close.

While super talented at creating great deal opportunities, most searchers have little experience in debt structuring, and are not connected into the debt capital world. Rather than navigate the fragmented debt market on their own, debt advisors help search funds by bringing expertise and lender access to the search fund.

The right debt advisor can turbocharge your financing process, and reach far deeper into the lender market than you can on your own. They will provide thoughtful and creative loan structures that will provide not only capital to close but capital to grow.

With the right debt advisor, a search fund will improve their debt sourcing options and improve their terms with the lenders. Given the need to move and close quickly, debt advisors give search funds a valuable edge in the competitive world of search fund M&A.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.

Why Search Funds need a Debt Advisor