Inside The Rise Of Search Funds: Private Equity's Hidden Gem

Forbes

30-06-2025

Krishan Arora is the Managing Partner at Novastone Capital, a PE group with over $440M in capital deployed across 23 global acquisitions.
In the landscape of private equity and entrepreneurship, search funds have emerged as an innovative asset class. Originally conceptualized at the Harvard Business School in 1984 and further developed at the Graduate School of Business at Stanford, the search fund model has matured into a proven pathway for entrepreneurs, investors and mid-career professionals alike. The latest data from the Stanford 2024 Search Fund Study underscores the resilience and appeal of this model, even amidst larger global macroeconomic forces at play.
For those entrepreneurs interested in pursuing this model, it's vital to understand the nuances and challenges.
Understanding The Search Fund Model
A search fund is an investment vehicle where mid-career professionals or entrepreneurs raise capital from a search fund program or private investors to search for, acquire, operate and then scale a privately held company. This business model offers an opportunity for these professionals or entrepreneurs to step directly into the role of the CEO of an existing small-to-medium-sized enterprise (SME). These SMEs are on average typically generating between $1,000,000 and $5,000,000 in EBITDA, so they sit on the lower end of the lower-middle market private equity world. These SMEs usually have around 30-50 employees, and have been in existence for over 10-plus years.
What makes the search fund model unique is the hands-on nature of the investment. Unlike traditional private equity or turnaround initiatives, where operators are hired post-acquisition or post-distress, here it's the entrepreneur (searcher) who finds the deal and steps in to run the business. This creates a deep alignment of incentives between the operator and investor, and it also attracts a different kind of talent—the one that is hungry to build, not just manage.
These searchers and mid-career operators are not buying high-growth startups; they are acquiring steady cash-flowing businesses that have been around for decades, and are then breathing new life into them. It is this unique mix of entrepreneurial grit and investor support that helps explain why this model has gained popularity.
The Business Impact
Based on the findings of the 2024 Stanford Search Fund Study (download required), which reviewed 681 search funds across the U.S. and Canada, these investment vehicles have the potential to deliver strong financial performance for investors. The report cites an average internal rate of return (IRR) of 35.1% in 2023 and 35.3% in 2022. The return on investment (ROI) for investors averaged 4.5 times.
But these figures tell only part of the story. Behind each data point are real entrepreneurs and operators stepping into real leadership roles and transforming real SMEs.
The consistency of returns across the many global market cycles suggests that this search fund model is more than a trend. It's starting to look like a unique path for investors and operators who are willing to take a long-term view and roll up their sleeves. The average hold period post acquisition is generally around 5-7 years, so it's generally in line with the holding period of many other appealing asset classes to investors.
Growth And Evolution
Over the past few years, the search fund landscape has undergone a massive transformation, sending a clear signal that a once-niche model is now gaining greater widespread traction and awareness. What's even more compelling is that the shifting profile of who is driving this momentum. The latest waves of searchers include more women than ever before, as Stanford found that 17% of all new fund managers in 2023 were women.
At the same time, we are seeing a diversification in how these funds are structured as well. New variations like self-funded efforts, operator-led program-backed searches and long-term hold fund models are emerging, each offering tailored approaches to various groups of investors. Taken together, these trends point to a maturing high-IRR asset class that is becoming more inclusive, flexible and relevant in the volatile world of entrepreneurship.
Challenges
Of course, the road to success in this space is far from guaranteed. While the search fund asset class and model offer investor metrics and upside, not every searcher's journey ends with a closed deal. Roughly 60% of searchers acquire a business, meaning that the other roughly 40% try hard to land a deal but are not able to finalize their acquisition. And even when the acquisition happens, the real work is just beginning.
Leading an SME through a transition and then a value creation plan is no small task; it's riddled with late nights and an uphill battle. For investors, this variability reinforces the need for a portfolio approach. Spreading capital across multiple searchers is a recognition that outcomes can vary based on industry, timing, the searcher and just good, plain old lady luck.
Still, for many entrepreneurs and investors, the risk is part of the appeal. Search funds represent a rare blend of entrepreneurship and hustle, allowing operators to earn their way into equity and ownership while giving investors early access to often overlooked businesses with real IRR potential. As the search fund model continues to grow across geographies and adapts to new macroeconomic climates, it's attracting investors and entrepreneurs.
Opinions expressed here belong solely to the author and do not reflect the views of their employer.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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