RELAY, CASE STUDY

Employment Growth and Search Fund Investing

SANDRO MINA & MARTIN STEBER

Co-Founding Managing Directors

POSTED DECEMBER 2017

Image via Relay Investments.

The Principals at Relay Investments (“RI”) have been investing in search funds for over 20 years. During this time, there has existed an industry-wide belief that the companies acquired by search fund entrepreneurs have enjoyed both employment and economic growth. However, until recently that view has relied primarily on anecdotal evidence and the common experiences of participants in the investment strategy.

As Limited Partners across the alternative asset management universe have increasingly guided their investment managers toward responsible investing practices (often using the “ESG” – environmental, social, and corporate governance – framework), RI has sought to quantify, with empirical data, the notion that search fund investing generates a demonstrably positive ESG impact with the capital it deploys.

To that end, RI canvassed a wide array of operating companies, acquired through the search fund model over the past couple decades, to collect the number of new jobs created at each company during the tenure of the search fund entrepreneur turned CEO. This survey included all the companies RI has invested in as of December 31st, 2016.

The Chart below provides a summary of the survey’s results. Out of the 72 companies surveyed, 63 (88%) reported increasing headcount post-acquisition, including 33 firms (46%) that doubled the number of employees under the leadership of the search fund entrepreneur. In total, these businesses added 9,332 jobs, for an increase of almost 4x (271%). Encouragingly, businesses tended to add more headcount the longer the searcher held them; operating companies in the 0-2 years bucket added an average of 6 jobs per firm (total: 80), those in the 2-5 years bucket added an average of 126 jobs per firm (total: 5,935), and those in the 5+ years bucket added 276 jobs per firm.

Relay Investments | A Survey: Economic Growth & Search Fund Investing
Relay Investments | A Survey: Economic Growth & Search Fund Investing

Growth As Key To Value Creation

Investors like RI incentivize searchers to scale their businesses by vesting typically about 1/3 of the total searchers’ carry upon reaching net IRR targets. Most search fund sourced companies are relatively small and have failed to receive sufficient investment from their previous owners. As a result, search fund entrepreneurs usually focus on sourcing and retaining top tier talent very soon after taking office as CEO, as organic growth drives their own success. Next steps often include improving existing process, implementing tighter corporate governance, and entering new markets.

Wide Geographic Distribution

As shown on the Map below, the Search Fund strategy creates new jobs in 23 states and nearly every region of the United States, markedly differing from the employment effects of most venture capital transactions, whose benefits tend to accrue more to large coastal cities than anywhere else. According to the survey, six other countries enjoyed job creation under the search fund model: Mexico, Canada, Germany, Spain, Kenya, and India.

Relay Investments | Wide Distribution of Employment Growth From Search Fund Investing.
Relay Investments | Wide Distribution of Employment Growth From Search Fund Investing.

“Search fund investing generates a demonstrably positive ESG impact– Environmental, Social, Corporate Governance– with the capital it deploys.”

Permanent Career Jobs

As part of the growth strategy to build not only a bigger company but a better one as well, search fund entrepreneurs approach their management plan with a goal to move the acquired business up the respective industry’s value chain and thus receive a higher multiple upon their own exit. This phenomenon tends to produce higher quality, and permanent, new jobs rather than just temporary positions.

For additional employment & economic data from the Relay Search Fund Investing Survey, contact Nicolás Lulli at (857) 990-3554 or nick@relayinvestments.com.

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