$25 million is the new number nowadays?

[Sig]

Sig - any insight on the holding period within the sample you came across?

the forbes articles mentioned up to a decade plus before the exit, is that the typical range? also just wondering how the general partners protect themselves in case of a downside situation?

I'll answer your second question first. The beauty of a search fund from the LP perspective is that you put down a very small amount of money in the search phase which you should look at as a real call option. You then get to spend many months watching your new management team in action and evaluating the companies they find a do due diligence on. At the point you have to put up real money, when they've found and are ready to complete a purchase of a company, you know far more about them and the company than you would in any equivalent PE purchase situation. And you're under no obligation to join the investment round, so you can just let your relatively cheap call expire if you didn't like what you saw. You don't get that in a regular small company PE investment. So that's the main risk mitigation. In addition, the structure is generally set up so that the search funder's compensation is based on a hurdle rate, for example if the investment IRR is 10% of exit they get 5% of the profits, if the IRR is over 20% on exit they get 15% of the profits, if it's over 50% they get 30% of the profits.... If things are going badly the investors still control the company so they could force out the CEO and sell or liquidate, but really those types of small investments are either succeed or fail without a lot of middle ground.
The two search funders I personally know exited within 5 years. Certainly that would be ideal, it's very hard to have a big IRR over a 10+ year holding period. If you were to take it out to 10+ years it would probably be because you were doing very well or doing a roll-up strategy where the numbers were getting pretty big, so that would generally be a good thing.

 

[Sig]

good stuff, i looked up search funds and it seems like their model is similar to doing a leveraged buyout

the capital requirements are pretty high though, to put into an illiquid investment

The model I've seen is pretty much angel level investments. The standard at least used to be $10,000 per block for the search phase and $100,000 per block for the purchase phase. They try to get as much debt as they can, hopefully at least 40% and often can get a big seller's note as well, which mitigates the required investment level.

 

[pinetboltz]

The two search funders I personally know exited within 5 years. Certainly that would be ideal, it's very hard to have a big IRR over a 10+ year holding period. If you were to take it out to 10+ years it would probably be because you were doing very well or doing a roll-up strategy where the numbers were getting pretty big, so that would generally be a good thing.

thanks for the perspective bro, good to know more abt the sector even though it's probably only small percent of ppl who are able to actually get access

 

[newwurldmn]

The EBITDA multiples vary a lot but they're generally based on an established firm with some history and stableness to their earnings and EBIDTAs of at least $1M and often much bigger. In some cases you can get a much higher multiple if you've got a lot of administrative costs as a standalone company that the buyer can essentially do for nothing. They trend lower if your earnings volatility is high.
Your question is aimed more at a venture type investment, which is an investment rather than a purchase. There is the aquihire concept if you have a put together a good software team where a company will buy you as much for your team as your product. And if you have some trend of the day type software you might get someone to buy it, think blockchain software a year ago. But in general it's not worth the cost of due diligence to buy something for $1M unless there's some really great IP in there a company for some reason couldn't replicate on their own or it gets them a foothold in a very defensible niche they could expand.

I will add one concept about paying 1mm for a business and that is if you do a roll up. One of the search finders i know specialized in buying mom and pop businesses. He was paying 700k-1mm for them and he was buying 10/year.

 

[Sig]

I will add one concept about paying 1mm for a business and that is if you do a roll up. One of the search finders i know specialized in buying mom and pop businesses. He was paying 700k-1mm for them and he was buying 10/year.

Good point.

 

[sle]

I think the article is a bit misleading. It's not that 25m is where "riches start", but it's where PWM bankers are willing to take your calls these days. Private banking has been pulling away from the middle tier over the last years. There are several reasons for it.

First, it's the costs. Rich people are getting more price-sensitive and more sensible about these services. These days, nobody intelligent would pay 1% per year for basic investing and tax advice. Once you bump the fees down to reasonable levels (say 20 bps) and bump the services up to include fancier things, bankers need to be scraping off 25 to make it worth their while.

Then there is automation and self-sufficiency among the new generation of rich people. Modern technology and infrastructure means that you can do things relatively easy on your own. For example, these days you don't really need an accountant unless you are taking home multiple millions - good accounting software will take care of it for you. Same goes for investing etc.

Finally, it's consistent with the general trend in banking of reducing "human services". Twenty years ago, when everyone talked to human brokers and advisors, it was pretty natural to have fancy and extra-fancy buckets. Now the number of client-facing people has been reduced dramatically, you really only want to leave the extra-fancy one.

PS. There is probably anywhere from 100k to 200k of people with 25 million net worth in the US, which is consistent with the "client desires" of PWM bankers

PPS. Actually, the article says more or less the same I said above

 

[ironchef]

so on bloomberg's front page today there's an article re-run from earlier that gives $25 million as the new number for being entry lvl/"economy-class rich"

that's higher than expected, lol, even if you factor in any number of bitcoin traders who bought early and sold near the top

the article made it sound like there were lots of ppl who all had $25m cash ready to invest in the markets - just wondering who these guys are? like i don't see that many even among those who work in finance, consulting, law etc as having $25m liquid, or even coming close

are they pro athletes and real estate developers or what?

There are more folks with that level of assets here on ET than you realized.