Although search funds may seem very complicated, they can be explained perfectly with one analogy. Search funds are like horse racing, their success is determined by the jockey, the trainer, and the horse.
The Jockey – The jockey of a search fund is the searcher, who often is a bright and talented aspiring CEO, but with no high-level management experience prior to a search. Searchers are drawn to the search fund model because it allows them the independence to manage their own firm and explore different industries in which they would own a business
The Trainer – The trainers of the search fund model are the investors. Institutional investors have identified highly talented young entrepreneurial minds as a great investment to diversify their portfolios and help small businesses grow. These investors, who often have prior experience working with other searchers, offer guidance and oversight to the relatively inexperienced searcher when they first start running their company or are searching for a company.
The Horse – The horse of the analogy is the business itself. Just like in horse racing, it doesn’t matter how good the trainer and jockey are if the horse doesn’t have the ability to keep up in the first place. It is imperative to buy a business that is in a growing or steady market, has historical growth and profitability, has a strong recurring revenue, and has low CapEx requirements.