Search funds expand in Brazil as an alternative to takeover entrepreneurship

An article titled “The Potential of Search Funds,” written by Rodrigo Maciel Rotondaro, Andrea M. A. F. Minardi and Newton M. Campos and published in the August 2023 edition of GV-Executive, explores the growth of search funds as an entrepreneurial alternative in Brazil. This model, created at Stanford and Harvard universities in the 1980s, has become an increasingly popular business succession option for small and medium-sized enterprises (SMEs).

Search funds function as investment vehicles that enable the acquisition of an established company. Entrepreneurs called “searchers” raise funds from investors to identify and acquire a medium-sized company, with the aim of revitalizing it and boosting its growth. According to the article, this business model combines private equity and venture capital practices and is an attractive alternative for entrepreneurs looking to avoid the risks of creating a startup from scratch.

In Brazil, SMEs account for 30% of GDP and 54% of formal jobs. However, many of these companies face challenges related to a lack of governance, succession plans and capital for innovation. In this context, search funds have emerged as a solution to promote their professionalization and growth. In 2022, 29 such funds were identified in the country, representing 11% of search funds in the world outside the United States.

As well as being a career option for entrepreneurs with a leadership profile, search funds are also an investment alternative with a high return and lower risk than startups. According to the authors, “search funds allow investors to diversify their portfolios into medium-sized companies, which are often neglected by traditional venture capital.”

The search fund model is still new in Brazil, but it shows great potential for growth, especially due to the demand for capital from SMEs, which are often overlooked by traditional investors. Despite the high interest rates in the country, which can represent an obstacle, the article highlights that search funds offer a unique opportunity for investors seeking diversification and willing to support entrepreneurs committed to running medium-sized companies. As the local ecosystem develops, the expectation is that more investors and entrepreneurs will become interested in this business model, attracting more capital and promoting the strengthening of the sector.

To read the full article, click here.