A niche in the PE industry, known as search funds – such a small niche that few in the business have heard of it. The funds typically run by top MBA entrepreneurs, who persuade a group of investors to raise $400,000 or so for about 21 months as they search for a single business to acquire.
The search target is a business with moderate growth, high margin preferred in a mature industry, valued at $10 to $20M. In other words, search for a dull business that is enduringly profitable.
Returns are surprisingly good. The average ROI is 6.0 times the money invested and an IRR of about 37%. By the time of the exit, the principals can hold a 30% equity stake. These are much better statistics than the average of the rest of the PE industry.
The model was pioneered by Stanford graduates back in the 1980s. It has grown sharply in the past two years. In 2015, more than 40 new funds were established, twice as many as in 2009.