State of the search fund: APAC

According to recent estimates by investors in the search fund community, there are somewhere in the neighborhood of 100 active search funds in the US today. Again by rough estimation, there are about 20 to 30 in Canada, 40 to 50 in Europe, and perhaps thereabouts in Latin America. 

In the Asia Pacific region where I sit, search funds are comparatively scarce. And to be clear, in this article, I speak strictly of search funds and not of self-funded searches or of the many other denominations of entrepreneurship-through-acquisition (ETA). The wider ETA world goes a little further back, long before the search fund model came into existence.

I have spoken with several prospective searchers who have tried, and failed, to raise a search fund in several APAC markets in just the last couple of years. I’ve also done my best to stay updated on search funds in APAC both because I’m curious, and because the state of the search fund in APAC is discussed just far too little relative to the Americas and Europe. 

Here, I’ll attempt a comprehensive summary of recent developments in the search fund ecosystem on this side of the world, and my preliminary theories as to why it’s taken so long for the model to find its way around the region. 

Australia & New Zealand

Australia is where SMEVentures and I currently operate. I’ve seen some healthy activity here, and that activity is only growing. In 2019, my good friend Alex Simmons launched Australia’s very first search fund Voyager Equity, which had been preceded by several failed attempts in ANZ. He has since acquired Inerva Software, which is right in the industry he was aiming for. Congratulations, Alex!

After Alex, it was our very own SMEVentures searcher Rob Gaunt, the second person in Australia to raise a search fund and, I’m proud to say, the first in Australia to have successfully acquired. Rob spent about ten months searching before closing his deal, soundly beating the average searcher’s 18-month search period. He now operates ACE Training and is loving life.

Meanwhile, we have Ryan Bernsmann of SMEVentures, Greg Green of Single Trail Capital, and Paige Kohalmi of Greenstorm Capital who have raised search funds and are currently on the hunt for a business to buy. In addition, there are several searchers currently raising funds in Australia and New Zealand. Australian search fund activity in 2022 is set to significantly outpace any previous year.

Sources of capital for searchers in Australia are growing in number. In fact, the amount of capital chasing searchers and deals outweighs the number of searchers in Australia right now. From the searcher’s perspective, that’s great news. For the sake of the ecosystem, we need more top-notch searchers to come to market. At the forefront of the investor charge are Pete Seligman and Ben Lee, both dear friends, valuable advisors, and enthusiastic search fund investors. They’re also some of the greatest proponents of the search fund cause on this side of the world. Pete produces a search-focused podcast The Next Step, which was the inspiration behind our own, The Search Fund Podcast. 

Trailblazers of the Australian search capital scene, Jake Maisey and Tim Moore of Dorado Capital closed Australia’s first ever fund-of-funds in November, and in December Lui Pangiarella, Akram Sabbagh, and Nima Sedaghat of Wayfinder Capital announced a first closing of its fund-of-funds — both focus squarely on backing search fund and ETA entrepreneurs in the country.

A multitude of individual investors also joined the Australian search fund ecosystem in 2021, both domestically and internationally. In all, the capital side of the Australian search fund market is developing nicely.

Japan

To my knowledge, only one other country in Asia Pacific has shown healthy levels of search fund activity, having gotten started even a bit before Australia.

Japan’s first search fund accelerator, JaSFA, has provided key support to the handful of active search funds in the country. It now names several searchers under its umbrella and has drummed up an impressive track record of successful searchers since its founding in 2018 by Noriko and Hajime Shimazu. According to JaSFA’s website, Kenji Watanabe started his search with JaSFA in 2019 and has since acquired Shiomi, and Yuki Mizoguchi and Keita Ito have also made acquisitions — a rapid succession of deals in three years or so. Shota Maruyama has also recently started his search with JaSFA. 

Additional kudos are due to Yoshiaki Kurosawa, who launched Japan’s first traditional search fund in 2019 and completed the acquisition of a software company in December of 2021.

The second search fund accelerator in the country is Search Fund Japan, founded in 2020 by Kimitake Ito. Before landing on Search Fund Japan, Mr. Ito had planned to launch a search fund in Japan some years ago but wound up self-funding before successfully acquiring and operating a chain of yoga studios under LOHAS International. Driven by his experience, Search Fund Japan supports a number of searchers, and that number is rumored to grow quickly over the coming year. 

In addition, Mitsuya Shimura is in the process of raising search capital for JBS Partners, slotted to be the second traditional search fund in Japan. 

Like Australia, Japan seems to be at a tipping point, opening the door to much more search fund activity in the next year or two. Watch this space.

Korea

Just last year, South Korea birthed its first search fund ever, Korea Search Fund Investment Partners, launched by search duo Charles Ryu and Taeksu Wang in 2021. They’ve recently concluded their search capital raise and are in the early days of their search, which is just really exciting stuff. 

Vietnam 

Based in Ho Chi Minh City, Eduardo Molon Batista and Thai Nguyen are attempting to raise Vietnam’s first ever search fund. While they haven’t closed yet, they’re making good progress on their capital raise and I’m pumped to see where it takes them.

India, Philippines, Taiwan & Indonesia

These countries have seen several attempts to raise search funds, but none too successful unfortunately. Pre-2012, there were two search funds raised in India. Of these two, one ended up starting Origo, and I’m not sure what happened to the other. Around this time a search fund was also raised in Indonesia, but it was forced to wind down prematurely due to personal circumstances. 

More recently, there was one attempt to raise a search fund in the Philippines, one in Taiwan, and at least one more in India, but none were successful. I’m hoping these attempts marked just the start, and not also the end, of search funds in these markets. 

In APAC’s defense, it’s clearly still early days for search funds; we can count on our fingers and toes the number of search funds raised in this part of the world. But I’m not worried. Among the countries I’ve highlighted above, there have been quite a few firsts in this part of town just in the last 1-2 years. The APAC landscape today is definitely looking much better than it did a few years back — far from crowded but showing keen growth.

Why has it taken so long for the search fund model to get started in APAC? It’s no science (yet), but I venture a theory that it boils down to two key factors: inertia and culture. 

Inertia

At some point in the past 5-10 years, the model reached a tipping point and began spreading beyond the borders of its native USA in a meaningful way. Why did it take decades to get to this point, and what sparked the spread?

Inertia and momentum. Hopefully at some point, sociologists and epidemiologists will be able to provide some scientific answers, but for now I’ll just surmise that the search fund was a tiny, closely held model for a small group of Stanford and Harvard students and their professors, and they were pretty happy with that arrangement for a while. Then, maybe it was the creation of funds-of-funds, maybe it was social media, or maybe it was b-school exchange programs, but word got out that this thing worked. 

And since then, the number of searchers has been growing quickly in Europe and Latin America, but not so much in APAC yet. However, I can attest to the fact that interest is growing quickly — the pieces just need to fall into place in synchrony. 

Aspiring entrepreneurs are taking action in APAC, but in some markets there just aren’t yet enough investors aware of or interested in the model. However, as that ecosystem grows and network effects take hold, I am sure we will see the momentum build and exponential growth of the model throughout the region, similar to what we’ve seen in Europe and LatAm.

Culture

It’s no secret that Asian cultures are generally more conservative, on multiple dimensions, than American culture, and the more conservative mindset is apparent on multiple fronts. At my own peril, I will make the following generalizations (although feel free to challenge me if I’m being too presumptuous):

Investors 

Japanese entrepreneurs lament that in Japan, VC stands for “very conservative.” Indeed, the appetite for risk among Asian investors, though varying significantly by market, is on average more conservative than that among American investors. Many have been making good money in more traditional asset classes for some time, particularly in property, and they are not, on average, as experienced in alternative assets like VC and PE as their American counterparts. 

In addition, especially in the more conservative markets, business is built on the foundation of relationships, not the other way around. With that backdrop, it is easy to understand that few Asian investors will have the appetite to back an unknown entrepreneur to identify, acquire, and operate an unidentified target via an unknown niche buyout model. 

Entrepreneurs in APAC, therefore, need to rely more heavily on their personal connections for capital, and if they don’t find that capital within their immediate network, their road to raising a search fund is quite a bit more difficult than for aspiring searchers in America. 

Entrepreneurs

30-somethings in APAC are generally more adventurous than their parents, but they are not immune to the more conservative pulls of their native cultures, a fact which carries several implications. 

First, it is culturally more difficult for them to take the leap into entrepreneurship, especially via a model unproven in their home market. The hypothetical Japanese MBA student has been raised in a culture that places an exceptionally high cultural value on the brand/company with which one is associated. So as tempting as an entrepreneurial path might be, when McKinsey and SoftBank come a-calling, it’s hard to look the other way, much more so than for the American MBA student. 

Second, when it comes time to raise the search capital, especially if the searcher is raising in a market in which the search fund model is yet unproven, that searcher must have the relentless tenacity to persevere through countless rejections. In a culture that frowns heavily upon failure and rejection, sticking to that path becomes all the more difficult. 

In a recent conversation with a startup consultant in Japan, I learned that approximately 70-80% of Europeans will raise their hand when asked “Who has an interest in starting a new business?” In Japan, that number is roughly 20%.

Business Owners

For the reasons I’ve mentioned above, cold outreach (the preferred sourcing method for most searchers globally) is significantly less effective than it would be in the Americas, and not because there is a lack of business owners in need of succession solutions. The number of potential fits for a searcher is far more than the searcher can ever process. In APAC especially, that just means the searcher must have the right systems to find the right people and opportunities, using more robust, reliable methodology and a larger top-of-the-funnel. 

Back when SMEVentures and I first zoned in on Australia, the entrepreneurial landscape in APAC did not exactly lend confidence. We assumed business owners in Australia would be some amount of conservative too, and unwilling to speak to our searchers. In fact, many people in Australia told me Australian business owners would never sell their business to an unknown younger person! But I’ve never been happier to have been proven wrong. 

As it turns out, there’s a very pronounced need for succession solutions in Australia — a gap we hope to fill by playing where others aren’t, and where there is silent demand, but only if approached in the right way. I find that when approached with the right language, communication, and outreach strategies, business owners are happy to have that conversation with searchers about a potential succession solution. 

Lenders 

Again, it’s difficult for me to generalise across geographies and comprehensively comment because I haven’t adequately explored outside of Australia and New Zealand. So I speak only for these two countries. To begin with, banking power here is concentrated in very few banks.  They tell you they’ll consider your request, but when the rubber meets the road, most will hardly spare a glance at deals that don’t have real estate attached to them, especially when considering cash flow-based loans for service businesses with few tangible assets — exactly the kind of businesses search funds are often drawn to. 

In the face of not-so-great lending odds and a host of market-specific idiosyncrasies to navigate, search fund accelerators partner with established financial institutions willing to take a second look at search deals, to lower barriers to capital and deal flow for the searcher.

Over the years, I’ve identified several banks that will absolutely consider cash flow-based lending. While there aren’t very many of them, the handful that will are very happy to look at the kinds of deals searchers present. This leaves significantly less of a question mark in Australia than we had previously expected. 

And it’s not just Australia. According to Japanese searchers I’ve spoken to, if a searcher brings a good deal to the table, it’s not difficult for her to get acquisition financing from Japanese banks, and at very attractive rates too. I admit these are second-hand accounts from people on the ground and I don’t know whether these findings will translate to other APAC markets yet, but it’s promising initial data that supports and anticipates a growing search fund scene in this neighbourhood. 

Conclusion

For all the attempts, the smattering of active search funds and successful acquisitions in APAC thus far, the search fund model is still very much in the exploratory phase on this side of the world. We’re doing our best to help it along, trying to lay down the tracks for aspiring entrepreneurs to discover and follow. 

SMEVentures is a small outfit right now, but we’re gearing up to be the region’s first ambassadors of the search fund. And where we succeed, others will naturally follow. APAC is due for an entrepreneurial renewal as seasoned operators transition out and eager entrepreneurs transition in. I’m proud to say SMEVentures and I will be part of the impetus behind that effort, especially as we bring in our next batch of high-calibre searchers this year. 

I am very excited for what’s to come. These are the model’s formative years in the Asia Pacific, that we’ll one day look back on as the time search funds really began to take hold in the Eastern Hemisphere. A decade from now, the search fund industry will look quite different in APAC, and I’m very much looking forward to watching that story unfold.