📰 An Interesting Trend Among MBA Candidates...

Estimated read time: 3 minutes

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Welcome back to another issue of Finance Focus.

Today’s article explores an interesting trend among MBA graduates who are bypassing traditional corporate trainee programs to dive into the world of search funds (funds that finance the process of finding and acquiring companies).

Rather than being stuck in an office working on financial models on Excel and pitch book slides on PowerPoint, this approach involves acquiring and managing small businesses which offers a unique blend of hands-on experience and entrepreneurial growth.

To add, these graduates are uncovering untapped businesses in the market and driving impressive returns.

Here’s the article. Scroll down to read my key takeaways and thoughts on the topic.

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📰 MBA Hotshots Just Want a One-Off Private Equity Deal

TL;DR: MBA graduates are increasingly opting to buy and run small businesses instead of joining traditional trainee programs. This trend, supported by financiers, focuses on acquiring undervalued small companies and applying strategic management to boost their value.

‘Search funds’ often target businesses worth between $10 million and $100 million, particularly those with retiring founders seeking liquidity.

Despite the potential for high returns, the financial rewards for search fund entrepreneurs are typically moderate, leading many to pursue multiple ventures.

Key Takeaways:

1. Rise of Search Funds: MBA graduates are turning to search funds to buy and manage small businesses. Graduates are increasingly opting for search funds to gain hands-on business management experience by acquiring and running small companies. The concept of search funds was developed through research at Harvard and Stanford, with a record 93 search funds launched in 2023.

2. Target Market: These funds target a niche market of smaller enterprises (between $10 million and $100 million) that are often overlooked by larger financial institutions. A significant portion of the acquisitions involves businesses where the original owners are looking to retire and seek liquidity (want to cash out of their business).

3. Financial Backing: These firms not only provide the necessary capital but also offer strategic advice throughout the acquisition and management process. From identifying potential targets to structuring the purchase and planning the eventual exit, these firms play a crucial role in the success of search funds.

4. Deal Characteristics: Typical acquisitions are around $15 million, bought at seven times EBITDA (Earnings Before Interest Taxation Depreciation and Amortisation). The average deal size is relatively modest, focusing on companies with strong earnings potential. Annualised equity returns for successful exits have been well above 30%. Historically, these investments have yielded high returns, making them attractive despite the inherent risks.

5. Career Path: Managing a small enterprise offers invaluable real-world experience that can be more beneficial than traditional corporate training programs. While not immediately lucrative, it offers significant entrepreneurial experience and potential for future wealth.

Personal Thoughts:

1. Practical Learning and Real-World Impact: The trend towards search funds underscores the value of practical learning. By directly managing a business, MBA graduates gain real-world insights and skills that are often not fully captured in traditional trainee programs.

2. Market Niche: This approach highlights a largely untapped market of small businesses that can benefit from strategic management and financial backing. It provides an opportunity for significant growth and value creation in sectors that larger firms may overlook.

3. Entrepreneurial Drive: The rise of search funds reflects a broader entrepreneurial spirit among new graduates. This hands-on experience fosters innovation and leadership, key traits for future business leaders.

4. Investment Potential: For investors, supporting search funds can offer attractive returns. The high equity returns reported by successful exits make this a compelling investment strategy despite the risks involved.

5. Long-Term Vision: While the financial rewards may not be immediate, the long-term vision and experience gained through managing and growing a small business can lead to substantial future opportunities and wealth creation.

That’s all for today. In case you missed it: 📰 Major Banks Set to Report Significant Gains As Deal-Flow Resurges

See you tomorrow!

Afzal

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