afrimind __ search funds - the new engine for growth in africa

7/28/2019 Afrimind __ Search Funds - The New Engine for Growth in Africa

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Search Funds - the new engine forgrowth in Africa

By Sean Obedih Posted On 21 Jun, 2013

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Afi Akolly

Ajiri Ubogu

Amaka Okechukwu

Blessing-Miles Tendi

Chiaka Nuella Chika Ezeanya

Daniel Agbiboa

Jerome Okolo

John Mukum Mbaku &

Julius Agbor

Julius Agbor

Julius Agbor & Eban Ebai

Makda Kassahun

Matthew Adeiza

Nana Sangbender

Nana Sangbender &

Amaka Okechukwu Olumide Taiwo

Olumide Taiwo &

Nelipher Moyo

S.N. Sangmpam

Sakina Badamasuiy

Sean Obedih

Uche Igwe

It is a well-documented fact that Africa is growing

at a tremendous rate and there is no day that goes

by without a story about the continents economic

rise from all major news publishers. The stories

are largely based around natural resources and

large infrastructure projects. The stories have also

involved a diverse group of investors contributing

to the growth, mainly the private equity firms with

the entry of major US private equity players such as Blackstone, Apollo, KKR and Carlyle into Africa

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The stories are however incomplete and the available investors go beyond the usual private equity and

venture capital investors. Indeed there are more investment and entrepreneurship vehicles that can be

explored as viable contributors to Africas growth story. But when it comes to the Small and Medium

Enterprises (SMEs), investors tend to get caught up in analysis paralysis largely due to lack of

tangible data. One way to mitigate this is by considering an entrepreneurship vehicle called Search

Funds, which was developed 29 years ago by Professor H. Irving Grousbeck at Stanford.

What is a search fund? Search Funds are a niche investment vehicle that enables high potential and

entrepreneurial individuals or partners to locate, acquire, manage and grow a privately held company.

It has historically been focused on the US market but have also been raised in the UK and there are a

few now operating in Latin America and India. For many prospective entrepreneurs Search Funds

offer rare opportunities. First of all, there is the possibility of becoming an equity-owning manager of a

business early in their career. Secondly, it also offers flexibility for founders as they can take a new

operating role, have a board seat, maintain equity stake, enjoy a cash out or exit entirely.

At the moment there is only one search fund operating in Africa: Impala Investment Holdings LLC. It

was set up by a principal who wanted to start a business in Africa and discovered that the search fund

model offered the perfect opportunity to do so. The fund has the aim of acquiring an East Africa based

private company..

A Search Fund is set up in two stages:

First, a small pool of capital is raised by a group of investors in the fund to cover the search

expenses and allow the lead operating manager of the pooled fund to draw a salary while

searching for a company to acquire. In return, search fund investors obtain the right of first

refusal to invest in the buyout and equity in the acquired company proportional to the value of

their initial investment.

In the second stage, an additional (and larger) amount of capital is raised to form the equity

component of the company to be bought. Initial investors have the option to invest in the second

round but are not obliged to do so. Search fund principals typically look for 10 investors, all of

whom are encouraged to contribute advice and expertise in addition to the capital.

The General Manager(s) of the Search Fund take operating roles in the acquired companyCEO,President and the like.

In comparison to private equity, search funds are typically comprised of individuals who are seeking to

buy and then personally operate a company that is usually smaller in size than the typical target for a

private equity firm.

Search funds investors also tend to provide patient capital compared to private equity and venture

capital; they seek out flourishing, small-to-medium-sized enterprises that want to sell, but cant find

buyers because Private Equity funds find them too small-sized, while Venture Capital funds find them

too late-stage.

In many respects, Search Funds seem ideally designed for Africa. The number of SMEs in the region

with great potential but in need of professionalization is significant. In addition, the model enjoys a

lower risk profile than venture capital and thus is better suited to individual investors and family offices

accustomed to safer investments in real estate, infrastructure, and commodity sectors.

To play in Africas fast growing market, investors have historically had to go head-to-head with

established bulge bracket Private Equity funds for big businesses or compete with Venture Capital

players for small, but promising start-ups or companies. Search funds offer an untapped middle

ground, a sweet spot that only this breed of investment vehicles is uniquely designed to access.

Are there challenges?


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Tags : Sean Obedih Search Funds Africa Venture Capital Private Equity

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In order to build this ecosystem, a community to support and facilitate this industry needs to be built

and that is where Search Funders International Venture (SFIV) Partners comes in. As a founder of the

Venture, our mission is to partner with ambitious entrepreneurs to unearth, acquire and manage

profitable micro-cap companies in Africa. Our focus is on well-managed companies with a history of

profits and significant growth potential that can benefit from an injection of great talent and technology.

More information on Search Funders International Venture can be found here http://bit.ly/sfivpartners

Here is a link http://www.gsb.stanford.edu/ces/resources/search_funds.html to key resources around

search funds and feel free to reach out through twitter @Searchfunders and comment or ask any

questions.

SEAN NDIHO OBEDIH is a serial entrepreneur. He is the founder of Ynotplast, Britain's first

and award winning multi-ethnic brand of first aid products tailored to the African skin tone. He

is also the founder of The Founders Hive, a business incubator and consultancy firm. His latest

company is Search Funders International Venture.

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