Search Funds: an investment and business continuity route with great potential
In recent years, the Search Fund model has gained increasing prominence in the European investment landscape, particularly within the Spanish market. This structure enables a professional with managerial experience to identify, acquire and manage an established company, backed by the financial and strategic support of a group of specialised investors.
At DEVESA, we advise the various parties involved in this type of transaction (investors, searchers and target companies), providing comprehensive legal assistance in matters of structuring, collective investment and share purchase transactions.
What is a Search Fund?
A Search Fund is an investment vehicle through which one or several entrepreneurs – known as searchers – raise capital from a group of investors with the purpose of identifying, acquiring and managing a profitable privately held company with sustainable growth potential. Unlike a conventional Private Equity fund, the searcher does not act as a mere passive investor but instead assumes an executive and operational role within the acquired company, typically taking on the position of CEO. This direct managerial involvement is one of the model’s defining features, as it ensures effective alignment between the investors’ economic interests and the success of the business project.
The Search Fund structure provides advantages both for investors and for business owners seeking to transfer their companies. For investors, it represents an opportunity to obtain attractive returns within a controlled-risk environment, gaining access to stable businesses with recurring cash flows outside the sphere of large-scale corporate transactions. For business owners, it constitutes an orderly succession alternative, particularly suitable for those wishing to achieve a full transfer of ownership and control. In most cases, the Search Fund acquires 100% of the share capital, enabling the seller to step away securely, confident in the continuity of the business project.
The three phases of a Search Fund
1. Search Phase
During this initial stage, the searcher raises seed capital intended to finance the costs associated with identifying investment opportunities, conducting sector analysis and carrying out preliminary negotiations. This process usually lasts between twelve and twenty-four months and is formalised through the Search Fund Agreement, which establishes the rights and obligations of both the investors and the searcher. Its key provisions typically include: the regime governing capital contributions, the searcher’s future participation in the acquired company, the investors’ preferential rights, as well as rules on confidentiality and periodic reporting. This agreement is essential to ensure proper alignment of interests and a coherent legal framework from the outset of the project.
2. Acquisition Phase
Once the target company has been identified, the searcher presents the investment opportunity to the investors, who then provide the necessary capital to execute the acquisition.
At this stage, several contractual instruments play a fundamental role in ensuring the proper execution of the transaction: the Letter of Intent (LOI), which sets out the principal terms of the deal and serves as the basis for the due diligence process; the Share Purchase Agreement (SPA), which governs the transfer of the company, the seller’s representations and warranties, and the price adjustment mechanisms; and, where applicable, the Shareholders’ Agreement, used when sellers or co-investors retain minority shareholdings following completion.
Additionally, financing agreements may be implemented depending on the capital structure defined for the operation.
3. Operation & Value Creation Phase
Upon completion of the acquisition, the searcher assumes the role of Chief Executive Officer (CEO), leading the company’s strategic and operational development. The objective at this stage is to enhance the professionalisation of the business, optimise its organisational structure and promote expansion – whether through organic growth or complementary acquisitions.
In this context, agreements such as the Senior Executive or CEO Employment Agreement are executed, setting out remuneration terms, vesting mechanisms, and incentive plans (such as stock options or phantom shares) linked to performance and generated profitability.
The typical timeframe for this phase ranges from five to ten years, after which an exit process usually takes place – by way of a sale to a Private Equity fund, a strategic buyer, or through a secondary buyout – thereby crystallising returns for the investors.
Conclusion
The Search Fund model has become an efficient and flexible alternative within the Private Equity ecosystem, successfully reconciling the interests of investors and entrepreneurs in succession or company sale processes.
At DEVESA, we offer searchers and investors our extensive experience in Private Equity, M&A, and Corporate Law, delivering comprehensive legal advice throughout all stages of the process – from the structuring of the investment vehicle to the execution and closing of the transaction – with the aim of ensuring security, efficiency and success in every operation.
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