The projected $18.3 trillion in wealth to be transferred globally by 2030 is expected to be the largest intergenerational transfer of assets in history. However, this great wealth transfer brings with it a problem for families whose assets are tied up in their own businesses.
There is a risk that the private market is not ready for the influx of companies ready for sale. Analysis from Nasdaq shows that families are extremely poor when it comes to transferring wealth. 70% of wealthy families lose their wealth by the next generation and as many as 90% lose their wealth by the third generation. As we are about to witness the baby boomers’ asset transition, the losses to business built up over decades could be substantial. Could the solution be for search funds to acquire some of these companies that will soon be offered for sale?
Search funds are acquisition vehicles controlled by one or two individuals (the “searchers”) who work with a small group of investors to search for, acquire, and lead a privately held company for the medium to long term, typically five to ten years. Search funds offer entrepreneurs the opportunity to become equity-owning business operators (typically in the role of CEO) without necessarily having accumulated the capital or experience required to buy or lead a company. For investors, a search fund can provide attractive returns in a two-stage investment, with an initial, small investment in support of the entrepreneur’s sourcing of an existing business, followed by a larger investment in the acquisition of this company.
The popularity of these funds is already on the rise. The latest edition of the biennial “International Search Funds” study by IESE Business School, revealed a record number of new international search funds launched (59) and acquisitions performed (31) in 2023. 79% of international search funds have successfully acquired companies, delivering an overall ROI of 2.0x and an IRR of 18.1%.
As many of the baby boomer business owners reach retirement age and their businesses go on the market, the vast majority will be overlooked by the likes of private equity and venture capital due to their size and the expectation of the existing management team to stay on and run the business after the sale. Add to this the UK Chancellor’s announcement in her Autumn Budget, that half the reliefs from inheritance tax for businesses worth more than £1 million will be removed, and it is likely that many businesses will be sold, rather than passed on intergenerationally.
For those businesses that have been built over many decades by the boomers that do fit either the PE or VC investment model, it’s important to remember that there has been great personal involvement in their creation and growth. An exit strategy that might see the company carved up and sold for parts – a private equity staple in the hunt for profit maximisation – is a cold process.
Searchers on the other hand, are more naturally aligned with what the baby boomer business owner would want from a sale. Searchers want to grow and support the business they acquire – for the many business school graduates who become CEOs of these companies, it is a chance to prove themselves as they begin their executive careers. Usually focused on only one company, and with significant personal investment through both their time and equity stake, searchers will commit to making the company’s future a success. For sellers, this represents a more reassuring outcome in contrast to either being broken up and sold, or becoming just one of many PE or VC portfolio companies.
Not only could search funds help secure the baby boomer’s transfer of wealth, but they could also act as a solution to the wave of de-listings from public markets and a surge in private equity-driven M&A. The London Stock Exchange saw 88 companies delist or transfer their primary listing from the main market in 2024, one of the worst years on record since the financial crisis. Research from the British Venture Capital Association (BVCA) shows that UK private equity outperforms the FTSE indices consistently, but with so many new companies potentially coming on the market due to the great wealth transfer, it will become a crowded space.
We have seen a number of failed private market investment tactics have their moment in the spotlight in recent years, such as the SPAC craze, but there is an argument to be made for coupling entrepreneurs with the businesses built by the baby boomers, which have already succeeded for decades. The searcher is usually a talented and driven individual who has the energy and commitment to build on the business that has been created, a more robust solution compared to the transfer of assets to the next generation, to watch its value slowly erode over time.
Jan Simon is Professor of the Practice of Management of Entrepreneurship at IESE Business School
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