Cultivating the search fund model in SEA

With growing recession fears, this might be the best or worst time for entrepreneurship. That, of course, depends on whether you see the glass as half full or half empty. Still, a new type of investment vehicle is emerging in Southeast Asia to test the waters.

Founded earlier this year, LT Partners says it is the first search fund in Vietnam and one of the selected few in Southeast Asia. It has secured committed capital of up to US$30 million to “search for and acquire a great Vietnamese business” to grow.

LT Partners co-founders Eduardo Batista (left) and Thai Nguyen / Photo credit: LT Partners

Search funds – also called “entrepreneurship through acquisition” – allow aspiring entrepreneurs or “searchers” to locate, acquire, and grow small businesses, normally with investor money. The concept has primarily been popular among graduates of business schools in the West, with at least 526 search funds formed in the US and Canada since 1984.

“Vietnam is a great country with all the right macro fundamentals for the concept to work out,” LT Partners co-founder Eduardo Batista tells Tech in Asia in an interview. “Our priority now is to build a solid pipeline of investable businesses to make sure we are able to acquire a good company as stated in our thesis.”

A quick path to CEOs?

What sets search funds apart from other investment models is that after an acquisition, the entrepreneurs of the funds generally become CEOs of the acquired companies. Searchers become part of the management team to manage operations and define the vision and growth strategy, and they even own equity in the acquired firms, Batista says.

The search fund model might suit aspiring entrepreneurs who don’t want to or can’t launch their own startups. Similar to tech founders, the potential CEO can also have the investors as their mentors.

To put it in simpler terms, “investors essentially pay the entrepreneur to scour the country for a company with potential” to “build into something bigger,” according to this Fast Company analysis.

In Vietnam, Batista says that LT Partners plans to complete its acquisition before mid-2023 and start running the company by then. “Our criteria is fairly straightforward – recurring revenue of more than US$5 million, EBITDA of more than US$1 million, industry growth ideally 1.5x to 2x the size of GDP growth,” he explains. Notably, LT Partners’ investors include global search funds AIJ Holdings and Ambit Partners.

The search fund model somewhat resembles the ecommerce roll-up strategy – where startups look for ecommerce brands to acquire and scale – which has seen a boom across Southeast Asia and India. In fact, some search funds may also pursue a roll-up strategy, including Thailand-based Springtide Equity Partners.

See also: Why Southeast Asia should pay attention to the ex-Lazada CEO’s hot new startup

Founded in 2014 and funded by “private businesspeople,” Springtide acquired Khaokho Talaypu, a Thai herbal personal care brand, after a two-year search. “Since the acquisition, the brand has grown well and this year, we’re on track to 7x revenues from pre-acquisition levels,” says Nakrin Narula, one of the fund’s principals.

Khaokho Talaypu, a brand of Thai herbal personal care acquired by Springtide Equity Partners / Photo credit: Khaokho Talaypu

Does SEA need more search funds?