Jon Staenberg and Joel discuss search funds, which buy and operate small businesses. Stanford research shows search funds have returned 35% annually over four decades. Two million U.S. businesses may change hands in the next five to ten years as baby boomers retire, creating opportunities for acquisition.
Hey Joel, it's good that we're having a meeting today, but I just heard that we can call ChatGPT, who's an expert on everything, of course, and ask interesting questions. As you know, I have an insatiable curiosity about search funds, so let's give ChatGPT a call.
Hello again, it's ChatGPT, an AI assistant. Our conversation may be reviewed for safety. How can I help you?
It's Jon again. How are you?
Hey, Jon. I'm doing well. Thanks for asking. How about you?
I'm doing great. I'm just sitting here with my partner from AgateHound Fund, and we wanted to ask you a couple questions about search. Search funds, you know, the kind that were invented at Stanford and Harvard. You know about them, right?
Ah, you mean search engines? Yes, I'm quite familiar with them. What would you like to know?
Actually, we don't mean search engines at all. A lot of people get confused. We mean search funds, the traditional search fund that came out of Stanford Business School. Are you familiar with those?
Got it. Search funds. Yes, they're a unique investment model where entrepreneurs raise funds from investors to search for, acquire, and operate a private What can I help you with regarding search funds?
Exactly. Well, Joel and I started a fund called AgateHound Fund, and it's a unique approach to investing in the asset class. We have taken a fund-of-funds approach, and generally we think that's a better way to get diversification. What do you think?
A fund-of-funds approach can indeed offer diversification. Spreading risk across various search funds. It's a way to potentially benefit from multiple acquisitions and management teams. It's an interesting strategy in the search fund space. How has your experience been with it so far?
Well, we're the only ones to be doing this, and it's been great. We're actually in 7 funds. We closed our first fund in June, but maybe you could remind everybody what the Stanford study says about the results of search funds over the last 40 years.
Absolutely. The Stanford study on search funds generally shows that over the past 40 years, they've provided attractive returns to investors. The model has seen successful entrepreneurs acquire and grow companies, often resulting in significant value creation. However, it's also important to note that returns can vary widely, and like any investment, there are risks involved. Okay, I see.
Absolutely, and we are very aware of those, but one of the reasons we like search funds is because I think, and you tell me, it's averaged 35% annual net returns according to the Stanford study. Is that right?
Yes, according to the Stanford study, search funds have shown an average annualized return of around 35%. Which is quite impressive. However, it's essential to remember this is an average and individual fund performance can vary, but it's clear why search funds can be an attractive option for investors like you and Joel.
Yeah, it's really important. It's one of the reasons we decided to aggregate funds in a fund-of-funds approach because it can vary. What we're excited about is the amount of Wealth transfer and business transfer that's going to happen in the United States over the next 5 to 10 years with the baby boomers changing out their businesses and retiring. Do you have any statistics about what that looks like and how many baby boomers are going to have to sell their businesses or, or try and give it to their kids, although their kids these days may not want it? Do you have any statistics around that?
Yes, there's a significant trend with baby boomer business owners. It's estimated that a large portion, possibly over 2 million businesses, will be sold or pass sell in the next 5 to 10 years. This is due to retirement, and not all businesses have successors within the family. This opens up opportunities for acquisition and investment. Making it a promising landscape for search funds like yours to find opportunities.
Wow, that's really interesting. ChatGPT, this has been wonderful talking to you. I wonder, and this is an odd request, so pardon me if it doesn't work, but I want to end this conversation with you. But I always like to end on a high note. Do you have any jokes about search funds by chance?
Sure, here's a light one for you. Why did the search fund entrepreneur bring a ladder to the acquisition meeting? Because they heard the opportunity was through the roof.
Ah, that's a good one, ChatGPT. Hey, it's been great talking to you. It's been fun to learn more about search funds with you, and we'll be back soon. Take care, have a great holiday season.
Thanks, Jon. It's been a pleasure chatting with you. Have a fantastic holiday season, and I look forward to our next conversation. Take care.
Take care.
