The Search Fund Model as a Possible Solution to the European Generational Transition Dilemma

Authors: Leonardo Marchi , Andrea Cascone and Alessandro Raschellà (CEO and founder at arKap)

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The search fund, a well-known investment vehicle that gained significant recognition in the U.S. during the final decade of the last century, is still relatively new in the European corporate finance landscape.

At its core, this model falls under the broader paradigm of entrepreneurship through acquisition, which also includes management buyouts (MBOs) and management buy-ins (MBIs). We, at arKap, like to think of search funds as “MBOs for young professionals”.??

Given its suitability for investing in small and medium-sized enterprises (SMEs), the search fund–and, more generally, entrepreneurship through acquisition models—presents vast opportunities in the European market, which is predominantly made up of these types of businesses. In particular, one of the key advantages of the search fund in a complex market like Europe's is its potential to address one of the most pressing challenges for family-owned SMEs: the issue of generational transition.??

What is a Search Fund??

A search fund is a private equity investment vehicle where an entrepreneur, usually an aspiring young entrepreneur with strong academic background, often referred to as the "searcher", raises capital from investors to acquire and operate an existing company. The concept was born at Stanford University in the 1980s to support entrepreneurs who want to lead and grow a business but prefer to acquire an established company rather than starting one from scratch, usually a much more demanding activity.?

The search fund model differs from venture capital (VC) and private equity (PE) in several ways. While VC focuses on providing early-stage funding to startups with high growth potential, and PE typically invests in larger, more established companies to enhance profitability, search funds are unique in targeting smaller, established businesses. These businesses can either consist of poorly managed companies with great potential or profitable companies that lack the resources to scale up or, as happens in many cases, face generational transition issues. In such situations, the objective of the searcher is to take the role of CEO and manage the company post-acquisition with a long-term growth perspective.?

Figure 1 - The Search Fund Life Cycle (Kolarova, Kelly et al. 2022)?

The European Landscape and SMEs?

Europe’s economy is one of small and medium-sized enterprises. Accounting for approximately 99% of all European companies, SMEs embody the true essence of European business and represent the backbone of the economy, contributing over 53% of GDP, and employing a significant portion of the workforce (data from Eurostat). These businesses operate in a range of industries, from artisanal craftsmanship to advanced manufacturing, and many have deep roots in local communities, often being family-owned for generations.?

Despite the many advantages that their structure affords them, in most cases European SMEs must deal with several challenges:?

• Risk aversity: many family-owned SMEs are often reluctant to take bold financial or strategic risks, which can limit growth and innovation.?

• Family-related dynamics: internal family conflicts or emotional attachments can complicate decision-making, especially when it comes to leadership succession.?

• Lack of management models: these businesses frequently rely on informal structures, lacking the formal management frameworks necessary for scalability and long-term sustainability.?

On top of these challenges, generational transition management and succession planning have become particularly relevant, often representing the primary cause of failure for SMEs. This issue has grown more acute in recent years, as younger generations begin to approach family businesses and prepare to take over leadership. Just to get a sense of how relevant the problem is, data shows that only 30% of European family businesses survive the first generational transition, while only 12% to 15% make it through the second. These statistics highlight just how critical this issue is for European SMEs. Executives at these companies must begin to recognize the importance of implementing effective succession planning, ensuring the continuity of the business while minimizing any disruption the process might cause.?

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How Can Search Funds Can be the Solution???

Search funds represent a significant innovation in the European landscape—in Italy, for instance, the first of these ventures surfaced only in 2017 thanks to the visionary effort of Vito Giurazza (MBA), who launched Maestrale Capital. Since its first appearance in Spain in 1996 (a venture which, incidentally, was conceived by two American investors), this model has been adopted in a limited number of cases around Europe, primarily in areas where the industrial sector tends to be more developed and M&A activity is concentrated.?

Figure 2 - International Search Fund activity by year (Kolarova, Kelly et al. 2022)?

With such a pressing issue as generational transition, the search fund model offers a compelling solution. Many family-run businesses are approaching a critical moment where the founder or current owner is ready to retire, yet finding a suitable successor remains a significant concern. Often, family members lack the interest, skills, or experience to take over, leaving a leadership vacuum.?

Search funds provide an opportunity to introduce new entrepreneurial leadership that is highly motivated and capable of managing the transition. The searcher, typically a skilled professional with management experience, steps in to ensure continuity while injecting fresh ideas and growth strategies. By acquiring the business through a search fund, the new leader becomes deeply invested in its success, usually assuming the role of CEO and collaborating with the existing team to maintain stability and drive forward progress. At arKap, we are aware of how delicate this last phase is, which is why we recommend that the searcher teams up with the right partner to successfully manage the process. As an advisory firm, our duty is to ensure that the searcher receives assistance throughout the entire acquisition journey–from target selection to providing strategic guidance and addressing operational and culture-related challenges that may arise after the deal is closed.???

While this model may appear to be an ideal solution to the succession problem faced by SMEs—not just in Europe but globally—there are obstacles to overcome. For one thing, financial literacy has long been an issue in different European countries, Spain and Italy among the others, with many business owners being unfamiliar with financial mechanisms like search funds and, as a result, more likely to welcome such ventures with reluctance. Without adequate knowledge of corporate finance and investment vehicles, entrepreneurs may perceive search funds as too “exotic” or risky, making them hesitant to pursue this innovative option.?

Additionally, cultural factors play a role. Many family-owned businesses in Europe are deeply attached to their legacy and may be reluctant to hand over control to an external party, even if it is in the best long-term interest of the company. Overcoming these cultural barriers requires increased awareness of the search fund model, as well as more success stories of search fund-led acquisitions to demonstrate their effectiveness.?

Conclusion?

Search funds offer a promising solution to some of the key challenges faced by European SMEs, particularly when it comes to generational transitions. As many family-owned businesses struggle to find successors within the family, search funds provide a practical way for entrepreneurs to step in and grow these established companies. This model could help address the succession issue that affects so many European businesses today. However, there are still barriers to its widespread adoption, such as limited awareness of financial instruments like search funds and a certain cultural resistance to outside leadership.?

That said, there’s reason to be optimistic. Younger generations, who have greater access to higher education and a more global outlook, are more open to innovative solutions like search funds. As they enter the workforce and take on leadership roles, there’s hope that this model will receive the recognition it deserves.?

As Europe’s economic landscape continues to evolve, search funds could play an increasingly important role in ensuring that the country’s small and medium-sized enterprises not only survive but also thrive in the long term.?