Australian MBA graduates seeking support and financial backing to acquire and grow an existing business are urged to consider partnering with a research fund as the niche asset class seeks to target opportunities. in the local market.
Although this is a relatively new concept in Australia, research funds have become increasingly popular in recent years in the United States as awareness of their return profile grows.
According to research from the Stanford Graduate School of Business from 1984 to 2019, at least US $ 1.4 billion of equity was invested in traditional research funds and their acquired companies, generating, in total, about 6.9 billion. billion US dollars in net worth for investors and around 1.8 billion US dollars for entrepreneurs (researchers) to date.
The term “research fund” originated at Harvard Business School in 1984, was popularized at Stanford GSB over the next ten years, and gradually spread to business schools and private investors around the world.
A research fund is a niche private equity vehicle that brings together an entrepreneur with a team of experienced and well-funded investors, all for the sole purpose of buying and operating a single small to medium-sized business with revenues of between 5 and 50 million dollars.
The funds provide entrepreneurs with access to capital and mentorship while providing business owners with an exit strategy.
The concept is being rolled out in Australia by Jake Nicholson, Managing Director of SMEVentures, an accelerator for research fund entrepreneurs. A former research fund entrepreneur, he was also No. 1 employee at Search Fund Accelerator in the United States, the world’s leading research fund accelerator.
Additionally, Jake teaches Acquisition Entrepreneurship at INSEAD, from where he obtained his MBA and is currently Entrepreneur in Residence.
Mr Nicholson said the company is actively seeking entrepreneurs (researchers) in Australia and strongly prefers people with MBAs.
âIn most traditional private equity buyouts, the buyer prompts the current CEO and management team to stick around for a period. Then, if necessary, the buyer can recruit a new CEO or a new management team to replace the existing team, âhe said.
âFundraising, on the other hand, begins with the management solution (the researcher) even before identifying the target company. Indeed, it is the researcher who is responsible for seeking the opportunity to buy back.
âEven in PE companies with an entrepreneur-in-residence program, EiR can source, but the company’s business development resources typically drive most of the sourcing effort.
âThe concept of giving the future CEO full responsibility for pursuing the buyout opportunity is quite unique to the fundraising model.
The research fund model was very successful, with Stanford research showing that the pre-tax overall internal rate of return for investors was 32.6% until the end of 2019, and the return on invested capital was of 5.5 times.
Researchers typically come from the ranks of business schools, with Stanford research showing that 84% of researchers have an MBA. The number of researchers launching a fund within three years of graduating from a business school was 62%, and the median age of a researcher was 32.
RESEARCH FUND ACTIVITY (UNITED STATES) BY YEAR
Mr Nicholson said that the quality of the researchers is the most critical factor in the success of a research fund investment, and that MBAs generally have the right experience, motivation and a diverse background.
âSenior MBAs are more likely to join large, branded companies, and relatively few to join SMEs, especially in the less sexy industries that the research fund model is so fond of. Therefore, there may be opportunities to bring ideas and tools to an SME that have not been implemented before in this SME or maybe even in the industry â, he said. .
âThe salesperson has often been running the business since she was the same age as the researcher. The seller can therefore identify with the researcher, and the two can build a special relationship. This relationship can both increase the likelihood of a successful close and promote a successful transition after acquisition.
âThe relatively young researcher is more energetic, hungrier and less tired than the more seasoned operator. She is also sometimes more willing to go all out in the business.