Written by Maxence Dumontaud Léger, Gregorio Perini, Vittorio Panvini Rosati and Federico Lucarelli
INTRODUCTION
Originating in the mid-80s in the United States, search funds have positioned themselves as a peculiar investment vehicle in the private equity market, enabling entrepreneurs with a finance background to acquire and scale small- to medium-sized enterprises backed by a small number of investors. The search fund model has also gained traction in Europe, where stable institutional frameworks and deep capital markets have enabled search funds to generate returns sufficient to justify their risk profile. Search funds’ recent expansion into emerging markets, however, raises a fundamental question: can a model built in predictable environments function effectively in more volatile and less transparent contexts?
WHY THE MODEL WORKS IN DEVELOPED MARKETS
In developed markets, search funds have spread fast thanks to favourable structural and financial frameworks. In such markets, the model was able to align incentives between investors and agents: searchers committed to long-term value creation while investors provided patient capital and strategic oversight. Furthermore, a well-functioning ecosystem reinforced such alignment.
First, developed markets offer a large number of acquisition targets, usually founder-owned SMEs facing succession challenges. Second, stable legal frameworks enhance the certainty and enforceability of contracts, the reliability of governance standards, and shareholder protection. Third, easy access to debt capital markets enables leveraged acquisitions, boosting returns for shareholders. Finally, predictable and less volatile exit channels ensure greater liquidity and clarity in value realisation.
Together, these conditions enable the search fund model to be executed with a sufficiently high degree of confidence and repeatability to make it an established private equity investment vehicle.
EMERGING MARKETS: KEY FRICTIONS
In emerging markets, the conditions listed above are often weaker or absent, thereby introducing frictions that undermine the model’s core pillars. Institutional limitations are usually the most significant: weaker legal enforcement and governance standards increase transaction risk and reduce investor confidence, requiring a systematically higher return on investment.
Additionally, debt financing is often scarce or expensive, thereby reducing potential returns. At the same time, information asymmetries are more evident. Many targets operate with low financial transparency, making the due diligence process more complex and increasing the likelihood of adverse selection issues.
Some operational challenges arise as well, as businesses may rely heavily on founder relationships, informal processes, or local networks that are hard to replicate post acquisition. Finally, exit channels are often constrained by less developed capital markets and a narrower pool of strategic buyers.
Even though the model remains fundamentally attractive, such frictions suggest that its direct transplantation into emerging markets may prove difficult without meaningful adaptation.
CASE STUDIES
Bios Community (Spain/Colombia): adapting the model to Latin America
Bios Community is probably one of the most interesting examples you will come across when looking at how search funds have tried to expand into Latin America. It was founded by IESE alumni and focuses on acquiring SMEs in Colombia, while pulling capital and governance expertise from investor networks in Spain. On paper, it follows the familiar playbook: one searcher, equity-based comp, a tight circle of experienced investors, but in practice, they have had to bend the rules in a few important ways.
Due diligence takes longer than it would in, say, Germany or the US, largely because financial records are often patchy or unreliable. Deals frequently involve earn-out clauses, which help bridge the valuation gap when you cannot fully trust the numbers you are given. And rather than calling in lawyers when things get complicated, they bring local legal counsel in from day one.
Colombia adds its own flavour of difficulty on top of all this. Businesses are often built around a single founder in a way that creates real continuity risk. Regulations shift when governments change, which they do. And the universe of businesses that are actually ready to be acquired, properly structured, and with a willing seller, is much smaller than you would find in Western Europe or North America. That said, Bios has shown it can be done. It is just slower and messier than the textbooks suggest.
Search funds in Sub-Saharan Africa: structural friction and early adaptation
A handful of searchers have begun exploring opportunities in Sub-Saharan Africa, Kenya and South Africa, mostly, though most of these efforts are still early and the evidence is largely anecdotal. What they have found is that the standard model does not translate cleanly, and in some cases barely translates at all without being significantly rebuilt.
Currency risk is an immediate headache. If your investors are expecting dollar returns, exchange rate swings in markets with volatile or managed currencies can significantly erode returns. Exit options are also thin; the M&A market for smaller businesses is underdeveloped, and public listings are generally not viable.
But the trickiest part might actually be the human side of it. Buying a business from a founder is always a relationship-intensive process, but in many African markets, it is also a socially loaded one. Who you are, who you know, and whether the local business community trusts you matter enormously, and that kind of credibility is hard to parachute in with. Some searchers have dealt with this by bringing in local operating partners, which is a real departure from the solo-searcher model but arguably a sensible one given how much depends on local relationships and know-how.
REPLICATION VERSUS ADAPTATION
These two examples get at something that sits at the centre of the whole international expansion question: it is not really about whether the search fund model can work in emerging markets. It is about how much of the original structure you actually need to keep for the underlying investment logic to still hold together.
There is a reasonable case for sticking close to the original. The core idea, a capable operator buys a solid business, runs it better, and sells it at a higher multiple, does not have an expiry date or a geography stamped on it. Succession gaps among SME owners exist everywhere. The incentive alignment baked into the equity structure arguably matters more in unpredictable environments, not less. And the relationship-heavy, hands-on nature of search fund investing might actually suit emerging markets better than the more financially engineered buyout strategies that lean on cheap debt and liquid exits.
But the frictions are not just friction; they cut into the model’s structural assumptions. The standard two-year search followed by five to seven years of ownership presupposes a reasonably stable planning environment. That is harder to count on when macro conditions or regulations can shift dramatically in a single year. The expected returns rely on leverage and multiple expansion, both of which become harder to deliver when debt is expensive or unavailable and when there are not many buyers around to set a competitive exit price.
So meaningful adaptation is not optional; it is the whole game. In practice, this means deals get structured with less debt and more conservative earnouts. The profile of a good searcher changes; local knowledge and credibility become just as important as financial acumen. Investors tend to be more hands-on, doing real governance work rather than just sitting on a board. And exit timelines stretch, with funds looking at options like secondary sales to regional operators, management buybacks, or local family office buyers, routes that would be considered second-best in a mature market but are often the realistic ones in a less liquid environment.
At the end of the day, this all comes down to what you think the search fund model fundamentally is. If it is the mechanics, the two-stage structure, the waterfall, the lone searcher, then emerging markets will expose genuine incompatibilities that are hard to engineer your way out of. But if the model is really about the underlying logic, patient, operationally-engaged capital going into underinvested small businesses, then it is more portable than it looks, as long as you are willing to actually adapt it rather than just drop it into a new context and hope for the best. The early movers suggest the second framing is closer to the truth. But getting there takes more iteration, more local knowledge, and a much higher tolerance for ambiguity than the standard search fund playbook prepares you for.
IMPLICATIONS FOR INVESTORS AND ENTREPRENEURS
Bringing search funds into emerging markets changes how both investors and entrepreneurs approach the model. For investors, the opportunity is quite clear: there is a wide pool of small and medium-sized businesses that are still underdeveloped, often with real potential to grow, and not a lot of competition when it comes to acquisitions. But that opportunity comes with trade-offs. Financial information is not always reliable, governance can be inconsistent, and exits are harder to predict compared to more developed markets.
Because of this, investors cannot rely on the same playbook. They need to be more careful in selecting deals and, in many cases, more involved after the acquisition. Having strong local connections becomes important, due diligence takes more effort, and returns tend to come over a longer period of time. In these contexts, performance is driven less by deal structuring and more by actually building and improving the business step by step.
For entrepreneurs, things are also more complicated. It is not just about finding and buying a good company. They have to navigate regulatory uncertainty, gain the trust of business owners who may not even know what a search fund is, and often bring more structure and professionalism into the company after the acquisition. In practice, this makes the role much more hands-on. The people who tend to do well are those who can adjust quickly, stay pragmatic, and combine solid execution skills with a good understanding of the local environment.
CONCLUSION: KEY TAKEAWAYS AND OUTLOOK
Search funds have been particularly successful in developed markets largely because the environment supports them. There is access to capital, information is more transparent, and exit paths are clearer. In emerging markets, these conditions are not always there yet, which makes it difficult to apply the model in the same way.
That said, the issue is not with the model itself. It is more about how it is used. In these markets, search funds need to be adapted rather than replicated.
Looking ahead, there are still good reasons to be positive. In many emerging economies, regulation is improving, access to financing is slowly expanding, and transparency is getting better. As these changes continue, it should become easier to apply the search fund model more effectively. Those who move early and learn how to navigate these environments will likely be in a strong position. In that sense, search funds are not just an investment tool, but can also contribute to the long-term development and professionalization of the SME landscape.
BIBLIOGRAPHY
- IESE – International Search Fund Study (2023) – link
- IMF – Financial Development in Emerging Markets reports – link
- OECD – SME and Entrepreneurship Outlook – link
- Kelly, J., Heston, T., & Peters, R. (2023). 2022 Search Fund Study. Stanford Graduate School of Business. – link
- Khanna, T., & Palepu, K. G. (2010). Winning in Emerging Markets: A Road Map for Strategy and Execution. Harvard Business Press. – link
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