Solo Search vs. Partnered Search: What the Data Says

In this episode of 5 Minutes in the Lower Middle Market, we look at the data behind solo searchers versus partnered search funds and why partnerships have historically outperformed on average.

0:00 Patience as an investor, impatience as an operator
1:02 Solo search vs. partnered search fund performance
2:15 The rise of exceptional solo search outcomes
3:38 How to attract A+ talent into a small business
5:06 The lower middle market rewards fit

Transcript

SPEAKER_00 0:00

Welcome to five minutes in the lower middle market, where I break down the best ideas about buying, building, and owning small businesses in five minutes or less. And today's theme, very simple. In the lower middle market, the best outcomes usually come from balancing opposites well. So the first tweet the true test of a great investor is patience. The true test of a great owner-operator is impatience. Very useful because great investing often means waiting, waiting for the right deal, waiting for the right price, waiting without forcing something just because you want activity. But once you own the company, the job changes, the impatience becomes valuable. Impatience with poor execution, impatience with uh slow hiring, impatience with unresolved problems, impatience with waste, thrift, and mediocrity. So I think that tweet captures something very well. The mindset that helps you buy well is not always the same mindset that helps you operate well. The second tweet was on a solo versus partnered search funds, and I think the numbers are worth saying uh clearly. The tweet argued that uh starting a search fund solo is not necessarily the obvious best move. According to the Stanford Search Fund study, solo searchers generated an IRR of 27.4% compared to 40.3% for partnerships in 2022. ROI was 2.9x for solo searchers versus 3.8x for partnered searchers. And in early 2020 study, it was 2.4% for solo searchers versus 3.7% for partnered searchers. So in the aggregate, partnerships have clearly outperformed. And the chart makes that interesting too. Solo searchers had higher percentages in the lower return buckets, like total of total or partial loss, which is like 1 to 2x return and 2 to 5x return. And partnerships, on the other hand, had a bigger share in the 5 to 10x and 10x plus buckets. But there is an important nuance. Over the last decade, more solo searches have started producing very large outcomes. Post 2009, 52% of funds returning 5% or crater were run by a solo searcher. Before 2009, that number was only 18%. And I told John Kappel, the legendary private equity investor and the GP, had a good take on this. He said it's not surprising because private equity shops controlled by a single individual don't usually have a great track record. You simply make better decisions when you have people to really bounce things off. I think that's a fair way to look at it. The lesson isn't the solo search is bad, it's that partnerships seem to work better on average, while solo search can still produce exceptional outliers. And doing a search alone gives you full control, but it also means carrying the world load yourself, which is sourcing, diligence, investor management, emotional pressure, and all of it. You can always hire people, but uh on a GP level discussing ideas, it's it's just better. Uh a great partner can improve decision making, widen the skill set around the table, and make the whole process more resilient. And the third tweet ties into uh this from a very different angle. Mike Potkin made the point that one of the best ways to recruit A talent is to show them that their specific skill set is needed and it will have real impact. I think that's a very important point, especially in the small business. The best people they just don't want a job, they want to matter, they want to know what they do and that it will move the business forward. And the Tim Cook story is a great example of that, and this was actually Mike retweeting this tweet. So on paper, going from uh Compaq to almost bankrupt Apple made very little sense back in 1998. But Steve Jobs, again, while hiring Tim Cook didn't sell him on safety, he sold him on vision, contribution, and the chance to be part of something meaningful. So, Cook, what he did, he left a much bigger company because he believed he could make a real contribution and because working with jobs felt like an opportunity of a lifetime. That's a very useful reminder for anyone building in lower middle market and hiring people. If you want to attract strong people, do not just sell the compensation, sell the mission, sell the importance, sell the size of their contribution they can make. Because A plus people want to feel needed. If I had to pull one lesson from today's episode, it would be that the lower middle market rewards people who understand fit, the right mindset at the right stage, the right partner for the right journey, and the right talent in the right role. Again, patience helps you build well, urgency helps you operate well, and the best people join when they believe they can truly matter. So that's it for today's five minutes in the lower middle market, and see you in the next episode.