Canada: Private Equity Search Funds: Look No Further

Copyright 2012, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Business Law/Private Equity, February 2012

Search funds, the lesser-known sibling of pledge, buyout and venture funds, are gaining momentum in the Canadian private equity marketplace. This model, which has been in use in the U.S. for several decades, might not be familiar to many Canadians despite its potential benefits for raising capital in a unique market such as Canada, as well as for succession planning for Canadian business owners.

What is a Search Fund?
A search fund is a specialized form of private equity fund best characterized by its multiple-stage capital-raising activities and evolving role of the founders over time.

The life cycle of a typical search fund consists of several phases: (i) initial capital raising to fund the search for a target; (ii) searching for a target; (iii) acquisition capital raising; (iv) acquisition; (vi) ongoing management of the acquired target by the founders of the search fund; and (v) the search fund's exit or sale of the target.

A unique feature of a search fund, as compared to other private equity funds, is the two-stage capital-raising process. A search fund establishes itself by raising an initial capital pool with the aim of financing a "search" for a business to acquire. This first stage seeks to raise anywhere from $250,000 to $750,000 for the search phase, which can, depending on the success of the principals in finding a suitable investment, range from a period of several months to several years. The initial capital raised is used by the search fund to pay organizational and due diligence expenses, as well as a salary for the founders. Often, in exchange for the search capital, initial investors are guaranteed a pro rata right, but do not have an obligation to invest in the acquisition of the proposed target once it is identified.

The second stage of capital raising occurs once a target is identified. The founders of the search fund will canvass their initial investors for acquisition funds and may also look to new equity investors, lenders or the seller of the target as additional sources if the initial investors do not provide the full amount of the acquisition funds. In Canada, search funds typically look for targets with an acquisition cost in the range of $5-million to $30-million, but there are no legal limitations on the acquisition size.

Post-acquisition, the search fund founders will typically operate the target for three to seven years, implementing rationalization strategies, increasing sales and decreasing expenses, much like any other private equity fund sets out to do. The "operating period" is then followed by a public offering, sale of the target or some other liquidity or exit event.

The Structure
The structure of a search fund can vary depending on the jurisdiction of its investors and tax planning considerations, but a typical structure, for a Canadian deal with Canadian founders, involves the creation of a limited partnership, the general partners of which are the founders of the search fund, and the limited partners of which are the investors in the search fund. Unlike in a traditional private equity fund model, management fees are minimal, if they exist at all, and instead founders receive a market rate salary in their post-acquisition managerial role, often with the ability to earn equity throughout the term.

Motivations of the Players
Founders. Founders of search funds are typically business-oriented individuals who are looking to satisfy their entrepreneurial spirit without having to build a company from the ground up, and who want to work as an operator, while being compensated with equity. Founders typically take an equity stake in the target, often in the form of stock options in the acquisition company or carry in the upstream limited partnership to incentivize the founder to perform.

Investors. Upon contributing initial search capital, investors receive a pro rata right-of-first-refusal to invest additional funds in connection with acquisition financing and the right to convert the investor's initial search capital into equity at an increased value, often 150%, of the initial amount. This conversion rate is meant to compensate investors for contributing capital at the riskiest stage of the investment. The right-of-first-refusal provides comfort to investors in that if they disagree with or lose confidence in the fund, they can bow out. This differs from a typical private equity fund which has firm capital commitments and a limited ability for investors to withdraw investments. A search fund investor base is rarely dominated by any one investor and is usually comprised of sophisticated investors who themselves act as advisers to the business. The founders, seeking to ensure investment in the acquisition phase, will often involve the investors in the acquisition diligence, allowing the founders to capitalize on each investor's knowledge, expertise and contacts. The expertise of the investors is often also called upon post-acquisition.

Legal Issues
Canada's lower middle-market capital sector provides a target-rich environment for search funds to operate. However, regardless of deal size, a search fund, like any other fund, will have to consider structuring, commercial and other legal issues prior to its formation and through to the exit stage. Ensuring adequate consideration is given to relevant legal issues is of particular importance to search funds with many first-time founders staking their reputation on a smooth and successful acquisition and exit.

Fundraising Considerations. Search funds must comply with provincial securities laws applicable to private offerings at both the initial funding stage and the acquisition funding stage. Most search funds will want to prepare an offering memorandum for investors to provide more information on their search fund. At the acquisition phase, the offering memorandum will help lend credibility to the search fund and show that the founders understand key risks of the target. Such offering memoranda will require the guidance of experienced legal counsel. Depending on where investors are located, compliance with securities laws of multiple provinces may be required.

Structuring and Governance Considerations. In addition to securities compliance, the structuring of search funds typically involves sophisticated fund agreements which specify governance, distribution, follow-on financing and allocation terms. These documents must balance certainty for investors with flexibility for the founders as the details and structure of the acquisition are not known at the time of fund formation. A key consideration in the structuring of a search fund will be the location of investors. As a result, tax planning should be taken into account at this stage. These preliminary planning steps are vital in ensuring that when the search fund is ready to make an investment, it is in a position to do so without having to revisit key legal points with its investors.

Diligence Considerations. Once the search fund is established and the founders begin diligence on potential targets, legal counsel can assist the founders in a variety of ways including investigating and reviewing potential target investments, drafting letters of intent, non-disclosure agreements and term sheets and assisting with legal due diligence. For many founders, the acquisition may be their first solo experience and legal counsel can help prepare founders for the inevitable questions from investors and educate them in the acquisition process.

Acquisition Considerations. Once a target is selected, negotiations begin and founders often find themselves negotiating on multiple fronts including with sellers, investors and third-party financing sources and managing these relationships in tandem is critical to success. From a legal perspective, different stakeholders have different issues that need to be considered with a co-ordinated strategy. In addition, ensuring that the initial search fund structure remains an appropriate structure for the post-investment time period (from a legal, commercial and tax perspective, among others) will require consideration. Experienced legal and financing advisers can be invaluable in assisting with these considerations.

Further Information
If you are considering forming or investing in a search fund or are already in an existing relationship, we welcome consultation on deal terms, the search fund model or legal matters associated with the search fund to help this entrepreneurial model grow in Canada.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
13 Dec 2017, Seminar, Toronto, Canada

Class actions across Canada continue to grow in volume and complexity, triggering significant policy and financial implications for businesses in Canada. With the Law Commission of Ontario’s recent announcement that it is reactivating its comprehensive review of class actions in Ontario, we may see important law reform on the horizon to evolve with the changing landscape.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions