Search funds are revolutionising investment in Italian SMEs. Paolo Guida, partner at Eureka, explains to We Wealth how this model works, what returns it can offer (up to 30% per annum) and why it represents an opportunity for investors and entrepreneurs.
In the Italian and international financial landscape, search funds are emerging as an innovative alternative investment formula for those who want to combine entrepreneurship and returns. This model — which involves the search, acquisition and operational management of a target company by a promoter (the so-called searcher) — stands out for the alignment of incentives between investor and entrepreneur and for the potential to enhance the value of undervalued small and medium-sized enterprises (SMEs).
In Italy, the phenomenon is growing rapidly: thanks in part to the efforts of organisations such as Eureka, an ecosystem is being built that can support new models of financing and business development. In this interview, Paolo Guida, Eureka partner and serial investor in search funds, guides us through the advantages, challenges, trends and prospects of Italian search funds, showing how this type of investment can offer a concrete way to relaunch SMEs and generate value in the medium to long term.
Guida, what does investing in a search fund consist of and how does it differ from other forms of investment?
In private equity, investors usually rely on professional managers who buy multiple companies for the fund, with an external management team. Returns in private equity are declining over time due to increasing competition between funds, which is reflected in higher entry multiples and longer exit times than in the past.
In the case of venture capital, investors, either directly (business angels) or through funds, have exposure to scalable, high-tech start-ups, without control and with high binary risk. Given the so-called “power law” in venture capital, where a single investment generates the returns of the entire fund, missing the outlier can lead to very modest or negative returns.
What is the typical structure of a search fund and what makes it different?
Investing in a search fund is different because it involves two phases: raising capital to search for a target SME and, subsequently, financing the acquisition and management of the selected company. This allows investors to evaluate the promoter (searcher) on the basis of their skills before committing to the acquisition.
The searcher, usually a young manager or entrepreneur with a managerial/financial background, takes over the operational management of the company after the acquisition, thus aligning their interests with those of the investors.
The typical targets are SMEs with EBITDA between €1 million and €3 million and turnover between €5 million and €20 million, often under the radar of traditional private equity, with less competition on deals and lower entry multiples.
So what are the distinctive features of a search fund?
The distinctive characteristics of a search fund are:
focus on a single asset,
control of the target company,
a full-time promoter/operator who is willing to relocate to where the target is located,
searching in “unglamorous” but cash-generative sectors (B2B, services, industrial niches) that are easy to manage and have a history of high profitability across the cycle.
What can you tell us about the main advantages for an investor who chooses to support this type of venture capital?
The advantages for investors who invest in search funds are:
- the possibility of diversification,
- less competition for targets,
- alignment of incentives with the searcher,
- bottom-up selection of companies that are not highly contested,
- the option to choose whether to invest in the final phase.
I would also add:
- target companies with low technological risk,
- the possibility of actively mentoring the searcher,
- flexibility in deciding how much to invest.
Over the last few years, the number of search funds in Italy has grown significantly. How does the national situation compare to that of other countries?
According to the Polimi–Eureka Observatory, between 2016 and 2024 there were 29 Italian search funds, with 15 active and 10 acquisitions completed. The numbers are accelerating, and we expect to reach over 40 search funds by the end of 2025 with the completion of 16-17 acquisitions.
The success rate in Italy is very high: 93% of completed searches lead to an acquisition, which is higher than the global and European average.
In the US, the success rate stands at around 67%, although operators indicate a declining percentage, in the order of 50%, due to the entry into the market of operators not coming from the world of search funds, who are partly contributing to distorting the model and skewing the statistics.
In Spain, the success rate remains high, at around 80%. France and England, on the other hand, are more difficult markets due to the greater financialisation of the English economy and the larger average size of the targets, which are therefore more in line with traditional private equity in the French case.
What are the reasons for the Italian boom and what opportunities are emerging? What are the reasons for this development?
The boom in Italy can be explained by the high fragmentation of many sectors and the small size of many family-run SMEs, which often fail to find a solution to the problem of generational transition. International investors are looking with great interest at the Italian market, perhaps the most interesting market in Europe at the moment. The number of searchers is doubling year on year. We expect this trend to continue over the next 3-5 years.
What is Eureka’s specific role in this ecosystem?
Eureka is playing a leading role in supporting and promoting the creation of a vibrant and dynamic ecosystem. Eureka has contributed to the creation of the Search Fund Observatory with the Graduate School of Management (GSOM) of the Politecnico di Milano, has designed and will coordinate the elective courses that GSOM is launching, and has taken an active role in involving Borsa Italiana and the Elite programme in the development of the ecosystem.
Furthermore, it intends to continue to play a driving role in the development of search funds in Italy, becoming the anchor investor for new projects launched in Italy, the local point of contact for international co-investors and the conduit through which Italian institutional investors and family offices can gain exposure to this emerging asset class.
What is the typical profile of an investor participating in a search fund in Italy?
According to data from the Polimi-Eureka Observatory, 49% of investors who have financed searchers launched to date are institutional investors (mainly foreign funds), followed by family offices (18%). Private individuals, business angels and personal holding companies account for approximately 33% of capital.
The searcher must try to create a balanced cap table between international and local investors. While former entrepreneurs and managers are often very useful for their experience and knowledge of a specific industry, specialised funds guarantee that the searcher has the financial resources to complete the acquisition of the target.
The motivation behind the investment is the pursuit of financial returns, coupled with the desire to be involved in supporting new entrepreneurs to succeed.
Can you give us an idea of the typical returns and average time to realisation for this type of investment compared to private equity or venture capital?
In the United States, the historical rate of return (IRR) ranges between 30% and 40% per annum, with investment multiples between 3x and 6x.
In Europe, which started later but is expected to align with US returns in the long term, the average IRR is between 20% and 30%, with multiples ranging from 2x to 4x.
The average holding period is generally 5-7 years, slightly higher than the historical series of 4-6 years for traditional private equity (which is, however, tending to grow due to fewer exits), reflecting the objective of long-term growth.
Mid-low market private equity tends to generate gross returns in the range of 15-20%, while in venture capital (VC) returns are highly variable, with a few outliers driving the fund and relatively few exits, especially in Italy.
How can the search fund model help solve the challenges of succession and growth for Italian SMEs?
My finance professor in Chicago, Luigi Zingales, described search funds as a third way to entrepreneurship in his book Chrony Capitalism. If you were not born into a very wealthy family or are not a tech talent who can successfully launch a start-up, the third way is to buy an existing company with the support of a pool of investors.
Europe, and Italy in particular, has a structural generational transition problem that requires a structural solution. The search fund model responds to this logic because it shifts the burden of searching for the target to the searcher, with the risk of not finding it, in exchange for a very high potential financial and personal return.
This incentive structure makes it possible to contact and analyse many more targets at a much lower cost per contact than traditional private equity funds or club deals, covering a totally uncovered market segment. This also helps to create a class of new entrepreneurs capable of professionalising and growing family-run businesses that have not solved the problem of generational transition.
What is the minimum amount of capital or investment required to participate in a search fund, and what level of involvement is expected from investors in the management and growth of the acquired companies?
Investors have two alternatives:
- they can decide to invest at the individual searcher level;
- or indirectly through a fund and possibly participate in individual deals on a co-investment basis.
At the individual search fund level, the search phase usually requires total capital of between £300,000 and £600,000 (typically 15-20 investors with shares ranging from £15,000 to £40,000 each). Upon completion of the research phase, the investor decides whether to reinvest in the acquisition phase, with contributions depending on the size of the target company (usually deal sizes between £4 million and £6 million in equity, but in some cases even £15 million to £20 million, which translates into pro-rata commitments in the order of a few hundred thousand pounds).
The investor’s involvement can be passive (financial support only) or active (governance, mentoring, strategic support – often board roles), but no ongoing operational commitment is required.
With Eureka, we wanted to launch the first institutional fund in Italy that allows investment in this emerging asset class, with all the guarantees of a structure regulated by the Bank of England, aiming to create a pool of ambassadors and operating partners who can provide valuable support to searchers in the search and management of targets. This pool is built on an open community basis, and if there are professionals and entrepreneurs interested in contributing, they are invited to come forward and contact us.
