Search Funds vs. Traditional PE: What LPs Need to Know

By Sean Smith and Nick Bryant

TL;DR — Search funds and traditional private equity both target business acquisitions, but they operate with fundamentally different structures, fee models, governance arrangements, and return profiles. Understanding these differences is essential for LP investors deciding how to allocate capital in the SMB space.

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Two Models, One Goal

Both search funds and traditional private equity firms acquire and operate businesses with the aim of generating returns for investors. But the similarities largely end there. The two models differ in virtually every structural dimension — from how capital is raised and deployed to how returns are distributed and how investors interact with the underlying businesses.

For LP investors evaluating where to place capital, these structural differences have real implications for expected returns, risk exposure, liquidity, and the level of involvement required. This article provides a clear-eyed comparison across the dimensions that matter most.

If you are new to self-funded search investing, we recommend starting with our overview of the model before diving into this comparison.

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Check Sizes and Access

One of the most immediate differences between search funds and traditional PE is the capital required to participate.

Traditional private equity funds targeting the lower middle market typically require minimum commitments of $1 million or more, with many institutional-quality funds setting minimums at $5-10 million. Access is often limited to endowments, family offices, and high-net-worth individuals with established GP relationships. Emerging managers may accept smaller checks, but the norm favors larger, institutional LPs.

Search funds — particularly self-funded search vehicles — operate at a fundamentally different scale. Individual deal co-investments typically range from $50,000 to $250,000, making the asset class accessible to a broader set of accredited investors. Search fund funds and co-investment platforms have further lowered barriers, allowing investors to build diversified portfolios without committing seven-figure allocations to a single GP.

This accessibility advantage is not trivial. It enables investors to build positions across 20-30 deals — a level of diversification that is essential for managing the concentration risk inherent in small business acquisitions. In traditional PE, achieving similar diversification requires either very large allocations or fund-of-fund structures with additional fee layers.

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Fee Structures Compared

Fee economics differ significantly between the two models, and these differences compound over time to materially impact net returns. For a detailed breakdown, see our guide to SMB private equity fee structures.

Traditional PE: the 2-and-20 standard. Most PE funds charge a management fee of 1.5-2.0% annually on committed capital (not just invested capital), plus 20% carried interest above a preferred return hurdle (typically 8%). Management fees begin accruing at fund close and continue through the investment period — meaning LPs pay fees on uninvested capital. Over a 10-year fund life, cumulative management fees alone can represent 15-20% of committed capital.

Search funds: leaner economics. Self-funded search deals typically carry no management fee or a nominal 0-1% fee. Carried interest ranges from 20-25%, often with a preferred return hurdle. Because LPs invest deal-by-deal rather than committing to a blind pool, there is no fee drag on uninvested capital. The operator's primary compensation comes from the equity they retain in the acquired business — typically 50-80% in self-funded deals — which creates strong alignment with LP outcomes.

According to McGuireWoods' independent sponsor benchmark data, the median independent sponsor (a category that overlaps significantly with self-funded search) targets management fees of 0.5-1.0% with 20% carry above an 8% preferred return. This is materially more LP-friendly than the traditional PE fee stack.

The net impact: On a $1 million allocation, the fee differential between traditional PE and search fund investing can represent $150,000-$200,000 in savings over the fund life — capital that compounds in the investor's favor.

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Governance and Control

The relationship between GP and LP differs substantially between the two models.

Traditional PE funds are structured as limited partnerships with extensive LP agreements. LPs have limited governance rights — they can typically vote on key-person events, fund extensions, and conflicts of interest, but they have no say in individual investment decisions. Reporting is quarterly at best, and many funds provide limited transparency into portfolio company operations. The LP is, by design, a passive participant.

Search fund investments offer a fundamentally different governance model. Because LPs invest on a deal-by-deal basis, they can evaluate each opportunity individually and decline deals that do not meet their criteria. Many search fund investors negotiate board seats or observer rights, giving them direct visibility into the operating company. Reporting tends to be more frequent and granular — monthly financials are common.

McGuireWoods' data indicates that 82% of independent sponsors target enterprise values between $5-50 million, a range where individual investor relationships matter and governance is more personal than institutional.

This closer relationship cuts both ways. LPs who want a truly passive experience may find the engagement requirements of search fund investing to be a drawback. But for investors who value transparency, control, and the ability to contribute operational expertise, the search fund model is meaningfully more attractive.

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Return Profiles

Both models have generated compelling returns, but the shape and distribution of those returns differ.

Search funds: higher headline returns, wider dispersion. Stanford's comprehensive research — covering 681 search funds since 1984 — reports a 35.1% average IRR and 4.5x average return on invested capital. These figures are striking, but they mask significant dispersion. The top quartile of deals generates extraordinary returns (10x+), while the bottom quartile includes total losses. The median return is lower than the mean, reflecting the positive skew of a few outsized winners.

Traditional PE: more consistent, lower ceiling. Lower middle market PE funds have historically generated net IRRs in the 15-25% range, with top-quartile managers delivering 20-30%. The dispersion is narrower — catastrophic losses are less common, but so are 10x outcomes. Returns are driven more by operational improvement and multiple expansion across a diversified portfolio than by individual home runs.

Cash flow dynamics also differ. Search fund acquisitions — particularly those using SBA financing — often generate meaningful cash flow from day one. LPs may receive current income through distributions while also participating in equity upside at exit. Traditional PE funds typically reinvest cash flow and distribute returns at exit, meaning LPs receive no current income during the hold period.

Liquidity considerations. Both models are illiquid, but the timelines differ. Search fund hold periods are typically 5-7 years for individual deals. Traditional PE fund lives are 10-12 years, with extensions possible. Neither offers meaningful secondary market liquidity, though the traditional PE secondary market is more developed.

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Which Is Right for You?

The choice between search fund investing and traditional PE is not binary — many sophisticated investors allocate to both. But your optimal allocation depends on several factors.

Search funds may be a better fit if you:

• Want to invest $50-250K per deal and build a diversified portfolio over time
• Value transparency, governance rights, and a direct relationship with the operator
• Are comfortable with higher return dispersion in exchange for higher potential upside
• Want current cash flow from your investments
• Have operational expertise you can contribute to portfolio companies
• Are willing to actively evaluate individual deal opportunities

Traditional PE may be a better fit if you:

• Prefer to allocate $1M+ to a single manager and delegate all investment decisions
• Want a more predictable, narrower return distribution
• Value the institutional infrastructure of established fund managers
• Prefer a truly passive investment with quarterly reporting
• Need access to a more developed secondary market for potential early liquidity

A blended approach — allocating to both search fund co-investments and traditional PE funds — allows investors to capture the best of both models. The search fund allocation provides higher upside potential and current income; the PE allocation provides institutional diversification and operational consistency. For guidance on managing risk across your SMB portfolio, our risk management guide provides a detailed framework.

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Next Steps

Understanding the structural differences between these models is the first step. The next is building the analytical toolkit to evaluate specific opportunities — whether that means assessing a search fund operator's capabilities or diligencing a PE fund's track record.

Our Foundational Guide to Self-Funded Search Investing provides the complete framework for investors entering the search fund space, including deal mechanics, capital structures, return benchmarks, and due diligence best practices.

Ready to see real opportunities? Create your investor profile on SMB Investor Network to access curated deal flow from self-funded searchers and independent sponsors operating in the lower middle market.

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Sean Smith is Managing Partner and Nick Bryant is Co-Founder at Search Fund Ventures, where they invest in and advise self-funded searchers pursuing lower middle market acquisitions.