Search Funds An Overview

What is a Search Fund?  Capital raised to help an entrepreneur to search for and acquire a business  The entrepreneur is usually a young MBA  Most Search Funds have a 3 to 5 year outlook  Investors and principals receive a return after dividends are issued, the company is acquired by another, or an IPO event

Advantages of Search Funds  Offer new entrepreneurs a quick path to capital and owning a small business  Generate significant returns to principals  Investors can serve as advisors to the entrepreneur

The Main Advantage of a Search Fund Is…  The experience provided by the investors  Investors acting as advisors can steer the business and entrepreneur down the right path  Psychic benefit to investors working with young entrepreneurs

Stages of a Search Fund  Stage 1: Raising the Fund  Stage 2: Searching for and Making an Acquisition  Stage 3: Operation  Stage 4: Exit

Raising the Fund  A business plan is created  Principals look to a wide variety of potential investors  Each investor typically purchases one or several units at about $20,000 to $35,000  Entrepreneurs look for investors who can act as advisors

Searching for an Acquisition  Search by either location or industry  Searching geographically can help a principal logistically, but limits opportunities  Target 2 to 4 industries, taking less time  Generally target industries that are not subject to rapid technological change and are in fragmented geographic or product markets  Searching for a company to buy usually takes from 4-8 months

Making an Acquisition  Each investor is given the right of first refusal on any acquisition  The investment is stepped up in the acquisition round  The business will often sell for a multiple equivalent to 70% to 130% of revenues  If the initial capital is exhausted principals may close the fund or find additional capital

Operation and Exit  Principals recruit a board of directors  Initial investors are often included  Principals create value by improving revenue growth, operating efficiency, or expansion, often in conjunction  Search funds have a 3 to 5 year outlook  Investors receive a return via an acquisition, selling investor equity, or dividends may be issued

Search Fund IRRs to Original Investors 2001 Study Figures Individual IRRs: Minimum(100%) 25 th Percentile(100%) Median17.6%(23.7%)(16.1%) 75 th Percentile21.9%24.8% Maximum98.3%84.8%215.0% (100%)26.5% (51%) to (99%)12.2% (1%) to (50%)14.3% 0% to 25%22.4% 26% to 50%14.3% 50% to 75%4.1% 76% to 100%2.0% >100%4.1% Aggregate IRRs with Same Starting Dates: Actual Cash Flows with Original EBITDA Multiples 37.6%31.7%37.3% Actual Cash Flows with Estimated Current Multiples Minus 30% Discount 35.7%33.0%37.7%

Comparison of Search Fund Acquisitions Categories All Acquisitions Median Statistics Top Quartile Performers Median Statistics Purchase Price$5.7 M$8.5 M Search Fund Investor Capital Raised for Company Purchase $2.2 M$2.3 M Company Revenues at Purchase$7.0 M$6.5 M Company EBITDA at Purchase$1.0 M$1.4 M Company EBITDA margin at Purchase 17.0%22.0% Purchase Price / Revenue Multiple0.9x0.95x Purchase Price / EBITDA Multiple4.6x5.6x Company Employees at Purchase5765

Search Funds in Alaska  Working with Native Corporations  Alaska InvestNet  Opportunities for growth  Previous attempts to assist entrepreneurs  Business plan competition

Working With Native Corporations  Opportunities for new entrepreneurs  Structure of native corporations allows for growth and expansion

New Innovative ANCSA 8(a) Business Model Entrepreneurial Manager Technical and Professional Services Provide the entrepreneurial manager with access to opportunities Business Opportunity Facilitate access to capital and management expertise Capital Investor Identify and develop entrepreneurial opportunities YIELD

ANCSA 8(a), LLC Potential Investors & Participants Collaborative, non-majoritive LLC Facilitate 8(a) process Help identify deal flow Minimum capital/bonding req’s Sponsor individuals to develop internal expertise Founding ANCSA Corp.(s) Capital in-flow coupled with project-based expertise ANC’s with Opportunity Based Core Competencies Private investors and AIN Provide & facilitate capital Identify & capture management expertise Help identify deal flow Lead Active Capital 3 member board Board of Directors Primary deal hunter; identify & validate deal flow Identify & capture necessary 3 rd party expertise Interface in government procurement Multiple sub-ordinate active managers in various fields Performance based compensation Lead Active Manager Expertise in 8(a) procurement process Legal & procedural advice Counsel Technical & professional services Project-specific competencies Little or no ownership stake 3 rd Party Experts SBA 8(a) contracts OMB A-76 contracts Focus on profits over revenues The Projects