Details & Features
| Asset Type | Lower middle market M&A–Search fund deals and independent sponsors |
| Minimum Investment | $25,000 per deal |
| Sourcing Fee | 0% |
| Management Fees | 0% |
| Platform Carry | 20% |
| Accredited Investor Requirement | Yes |
| Ability to Invest Through Your IRA | Yes |
| Average Time to Liquidity | Years |
| Customer Service | https://capitalpad.com/contact/ |
| Mobile App Availability | Mobile-friendly, but desktop is preferred |
Overview:
Search funds used to be a narrow niche within private equity, with only a handful of investors having access to a small pool of deals.
But I’m seeing that changing.
Now search funds have become part of the larger “entrepreneurship through acquisition” (ETA) framework that has been exploding with interest recently, with self-funded searchers, independent sponsors, and “micro” lower-middle market private equity finding plenty of appetite for SMB deals among private investors interested in tapping into the potential high returns these deals can offer.
CapitalPad is an innovative investing platform for search fund and independent sponsor deals. Searchers and sponsors can use the platform to find eager, qualified investors to help fundraise equity checks and close deals.
What Does CapitalPad Offer?
CapitalPad invests in the so-called “boring businesses”. The CapitalPad platform connects accredited investors with individuals or teams acquiring an existing privately-held company (the acquirers are called “searchers” or “sponsors”).
Approved accredited investors are able to view the listings of any currently available investable deals.
In each deal, a deal sponsor is acquiring an existing and historically profitable company. They aim to run it, improve it, and either distribute cash-flows from operations, or aim to resell the company for more at a future date.
This is very similar to the private equity model, with some notable exceptions:
- The target companies are smaller in nature, and are available at a lower average purchase multiple than that of traditional private equity deals.
- The acquirer will sometimes directly step into operational roles post-acquisition (even the CEO position for smaller organizations).
- Capital for closing these deals is raised on a per-deal basis instead of via a fund.
- Unlike a fund, there is not a management fee.
- Investors can invest on a per-deal basis.
- On-average, these deals have the potential to pay more frequent distributions (quarterly profit-share) than the typical PE fund.
What types of deals does the platform offer?
The platform does not appear to be industry-specific, but it does tend to focus less on tech-related deals and more on legacy-style companies:
- Home services (HVAC, dry cleaning, etc)
- Repair services (plumbing, appliance, etc)
- Domestic manufacturing
- Remodeling
It tilts towards the legacy and historically profitable “boring businesses” instead of towards more tech-heavy companies.
What sort of returns are available?
Due to securities laws CapitalPad does not publicly advertise returns, but thanks to the annual Stanford Search Fund Study the aggregate returns of search fund deals are well known.
As of the 2024 study, the aggregate search fund IRR is at 35.1%.
Why do investors use CapitalPad?
Small M&A deals are historically a very difficult asset class to access as a passive investor.
Traditionally these deals are only shared with UHNW family offices and a select few university MBA alums (Harvard, Stanford, Booth, Kellogg, Wharton).
On top of limited access, historically search fund deals have high minimum check sizes ($250k/investment is average).
CapitalPad solves these problems for accredited investors:
- Users can finally get access to these deals.
- All users are pooled together, so the minimum check size can be as small as $25k/deal.
The platform organizes all deals into one (relatively) simple centralized area.
Why do deal sponsors use CapitalPad?
Raising capital to close these deals can be a slog.
Sponsors frequently have outreach to hundreds of potential investors, have dozens of meetings, and deal with countless unique requirements, funding schedules, and communication channels.
CapitalPad simplifies the raising process for sponsors by rolling all investors into one entity (an SPV), and presenting all necessary material in the platform (behind an NDA) so that finding and combining investors is far easier.
How do investors evaluate deals?
Inside of the dashboard investors are able to see a list of currently available deals (usually there is 0-1 available deals at any given time).
Inside of a deal-room investors can see:
- A short teaser-video describing the deal (2-3 minutes)
- Company description
- Sponsor background
- Company financials
- Projected financials
- Distribution objectives
- Customer/Supplier concentration
- Assets being purchased
- Sources & Uses table
- Deal structure and purchase multiple
- A full deal memo
- Due diligence documents (P&L’s, tax returns, agreements, etc)
- An open investor call with the sponsor, or a full video recording if the call already happened.
What happens post-acquisition?
Deal sponsors generally attempt to create value in one or more ways:
- By maintaining the existing profitable operations of the company
- Attempting to grow the company
- Decreasing company expenses
- Combing multiple companies together for increased synergy (rollup)
- Combining multiple companies together to resale at a higher combined multiple (rollup)
How do Investors Realize Returns?
Through one or more of the following:
- Sharing of the distributable profits from ongoing operations of the acquired company (profit-share)
- Sponsors increasing the value of the company and reselling at a future date (usually 3-5 year targets)
- Paying down debt
- Multiple expansion, frequently due to a rollup. A common tactic for these deals is buying multiple smaller companies that trade at a 3x-4x EBITDA multiple, combining and synergizing operations, and then attempting to sell the now larger organization to larger buyers who are willing to pay higher multiples (6x-10x).
Each deal is unique in structure and targeted outcome.
It is very important to note that not every deal will be successful though. Although the failure rate of micro M&A is much lower than the venture capital industry, diversification is key as deal-failures will happen. It is also important to maintain adequate liquidity via other asset types and cash, as these deals are completely illiquid outside of profit distributions and liquidity events.
Do I Need To Be Accredited
Yes. CapitalPad is for accredited investors only.
Are There Any Fees?
Yes.
Most private equity funds operate under a “2 and 20” model. They take a 20% share of the profits, and take a 2% per-year management fee.
CapitalPad does not take the 2% management fee, but does share in 20% of the profits on deals.
Once investors have had their initial investor capital returned, then they will share 20% of the profits with CapitalPad as the fee for the services.
Fees for the legal structure and accounting are also passed on to investors (SPV fees), but these are relatively small compared to total deal sizes and are split pro-rata between participating investors.
Summary
It’s impossible for a stranger on the internet to tell you whether or not you should use a platform.
The benefits of CapitalPad is that it’s an easy way (and maybe the only way for many) to get into these difficult to access deals. The fee’s are fair, the asset class is attractive, it’s less-speculative than venture capital, and the platform makes it as easy as is possible to allocate to small M&A deals (but buying a stock is still 100x easier).
The main downside is that these deals are illiquid. Once you invest, you would generally need a liquidity event to receive your profits. It also only accepts accredited investors.
