Search fund investing is built around entrepreneurs. That is one of the model’s strengths, but it is also why diversification matters.
In Entrepreneurship Through Acquisition, or ETA, entrepreneurs search for, acquire, and lead established businesses. The opportunity is compelling because these businesses are often profitable, founder-led, and located in fragmented lower middle market sectors. But individual outcomes can vary widely. Some searchers do not complete an acquisition. Some acquired companies underperform. Others create significant value over time.
That distribution is exactly why Northspring views diversification as a core part of the strategy.
Diversification Starts Before A Deal Closes
In traditional private equity, diversification is often discussed after capital has been deployed. In search fund investing, diversification begins earlier. Investors evaluate multiple entrepreneurs, multiple searches, multiple industries, and multiple acquisition opportunities before a portfolio company ever enters the picture.
This matters because search failure is part of the model. Not every entrepreneur will find the right company. A disciplined strategy should account for that reality rather than treat it as a surprise.
The Stanford Graduate School of Business 2024 Search Fund Study reported that, among concluded core search funds, 63% completed an acquisition and 37% ended without an acquisition. Since 2014, the acquisition rate has been closer to approximately 57%. Source: Stanford Graduate School of Business, 2024 Search Fund Study. Past performance does not guarantee future results.
Looking for Outliers
Diversification matters because investors cannot reliably predict which companies will generate exceptional returns, so a broader portfolio increases the likelihood of capturing those outlier outcomes. According to Stanford, approximately 11% of search funds generate returns of 10x or greater. These exceptional performers can have a meaningful impact on overall portfolio returns.
Northspring’s strategy is designed with this reality in mind. By investing in 20+ high-potential companies in each fund, we increase the probability of gaining exposure to the exceptional businesses that can drive portfolio performance.
Diversification After Acquisition
Once companies are acquired, diversification remains important across operators, companies, industries, geographies, and end markets. A portfolio approach reduces reliance on any single entrepreneur or company outcome.
For Northspring, diversification is not about collecting exposure for its own sake. Every investment still has to meet a high bar. We look for businesses with durable fundamentals, repeatable revenue, strong cash generation, and clear opportunities for long-term value creation.
What Diversification Cannot Do
Diversification does not eliminate risk. It does not guarantee returns, protect against poor execution, or make every acquisition attractive. It is a portfolio construction tool, not a promise.
Used thoughtfully, diversification helps investors participate in the long-term pattern of the model while reducing dependence on any one searcher, transaction, industry, or company.
The Northspring View
We believe search fund investing works best when entrepreneur-led sourcing is paired with disciplined portfolio construction. Entrepreneurs create access. Northspring focuses on selection, underwriting, governance, and support. The goal is to build exposure across a carefully selected group of operators and companies, not to depend on one perfect deal.
Connect With Northspring
If you are an Accredited Investor or Qualified Purchaser interested in learning more about Northspring’s investment approach, portfolio construction, and current opportunities, we welcome a conversation.