Search fund investing has one of the strongest long-run records in private markets, and Stanford Graduate School of Business's 2026 Search Fund Study puts the aggregate IRR at 33.9% and the return on invested capital at 4.75x across 862 core search funds formed since 1984. Take out the funds that returned 10x or more, though, and the aggregate drops to 27% and 2.8x, which tells an allocator almost everything about how to hold the asset class.
The returns are real, but they're concentrated in a small number of outcomes, so breadth and manager selection decide whether a program actually captures them. This guide covers how entrepreneurship through acquisition, or ETA, behaves, what Stanford's data says about losses and concentration, and where the strategy fits inside a private markets book that already holds venture and buyout.
What a search fund is, in allocator terms
A search fund is small-company private equity, the part of the market often called microcap PE, in which an operator or a pair of partners raises a modest pool of capital, spends about 20 months finding one profitable, established business, buys it and then runs it as CEO.
It works as two investments in sequence, because the search capital is small and mainly buys the right to see the deal, while the acquisition capital is the real position and is usually committed alongside bank debt or seller financing once a company is under letter of intent.
Stanford's numbers describe a recognisable target, since among companies acquired since 2020 the typical business had a 25% EBITDA margin and 30 to 40 employees and sold for 6 to 7x EBITDA. In 2024 and 2025 the median purchase price rose to $16.0 million while the median multiple paid fell to 6.2x.
That makes ETA something other than venture or traditional buyout, because you get operating control of a profitable company, bought at a multiple that larger and more competed-for assets rarely trade at, with a single operator carrying most of the execution risk from the first day.
Why it behaves differently from the rest of your private markets book
Three structural features matter for portfolio construction, and the first is that the companies are profitable at entry, so you're underwriting the durability of existing cash flow and the operator's ability to grow it rather than a path to product market fit.
The second is concentrated ownership, with one searcher, one company and a board that usually includes the investors who funded the search, which puts an ETA position much closer to control than anything in a venture book.
The third is that entry prices are grounded in earnings, and a 6.2x median multiple on a business with a 25% margin is a very different starting point from a revenue multiple on a company that hasn't yet turned a profit.
What the returns data says
Stanford has published this study every two years since 1996, and the 2026 edition covers 862 core search funds in the United States and Canada, roughly 99% of known funds, with outcomes measured through December 31, 2025.
The aggregate IRR is 33.9% and the ROI is 4.75x, against 35.1% and 4.5x in the 2024 study, and Stanford explains that IRR slipped while ROI rose because CEOs held their companies longer. It also reports a public market equivalent of 2.88, meaning search funds as a group earned nearly three times what the S&P 500 returned over matching periods.
Stanford calculates these figures from aggregate cash flows across every investor contribution and distribution, so they aren't an average of fund-level returns, they aren't net of any particular vehicle's fees, and they aren't the results of any one manager, including Agate Hound, which is why they should be read as historical and pre-tax.
The aggregate also includes searches that never bought anything, companies still operating and exits at a loss, and that's exactly what makes it useful to an allocator, because it describes the return of the whole asset class and not just of its winners.
Read the distribution, because it's the whole strategy
The overall acquisition rate for concluded search funds is 58%, but for funds that started between 2021 and 2024 and have since concluded it's 48%, which means roughly half of recent searches end without buying a company.
Of the searches that did acquire, 74% reported some gain in value, with about two thirds of those returning 1 to 5x and the rest returning more than 5x, while the other 26% lost value, and 61% of those losses were partial rather than total.
Then comes the concentration, because excluding funds that returned 10x or more takes the aggregate from 4.75x and 33.9% down to 2.8x and 27%, and excluding the top 10% of funds by ROI takes it to 2.1x and 20%. Stanford's own conclusion is that top performers are rare but drive overall returns, which makes market performance hard to replicate in any single portfolio.
That shape should look familiar to anyone who runs a venture allocation, even though the underlying businesses couldn't be more different, and it leads to a simple conclusion: a program that holds only a handful of searches is mostly a bet on whether it happens to own one of the outliers.
Where search funds fit in a private markets allocation
Allocators tend to place ETA in one of three buckets, and the choice changes the size of the check, so it's worth deciding which one you're in before you underwrite a single manager.
Some treat it as a small-company private equity sleeve, sized alongside buyout and underwritten on entry price and cash flow, in which case it sits at the microcap end of the book, well below the size range most buyout funds can reach.
Others treat it as a differentiated return stream, because the businesses serve local and regional demand that doesn't move with public tech multiples, and their exits depend on operator readiness rather than on a fund's harvest window.
A third group treats it as a talent bet, closer in spirit to seeding an emerging manager, where you're backing an operator early in a career and the investor group effectively acts as that operator's board.
Our view is that ETA works best as a complement to venture, buyout and public equities rather than a replacement for any of them, since a PME of 2.88 earns it a place in the book while the dispersion in Stanford's data decides how you should hold it.
The cash flow profile is friendlier than venture
Search fund companies generate EBITDA from the first day of ownership, and while that doesn't guarantee distributions, since much of it goes to reinvestment and paying down acquisition debt, it does mean the business doesn't depend on the next financing round to survive.
Stanford's data also shows patient capital getting paid, because ROI rose from 4.5x to 4.75x between studies precisely as CEOs held their companies longer, which is a useful reminder to size ETA as a long-hold position and not to expect a venture-style harvest window.
Manager selection is most of the outcome
When the top 10% of funds separate a 20% IRR from a 33.9% one, the question of who you back carries more weight than any individual entry price, and Stanford's 2026 data points to a few traits that correlate with a search reaching an acquisition.
Searchers with more than two years of post-graduation experience acquired at a 55% rate against 40% for those with a year or less, partnered searches acquired at 58% against 43% for solo searchers, and searchers who signed a letter of intent within their first six months acquired at 74%.
Those are correlations rather than guarantees, and plenty of strong searchers break the pattern, but they still make a better starting checklist than intuition, especially for an allocator meeting a searcher for the first time.
Selecting individual searchers and selecting fund managers are different jobs, because a diversified ETA vehicle is judging experienced underlying managers who've each already built a process for picking and supporting searchers, and for an institution that's the decision that actually scales.
Access is the real constraint
The part that surprises allocators new to the space is that strong searchers are often oversubscribed, and their capital tends to come from a small, repeat group of investors who've backed searches for years and get the first call on each new deal.
That creates a practical problem at institutional size, since positions are small, each acquisition needs a follow-on decision inside a short window, and building the program internally means sourcing, diligencing and monitoring dozens of small private companies that each have their own board.
That's the job an access fund does, because a fund of funds with selected directs gives an institution exposure across experienced managers, their searchers and the companies they acquire through one relationship, in a corner of microcap PE that's otherwise hard to reach at size.
How Agate Hound approaches the asset class
Agate Hound is a diversified access fund for the search fund and ETA ecosystem that invests primarily through underlying search fund managers, with selected direct investments alongside them, and it isn't a search fund itself.
Managing Partner Jon Staenberg has invested in private companies for decades and has been active in search funds and ETA for more than ten years, which gives the team repeat relationships with the managers and searchers in the market, and the portfolio is diversified on purpose across underlying funds, searchers, companies, industries, geographies and vintages, with the GP committing its own capital alongside investors.
Agate Hound's Fund II also emphasises investments that may qualify for Qualified Small Business Stock treatment under Section 1202, although QSBS eligibility depends on company and investor facts, isn't guaranteed and isn't a promised return enhancement, so investors should consult their own tax advisers.
Questions to ask any diversified ETA manager
Ask how many underlying funds and direct positions the portfolio holds and how that breadth compares with the concentration in Stanford's data, and then ask which managers and searchers take their calls, and why those relationships exist in the first place.
Ask how follow-on and direct decisions get made and how quickly, how the manager handles industry and vintage concentration, and what a sample quarterly report looks like, because a portfolio of private operating companies produces far less standardised data than a venture book does.
Risks to underwrite before you commit
Key person risk comes first, since one operator runs one company, and if the searcher leaves, burns out or turns out to be a weak manager, there's usually no bench behind them to step in.
Debt is the quieter risk, because most acquisitions are financed partly with borrowing, so a leveraged business has less room to absorb a demand shock than its purchase price alone would suggest.
Then there's the search that never converts, and with a 48% acquisition rate for recently concluded cohorts, roughly half of search capital buys nothing, which is a real drag on the aggregate even though each of those checks is small.
Liquidity is slow as well, because exits depend on finding a strategic or private equity buyer for a small company, and there's no meaningful secondary market to fall back on if an investor needs out early.
Finally, the data has limits of its own, since entrepreneurs self-report fund details and outcomes to Stanford, and the study itself warns that findings may differ from any individual investor's experience, particularly for portfolios with younger vintages or larger deals.
Why small businesses may gain the most from AI
Small businesses have historically adopted new technology more slowly than large companies, which was true of ERP, cloud software and sales automation, and it's true of AI today.
That lag is why we think they may have the most relative upside, because a new CEO who understands the tools, with direct control of the P&L and no legacy systems to defend, can apply AI to pricing, customer service, scheduling and the back office within months, and in a company running a 25% margin those gains reach the bottom line quickly.
This is a forward-looking thesis rather than return data, and nobody has a clean dataset yet on AI's effect on search fund outcomes, but it's one of the reasons we expect the next decade of ETA to look different from the last.
Frequently asked questions
What returns have search funds produced?
Stanford GSB's 2026 study reports an aggregate IRR of 33.9% and a 4.75x ROI across 862 core search funds formed since 1984, with data through December 31, 2025, and these are historical, aggregate, pre-tax figures rather than projections, so individual outcomes vary widely.
How concentrated are search fund returns?
Very concentrated, because excluding funds that returned 10x or more takes Stanford's aggregate down to 2.8x and a 27% IRR, and excluding the top 10% of funds takes it to 2.1x and 20%.
How often do search funds lose money?
About half of recent searches don't acquire a company at all, and of the concluded funds that did acquire, 74% reported a gain and 26% a loss, with most of those losses partial rather than total.
Are search funds a type of private equity?
Yes, they're small-company private equity, often grouped under microcap PE, and what's distinctive is the structure, since investors back an operator before a company is found and that operator becomes the CEO.
What's entrepreneurship through acquisition?
ETA is the broader category that contains search funds, covering any path where an operator buys an existing business instead of starting one, including self-funded searches and independent sponsor deals.
Can institutions invest in search funds directly?
They can, but few do it at scale, because positions are small, strong searchers are often oversubscribed and each acquisition needs a fast follow-on decision, so many institutions get exposure through a diversified access fund instead.
Talk to Agate Hound about diversified search fund exposure
If you run a private markets program and want search fund exposure across many managers instead of a handful of searchers, book a conversation with the Agate Hound team, where you can ask for the search fund primer and walk through how a diversified ETA allocation could sit next to your venture and buyout commitments.
Publisher's note: This article was produced with Decile Group and VC Lab, a community of 1,000+ investors in over 88 countries, and it's for educational purposes only, so it isn't an offer to sell or a solicitation to buy any security.