SME growth and financing through the Search Fund model

We would like to express our sincere thanks to Foro Capital Pymes for inviting Arada Capital Partners SCR to speak about the Search Fund model and its impact on small and medium sized companies in Spain.

Thank you for the opportunity to contribute to the debate and learn from other experts in the field such as Pleamar Partners SL and Enrique Sales Rodriguez, CEO of one of our first investments.

It was amazing to see so many people connecting and joining the conversation about the Search Fund model. We are very pleased with the positive response and enthusiasm of everyone who participated. It is inspiring to see so many people sharing their ideas and perspectives on how we can drive growth and change through Search Funds.

Once again, thank you for the invitation and for making the event a success.

Arada Capital Partners, Tressis’ private equity firm, invests in 14 Search Funds in Europe

  • Arada Capital Partners completes first closing of its venture capital fund focused on Search Funds
  • The fund invests in European entrepreneurs to facilitate the succession of SMEs.

Arada Capital Partners, the private equity firm advised by Javier Puig and managed by Tressis Gestión, announces its first closing with commitments close to 60% of the target capital, estimated at €15 million. The firm has an initial portfolio made up of 14 national and international Search Funds and a first company: IESMAT. In its first year, the privat equity firm has consolidated its presence in 4 geographies (Spain, UK, Portugal and France) and is finalising its entry into Italy before the summer, thus becoming one of the institutional investors of reference in the Search Funds ecosystem in Europe.

The objective of Arada Capital Partners is to acquire around twenty companies (50% in Spain and 50% in the rest of Europe and the UK) which it will manage through 30 national and international Search Funds. To raise capital, Arada Capital Partners has Tressis SV as its exclusive marketer among family offices, mostly Spanish, and entrepreneurs with experience in different sectors. Executives who are not only looking to invest but also to support entrepreneurs and new executives of investee companies.

Twenty entrepreneurs

The 14 Search Funds financed to date by Arada Capital Partners consolidate 18 entrepreneurs who are currently looking for a SME of between 1 and 3 million EBITDA, each of them in their respective geographies. The Search Fund investment model consists of acquiring one company, managing it and growing it, in many cases facilitating the succession and generational handover of family-owned SMEs. “During 2023 we plan to make several acquisitions of companies with succession issues across Europe. Although 2022 has not been an easy year, we have seen that among SMEs there is a lot of movement and very interesting investment opportunities”, confirms Javier Puig to

Arada Capital Partners’ first portfolio company is IESMAT, the Madrid-based scientific instrumentation supply, installation and support firm led by Enrique Sales, the founding partner of Signatus Capital, the Search Fund that identified and bought 100% of the Madrid-based company. “With the reinforcement of its sales and after-sales team, the upcoming opening of an office in Barcelona and the entry into Portugal, we expect a solid growth of the company during 2023,” says Javier Puig.

For the location and management of the companies in which Arada Capital Partners invests, the private equity firm finances entrepreneurs with a wide variety of profiles. “We look for sufficient commitment and experience so that our entrepreneurs can not only identify and acquire an SME, but also manage and run it later” explains Javier Puig.

Tax advantages

In addition to supporting entrepreneurs and providing a solution to the succession problem faced by many European SMEs, the private equity company “has tax advantages for investors (spanish legal entities) with a 95% exemption on dividends and capital gains received, as well as the consideration as assets used for economic activities for those participations of more than 5% in the share capital of the firm,” says José María Mingot, director of legal and tax advice at Tressis.

JC Partners, the Search Fund created and led by entrepreneurs Juan Pablo Ocampo and Chaid Neme, explains to the alignment of interests between entrepreneurs, sellers and investors that favours this investment model. “On the one hand, the investor diversifies his portfolio while making a long-term investment with historical returns of more than 25%, while ensuring the continuity of companies with succession problems. On the other hand, entrepreneurs, in addition to the potential economic returns, have the opportunity to live a unique experience together with their investors by undertaking the acquisition and management of a stable company with a proven business model”.

After several months of looking for a company, JC Partners explains that, in the current situation of uncertainty, business owners who had not previously considered divesting are starting to think about selling their companies “as an attractive option, which translates into new investment opportunities in the market”.

Another Search Fund in which Arada Capital Partners invests and which is currently looking for an SME to acquire in Spain is Pleamar Partners, led by José Luis Soria and Carlos Gómez de Iturriaga. “We are doing an agnostic Search, with no restrictions on sectors or specific geographies. A clear trend is that we have identified younger owners who, despite being far from retirement age, want to turn their lives around or undertake new business projects. In both cases, the Search Fund model is well received. Sellers and entrepreneurs like to put faces and eyes on the people who will give continuity to their business projects,” they add.

Translated by Arada Capital Partners.

Entrepreneurship through the acquisition of an established company

A Search Fund is an investment vehicle created by one or two entrepreneurs, with the objective of raising capital from several investors to finance the search for an SME in order to acquire, manage and grow it.

Instead of creating a company from scratch, in this case entrepreneurs seek to continue the cornerstones of the acquired company’s success. Entrepreneurs build on the legacy of the company’s founder with the help and advice of their investors, seeking to realise a new phase of growth for the SME.

The target company for a Search Fund is an SME with an EBITDA of between EUR 1,000,000 and EUR 3,000,000. They are looking for solvent companies with a good financial structure. Companies with a history of profitability and growth that, for succession or other reasons, their owners want to sell. These are companies that tend to be below the natural targets of private equity funds and above private equity funds. Search Funds are therefore an alternative for many entrepreneurs who want to sell their company, and a fantastic alternative for entrepreneurs who want to acquire and manage companies with high growth potential.

Although the Search Fund model was born in the United States more than 35 years ago, we are currently seeing a proliferation of this type of entrepreneurship around the world, which has led to the emergence of specialised institutional investors such as Arada Capital Partners that focus their investment strategy on first financing the search for Search Funds, and then acquiring localised companies with them.

One of the keys to this investment model is the alignment between investors and entrepreneurs, and the collaborative nature of the Search Fund model. The entrepreneur is not only supported by his investors in the search for the business, but also during the management of the company once it has been acquired.

In the current economic climate, there are a number of advantages to acquiring an existing company. The type of companies that are acquired tend to be more resistant to sudden economic movements than newly created ones. Moreover, in an environment of rising interest rates, they are companies that, because of their track record and good position, tend to obtain more favourable financing conditions.

There is no doubt that the search fund model is here to stay. They provide a solution to a problem of generational handover or the sale of a multitude of companies, while supporting experienced entrepreneurs.

Spanish regulators (CNMV) give the green light to Arada Capital Partners, the private equity firm promoted by Tressis to invest in European SMEs.

Interview with Javier Puig, Investor & Advisory Partner of Arada Capital Partners, where he shares his vision of the search fund investment model and confirms the approval of the regulators (CNMV) for the launch of the private equity vehicle – [press article in spanish]

  • Prevé levantar 15 millones entre family offices e inversores privados españoles
  • Comprará 20 pymes europeas a través de fondos de búsqueda (search funds)
  • Los ‘search funds’ logran retornos del 30% para sus inversores y emprendedores

Arada Capital Partners, la sociedad de capital riesgo asesorada por Javier Puig y gestionada por Tressis Gestión, ya tiene luz verde de la CNMV para su lanzamiento e iniciará la captación de capital (fundraising en la jerga financiera) durante este mes de septiembre. La tesis de inversión y el objetivo de Arada Capital Partners es adquirir cerca de 20 pymes a nivel europeo, localizadas y gestionadas a través de diferentes search funds.

Un search fund o fondo de búsqueda es una firma creada por un emprendedor y financiada por un grupo de inversores (entre 10 y 14) cuyo objetivo es identificar una sola empresa -normalmente pymes con un ebitda de entre 1 y 3 millones de euros- con un historial de rentabilidad y crecimiento sostenido, para adquirirla, gestionarla directamente y hacerla crecer.

Arada Capital Partners busca captar 15 millones de euros entre inversores privados y family offices, en su mayoría españoles, con un primer cierre a finales de este año. Su objetivo será invertir en cerca de 30 search funds españoles e internacionales a través de los cuales comprará junto a otros inversores 20 compañías pequeñas y medianas con un gran potencial de crecimiento.

Como explica Javier Puig a, «como modelo de inversión, el search fund permite a sus inversores diversificar sectorialmente y de forma geográfica, alineando al 100% los intereses del equipo directivo y de los inversores».

Modelo de éxito

La aprobación de la CNMV consolida un proyecto iniciado hace dos años cuando Tressis y Javier Puig se adentraron en el creciente ecosistema search fund. Hasta el momento, la firma ha analizado más de 60 fondos nacionales e internacionales, con conversaciones muy avanzadas en muchos de ellos para formar parte de la cartera inicial de la sociedad de capital riesgo. Varios de estos search funds están buscando una pyme para adquirirla y gestionarla, y otros iniciarán su búsqueda este mes de septiembre.

La tesis de inversión del ‘search fund’ combina el modelo tradicional del private equity con el emprendimiento

Jacobo Blanquer, consejero delegado de Tressis Gestión, explica que «con el lanzamiento de Arada Capital Partners continuamos completando la propuesta de inversión alternativa a través de vehículos innovadores». La figura del search fund «se ha desarrollado mucho en otros países. Ofrece la oportunidad de invertir en empresas con gran potencial de crecimiento gracias al talento del emprendedor que será el nuevo gestor de la empresa en el día a día y a la ayuda y asesoramiento continuado de un grupo inversores experimentados. Con Arada Capital Partners SCR ofrecemos a nuestros clientes la oportunidad de invertir en search funds cuidadosamente seleccionados», añade.

Objetivo: 30 fondos en cartera

Arada Capital Partners SCR invertirá en search funds y vehículos similares a través de los cuales tomará participaciones minoritarias, pero relevantes, en compañías pequeñas y medianas por toda Europa. Javier Puig matiza que «el tamaño del vehículo de inversión nos permite apoyar activamente a los search funds en la búsqueda de sus empresas, en el posterior proceso de compra, en la creación de valor -una vez adquiridas- y en la desinversión final».

Los fondos de búsqueda buscan pymes con un historial de rentabilidad y crecimiento ante problemas de sucesión 

La tesis de inversión del search fund combina el modelo tradicional del private equity con aspectos del emprendimiento. Arada invierte a través de un modelo colaborativo e innovador de «adquisiciones emprendedoras», capaz de generar retornos cercanos al 30% para inversores y emprendedores.

Según los recientes estudios de Stanford (2022) y el IESE (2020), en EEUU, donde este modelo de emprendimiento goza de 35 años de vida, el retorno medio de los últimos 526 search funds ha sido de 35,3% de TIR («tasa interna de retorno») y 5.2x MOIC («múltiplo sobre el capital invertido»). En el resto del mundo (Europa incluida) el ecosistema se está desarrollando rápidamente y los retornos medios ascienden a 28,5% de TIR. 

Javier Puig confirma a este diario que el ecosistema nacional de search funds vive un buen momento con oportunidades de inversión muy elevadas. «España es el país europeo más activo en fondos de búsqueda o search funds y el tercero a nivel global gracias a los múltiples factores que impulsan la proliferación de estos vehículos de inversión. Factores como la mayor inquietud emprendedora en España, el creciente número de pymes que afrontan una situación delicada en el momento de su sucesión y la capacidad de generación de valor y profesionalización en este tipo de empresas».

El objetivo típico de los fondos de búsqueda son pymes con un historial de rentabilidad y crecimiento, que, por problemas de sucesión u otros motivos, sus dueños quieren vender. «Nosotros buscamos dar continuidad a los pilares fundamentales del éxito de la compañía adquirida y construir sobre el legado del fundador una segunda fase de crecimiento. Este tipo de operaciones son vistas con buenos ojos por los bancos al tratarse de negocios probados, solventes y con una buena estructura financiera», añade. 

En definitiva, este modelo de adquisición y emprendimiento ha venido a España para quedarse y para ofrecer al inversor una alternativa que, por tamaño, se sitúa entre el private equity tradicional y el venture capital, pero con un objetivo de retornos asombrosos, ofreciendo una gran diversificación (por sectores y países) a sus inversores.

Investing in growth and adding value: the Search Fund model

The Search Fund model has been active in the US for over 35 years. As a pioneer country, the ecosystem in this geography has developed enormously over the last few years and there are already several specialised funds of more than €200M AUM.

In Europe, this model is more recent and innovative, yet the Search Fund ecosystem is growing enormously and showing exceptional results. Spain is the country in Europe with the largest number of Search Funds and investors.

Javier Puig – Investor & Advisory Partner of Arada Capital Partners

ESG: Search Fund’s key criteria for long-term investment

Environmental, social and governance (ESG) factors are set to shape the financial investment industry in the coming years.

Investing with ESG criteria is no longer a tangential and purely regulatory criteria for long-term investment such as Search Funds or Private Equity, ESG must be considered as a key driver to ensure long-term value creation and profitability.

Investment focused on generating positive impact can not only be achieved alongside attractive financial results but can also help investors determine the long-term sustainability of a company and any intangible ESG risks arising from these issues.

Why is ESG important for Search Funds?

Besides the obvious ethical reasons, we can distinguish some key motivators and ways in which ESG criteria can generate value for SMEs and therefore for Search Funds:

  • Improving long-term returns while minimizing risk: It was believed that ethics and finance did not mix well. While people used to think that ESG investing would lead to weaker returns, the data shows that this is not true. In fact, studies in recent years show that ESG investing achieves similar returns while minimising the associated risks.

  • Capacity of reaction of SMEs: small businesses can benefit from faster decision-making, flexibility and closer contact with their customers which helps them better understand their needs and concerns towards ESG factors. In general, the implementation of ESG measures in SMEs can be carried out much more quickly and objectives can be measured or set more easily. The impact of these measures on the culture and performance of SMEs also tends to appear more quickly.

  • Financing considerations: banks and private lenders analyze all the risk associated with SME financing, so ESG criteria will become increasingly important to ensure good financing conditions.

  • Solution to SME succession challenge: Search Funds offers an exit strategy for Europe’s ageing business owners, while revitalising the businesses by bringing in highly skilled young entrepreneurs. This solution to the succession problem, which can be directly related to the social part of ESG, is a very important factor to take into account when assessing the viability of the purchase and the reasons for the sale.

  • ESG can affect employee productivity and retention: companies with good ESG scores attract better talent and have longer retention. Millennials and other younger generations prefer to work for companies with stronger commitments towards society. According to a recent study, around 65% of Millennials consider a company’s social and environmental commitments when deciding where to work.

  • Meet investor expectations in the exit: ESG can improve investment performance by allocating capital to more promising and sustainable opportunities. This fact is pushing private equity firms to focus on companies with a strong ESG culture.

Measuring difficulties: Scoring ESG factors

Arada Capital Partners completes a scorecard when analyzing different investment opportunities in SMEs. One of the criteria’s considered is related to ESG.

Investors can compare a company’s performance with its peers and with companies in other sectors by assigning an ESG score. Each investor is free to use their own formulas and assess the different variables that affect the ESG score in the way they choose. There has been controversy over how an investor should assess or calculate this score and this metric will vary from investor to investor.

In our view, each company should be assessed independently to get a full picture of the ESG impact it may be generating. In addition, the same factor could be assessed differently depending on the sector being analysed, and it is therefore very difficult to create a framework or standard.

Due to the difficulties in creating a framework or standard, investors are increasingly demanding transparency on ESG key performance indicators and measurement. To meet investor demands, it is essential to establish a set of targets, collect data and analyse them, showing investors the progress made. To do this, it is important to start building a history of data and to continuously analyse the progress made by the company.

In the future, investors will be able to make more informed decisions thanks to greater access to data, which will improve real-time analysis of a company ESG score.

ESG and Search Funds work in the same direction

Companies targeted by search funds can certainly benefit enormously from a culture that takes ESG objectives into account.

If the main objective of a Search Fund is to generate value for the acquired company, ESG criteria must be considered, not only for risk mitigation as many might think, but also as a key driver to ensure long-term value creation and profitability.

Javier Puig

Thanks to the Search Fund model, the seller objectives and motivations are truly maximised

At Arada Capital Partners, every week we talk to talented entrepreneurs who are preparing to launch or have already launched their Search Fund. They are following an entrepreneurship through acquisition path.

In all these meetings we are fortunate to learn new things that help us to have a much broader vision and to give an additional added value to new Search Funds. With these conversations we enrich our knowledge of the Search Fund ecosystem.

Below we share with you a meeting Javier Puig had last week with Javier Poveda, Managing Director of Almond Capital. In this excerpt from the conversation, Javier reminds us of the importance of alignment with the seller of the company to be acquired. There are many mechanisms that can be used to align the interests of all parties, but as Javier says, it is important to analyse and understand the circumstances surrounding each target company and its owner.

Javier Puig: What are the seller main motivations for selling? What factors should a Search Fund analyse regarding the sellers objectives or needs?

Javier Poveda: Every businessman who wants to sell his company has a different motivation and a different vision of his future. They are the real protagonists of the story and a key point in any Search Fund acquisition.

In the first stage, as in a Maslow pyramid, the seller has different survival factors: securing long-term wealth and ensuring the well-being of their families through diversification. By selling the family business when there is no natural successor, the businessman can diversify the capital obtained from the sale into different sectors or investments, and even keep part of it in the company he created, built up and now sells.

In a second stage, the seller will seek to ensure that the history of the company continues, that his legacy continues and that the company he founded grows while maintaining the pillars he established. With this goal in mind, the seller will seek to leave the company in the hands of a buyer who care for it as he did. Therefore, it will also be very important to organise a structured transition, where empathy between the founder and successor-searcher has a great importance.

The aspiration of a full retirement is not just about the cash outflow, but also includes higher aspects that searchers must analyse and understand to facilitate the acquisition of the company. Alignment with the seller’s objectives is a critical part of the acquisition.

Javier Puig: In this sense, when we talk about aligning objectives with the seller, what can a Search Fund bring on top of the table that a Private Equity or industry competitor cannot?

Javier Poveda: The first stage I was talking about in the previous question can be given by any potential buyer. Economically speaking, the market is efficient in that sense, although extreme offers always have a trick; buyers use them to dazzle the seller with a multiple X and thus rule out other candidates.

I would argue that the key is in the second part: different types of buyers bring different circumstances. For sellers who value the legacy of their company and its history, a Search Fund can be a fantastic acquisition-partner because the focus is always on the company.

The Search Fund can be very flexible in structuring the deal and the alignment of interests is usually maximised. The Searcher, together with its investors, simply takes over to start a second phase of growth of the acquired company, respecting always the culture and foundations established by the founding businessman or seller. That culture and those foundations have proven to work very well for many years, it makes sense that the next phase of growth builds on them.

In the case of an industrial buyer, the key player is the parent company that takes over the company in question. In the case of private equities, the day-to-day involvement of the latter is limited and is often structured through the management committee. In the case of a Search Fund, the searcher becomes the new CEO, ensuring that he will be on the ground on a day-to-day basis, the value contribution is immensely greater.

Javier Puig: Searchers typically looks for companies in very different sectors, they are considered to have a sector agnostic search. How does a searcher prepare for a serious conversation with a seller and demonstrate the necessary industry and business knowledge?

Javier Poveda: I believe in specialisation. I believe that searchers should have sectors of preference based on their backgrounds; there is no research that can replace in-situ experience. In addition to knowledge, when two professionals from the sector sit down to talk, people in common from the industry that both employer and searcher know come out to the conversation, stories from the industry, etc. All this generates empathy in both directions that is very positive for the future negotiations and alignments of interests.

Javier Puig: How do you gain the trust of the seller to make him believe that you will be capable of managing his company in the future? How will you win over the company’s staff when the time comes?

Javier Poveda: I believe that being both 100% authentic and competent are key factors.

Authenticity is very important because in the end what this type of sellers are looking for, is a successor who shares the same way of seeing the world and who works with the same values.

The Search Fund’s competence and knowledge of the sector generates confidence in the businessman who is selling, as the baton is passed on to someone who knows the business and shares the same passion for the product/service. The same goes for former employees of the company, they will be looking for a competent decision-maker from the very first day.

Javier Puig: How do you know if a seller is really motivated to sell?

Javier Poveda: The enemy of the sellers is the lack of time. Time to visualise their future and time to find the right successor. Often, there are sellers who have started to think about a potential sale of their company but have not yet matured it. In these cases, when there is real excitement and the potential sellers starts seeking for a vision of not only his future, but also the future growth of his company, then I believe that it is a good moment to start a serious conversation with them.

At the other extreme, if the seller is very proactive in selling but all they focus in is a price or valuation of their company, for us it is a clear sign that they have no interest in the future of their company. Without this interest, the alignment and structuring of the management handover will be very difficult.

Javier Puig: When you identify a good target company and a seller who is willing to sell, how do you think is the best way to structure the buying process?

Javier Poveda: I think it is a shared effort: “let’s do it together”. It is good to have visibility of all the different steps involved in a typical transaction and to approach it together. In case they are not familiar with it, you must explain to them what phases and milestones are involved in an M&A transaction like this.

It is also very important to talk openly about the concerns of both parties, and to help each other mitigate those risks or concerns as quickly as possible.

Javier Puig: How do you coordinate the opportunity with your search fund investors?

Javier Poveda: Each investor brings a different value to Almond Capital. Having fluid communication and knowing who to call and when to call, is important to optimise each investor’s time.

In my case, since I started the search period, everyone is up to date on how the process is progressing and everyone has their doubts or opinions that help me to reflect on things I hadn’t realised, or that help me to better structure the details of the operation.

Javier Puig: Once a Searcher acquires the company, what role does the former owner have to play in this second phase of the company’s growth? What degree of involvement will the founder or former owner of the company maintain in the future?

Javier Poveda: I believe in structured and carefully planned transitions. Entering a company and trying to start many plans/ actions from day one is a guarantee of failure. I like to see owners taking care of the transition process, accompanying the successor/ Searcher and gradually stepping back. It takes time for the successor to be able to fully replace the founder.

I look for structures where both parties are comfortable, structures where parties also complement each other and walk together through the transition. That is why I believe that empathy between the seller and successor is key. If this does not happen, there will be serious problems.

This model is about people, and therefore not just any Search Fund is the right partner for the company in question, and vice versa.

The ‘search fund’ Arcadio Investments facilitates the generational replacement of SMEs.

(Translation of the article of elEconomista newspaper)

The search fund ecosystem continues to grow in Spain with an increasing acceptance of this entrepreneurial model through the acquisition of a single company. Arcadio Investments was created with the purpose of facilitating the generational handover to a businessman who wants to preserve his legacy and essence of his company. To this end, the new firm led by entrepreneur Jacobo Vera is actively seeking a unique partnership with the founder of a small and medium-sized enterprise (SME) to actively manage it and grow the business over the long term.

Under this investment proposal, Arcadio Investments looks for companies in sectors with growth prospects, sustainable returns, low exposure to external factors (regulation and economic cycle), with a niche or high added value product/ service and a stable and diversified client portfolio. Specifically, Arcadio Investments focuses on businesses between 5 and 20 million euros with a track record of growth and stable revenues.

The search fund takes an active role in the company in which it invests. “We join the management team full time and travel to their headquarters to manage the day-to-day operations. Unlike traditional private equity, we dedicate 100% of our time, energy and capital to the continued success and growth of the one company acquired” explains Vera.

Investment Base

Arcadio Investments is backed by more than 20 partners, institutional and individual investors, both national and international, with an outstanding experience as businessmen, investors, and entrepreneurs. As partners in the project, they will assist the searcher in the investment decision-making, through Arcadio’s investment committee, and subsequently in they will support the Jacobo in the operational management of the company, through the board of directors.

Among the investors that have supported Arcadio Investments, Arada Capital Partners has supported Jacobo Vera since the very beginning. Arada Capital Partners invests in search funds globally. Combining the traditional private equity model with aspects of entrepreneurship, Arada Capital invests through an innovative collaborative model of “entrepreneurial acquisitions”, capable of generating superior returns for investors and entrepreneurs.

Arada Capital Partners, based in Madrid, invest and advises search funds and similar vehicles. Through the “search funds” it takes minority but relevant stakes in small and medium-sized companies. In addition to investing, Arada Capital Partners also actively supports search funds in the search for their companies, in the subsequent acquisition and value creation process – once acquired – and in the final exit (final divestment).

Growing ecosystem

Javier Puig, international investor in the ecosystem and advisor at Arada Capital Partners, explains that Spain is one of the main players in the search fund ecosystem thanks to the multiple factors driving the proliferation of this type of investment vehicle. “The typical target of search funds are SMEs with an ebitda between 1 and 3 million euros. Companies with a track record of profitability and growth, which, due to succession issues or other reasons, their owners want to sell. This type of operation is viewed favorably by banks when it comes to financing the acquisition and their new strategic plan, as they are proven and solvent businesses with a good financial structure”, he explains. In his opinion, after the baby-boomer generation, a simple demographic reasoning makes it obvious that the opportunities for companies/SMEs to be acquired are very high. “Although there are many search funds in Spain, competition is still limited and much lower than in segments of the market where acquisitions are larger”, he concludes.

Arada’s latest investments also include Signatus Capital, the search fund led by Spanish entrepreneur Enrique Sales. Last December Enrique’ acquired IESMAT, the Spanish leader in applied technology solutions. With the operation, the industrial engineer has assumed the functions of CEO of the group and acquired a significant stake in the company together with other private investors, with the aim of promoting a new phase of growth.

In the quest for good investments: The industry analysis

It is true that a good business is a good business, but some sectors will enhance a company’s value creation and therefore become a better investment.

Reviewing the industry or sector should be the first step in analysing the different investment alternatives. Industries will positively or negatively affect our investment in the future and will also play a very relevant role for shareholders.

Arada Capital Partners looks for several characteristics closely related to each other, the most relevant being the following:

Investing in the correct moment: industry growth and the stage of maturity of the industry

Companies are like sailing ships, it is important to have a tailwind if you want to move fast. The historical and projected growth of the industry is one of the key factors to analyse. All industries evolve through the following stages:

  1. Introduction: new and developing industries. Although the competition might be limited, it usually takes some time to establish itself.

    This first stage is not what we look for in Arada Capital Partners, returns might skyrocket, but the companies tend to be small and more likely to fail.

  2. Growth: the industry/ business has proven its viability and the expansion stage begins. In this stage, many new companies will enter the industry and products/ services will improve.

    It is not easy to differentiate when this stage begins, but Investors reap high reward at low risk since demand outstrips supply.

  3. Maturity: rapid growth will fade at this stage, giving way to a period of slower growth and stabilization. Although sales may continue to grow, they will do so at a much slower pace than before. Products will no longer be as innovative but rather standardised and competition will be high because there will be many competitors that were attracted in the growth phase.

    This does not have to be a bad stage in which to acquire a company, far from it, they are proven businesses in which the viability of the business is more than proven. It will simply be necessary to take into account other characteristics of the sector that ensure that the investment is worthwhile: limited competition, entry barriers, cyclicality…

  4. Decline: this stage can be caused by a multitude of variables: changes in the sector or industry, loss of interest in a product, etc.

    It is sometimes worth questioning sectors facing these decline stages: was the decline inevitable or could have the management of the companies made some decisions that could have changed the outcome?

Beware! Cyclical and seasonal industries might be too dangerous for the search fund model

We invest in companies where the management will become the main shareholder and will be part of the advisory committee, ensuring the alignment between all the shareholders and employees. But we must always remember that they will become the NEW management and therefore we all seek to minimize the risks.

Non-cyclical companies will typically be easier to manage, since the challenges that will appear will have less or no exposure to economic cycles.

Likewise, seasonality might put too much risk into the equation. Seasonal business will increase the company risk and will affect the management decisions.


So far so good? Let’s start to look at the industry more closely: Porter’s Five Forces Model

We should always review and question the industry through Porter’s Five Forces Model, and add a sixth variable: the power of suppliers of complementary goods and services.

  1. Intensity of industry rivalry: many variables must be analysed to better understand the intensity of rivalry within an industry. Note than some variables might be common between various forces of the model:

     – Concentration of rivals
     – Product homogeneity
     – Brand loyalty
     – Excess production capacity
     – Consumer switching costs
     – Network effect

  2. Barriers to entry: main factors to analyze:

     – High fixed costs
     – Economies of scale
     – Network effects
     – Government regulation
     – Specialized skills or equipment needed

  3. Bargaining power of clients: this negotiating power will increase when clients are bigger or more concentrated and have good information
     – Client concentration
     – Client information and coordination
  1. Bargaining power of suppliers: this negotiating power will increase when suppliers are bigger or more concentrated and have good information
     – Supplier concentration
     – Supplier information and coordination

  2. Threat of Substitute Goods/Services
    Low switching costs
     – Substitutes price differences
     – Substitutes attributes differentiation

  3. Power of Complementary Good/Service Providers: Complementary goods or services can add value to the existing products in an industry. However, when complements have unattractive features or provide no value to consumers, they can become an issue for the industry by slowing growth and limiting profitability

  Javier Puig

IESMAT: Arada Capital Partners first acquisition

We are excited to announce the first acquisition of Arada Capital Partners. Thanks to the incredible work done by Enrique Sales and his Search Fund team at Signatus Capital, we have been able to acquire an incredible company with a great growth potential: IESMAT.

From Arada Capital Partners, we are very proud to be partners of our new CEO Enrique and excited for this next phase of our journey together.

With more than 15 years in the sector, IESMAT supplies, installs and gives support in the world of scientific instrumentation. IESMAT distributes in Spain products with exclusivity from some of the main brands and producers within the scientific instrumentation sector.