Category: Interviews

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.

Emprender adquiriendo una empresa ya establecida 

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.

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 elEconomista.es, «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.

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https://www.eleconomista.es/capital-riesgo/noticias/11931938/09/22/Luz-verde-de-la-CNMV-para-Arada-la-sociedad-de-capital-riesgo-impulsada-por-Tressis-para-invertir-en-pymes-europeas.html

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.

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.

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Javier Puig

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.