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