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

Posted on by AradaAFM
  • 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.

https://www.eleconomista.es/capital-riesgo/noticias/12154400/02/23/Arada-la-sociedad-de-capital-riesgo-de-Tressis-invierte-en-14-fondos-de-busqueda-en-Europa.html

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 elEconomista.es.

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 elEconomista.es 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.

In the quest for good investments: The industry analysis

Posted on by AradaAFM

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

general@aradacp.com

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