Tuesday, May 21, 2024
Tuesday, May 21, 2024

Interview: José Cabiedes, Serial Investor in Search Funds

For many years, we thrived in a VC environment with few players, yielding significant gains.

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1/ After achieving numerous successes in the venture capital world, where you have been a key player in successful deals such as BlaBlaCar, Privalia, Trovit, Tiendeo, Indexa Capital, among others, in 2016, you decided to pivot away from venture and focus on the search fund segment. What prompted this shift?

For many years, we thrived in a VC environment with few players, yielding significant gains. However, from 2015, we noticed increasing complexity in maintaining our successful trajectory. Recognizing the underdeveloped state of the search fund segment in Spain at that time, we realized that comparable or better returns could be achieved with a fraction of the risk. Consequently, we redirected a significant portion of our resources to support searchers in acquiring small and medium-sized enterprises. Buying companies with positive EBITDA entails minimal risk. To date, we’ve completed 3 exits, and notably, our portfolio of around 50 companies acquired in the last 7 years has seen no casualties, showcasing the lower risk compared to the VC segment. Investing our own funds, we prioritize achieving a threefold return on invested capital over TIR.

2/ What assessment do you make of this decision? How many search funds have you invested in, and what is your strategy to deploy your capital?

We’ve become one of the most active global players, participating in over 150 SFs and completing 50 acquisitions, with 47 still active after 3 exits. Our investments span the globe, excluding the United States. Presently, around 75% of our portfolio is in Europe, with approximately half of that in Spain (though the percentage has decreased in the last 18 months), and the remaining 25% spread across the rest of the world, with a prevalence in Latin America and investments in many other countries such as Japan, Australia, Egypt, etc. Firm believers in the SF model, we maintain a hands-off approach, participating on the board of only about 4 companies. Our average investment ticket is around €400-500k per operation, ranging from a minimum of €150k to a maximum of €900k, with a cap of €1M. Despite being generalists, we believe that, except for the United States, no country has a market size sufficient to justify a sector-specific search. However, we would be willing to consider a sector-specific SF if it were pan-European, for example.

3/ Being among the European pioneers in this asset class, what lessons have you learned in recent years? What profile must a searcher have to attract your attention? Solo or duo? Do you notice an increase in acquisition multiples?

We favor blue-collar over white-collar profiles, emphasizing individuals with robust operational experience and preferably an MBA from a prestigious business school. In terms of personality, we seek entrepreneurs whose main quality is humility. In the SF industry, the Solo and Duo split is roughly 50-50, but our portfolio trend is closer to 75-25, having previously favored “one-man shows.” As private investors, we primarily support searchers focused on acquiring a company with EBITDA below €3M. Contrary to popular belief, we haven’t observed a significant increase in acquisition multiples. Generally, we avoid deals with prices exceeding 6x EBITDA but continue to find numerous opportunities in the 4-5x EBITDA range and even close deals in the 3.7-3.8x range.

4/ Spain is one of the most active markets in the world of search funds. What is the reason behind this? How do you perceive the evolution of the national market? Could there potentially be market saturation in Spain?

One prominent factor contributing to the increased activity in the search funds market in Spain is the significant promotion by the IESE Business School over the last decade. As a pioneer in Europe, the school has actively promoted classes on this opportunity, leading to the emergence of numerous entrepreneurs from its programs. As an interesting anecdote, in the past two years of teaching on this subject, I’ve witnessed a dozen students launching their own search funds.

Beyond this, I believe the development of the search fund model in Spain can be attributed to two specific factors. First, our economy possesses unique characteristics that foster the growth of this alternative solution to the challenge of business succession. Historically, the shift to democracy in 1977 and subsequent integration into Europe five years later led many entrepreneurs to venture into businesses in the 80s, predominantly self-made. Now, these companies, with 30-40 years of existence, are grappling with succession issues, creating a distinctive supply environment conducive to the search fund model. The second contributing factor is the role of banks. In Spain, banks have been robust lenders for decades, providing ample support that has facilitated the development of buyouts. This contrasts with the situation in Latin America, where leveraging acquisitions is challenging, and the cost of debt is prohibitively high.

Regarding your final question, I would assert that there is currently a saturation of capital raising efforts in Spain, posing increasing challenges for new searchers. However, I don’t believe there is saturation in finding interesting companies. On the contrary, our business landscape offers multiple acquisition opportunities. The number of acquisitions by searchers has seen significant growth in the last 2-3 years. Taking statistical data into account, the overall probability of not successfully concluding a search quest in other countries is around 23%, whereas in Spain, I don’t think it exceeds 13%. To date, only 3-4 searchers have not completed the process. In contrast, countries like Germany exhibit a failure rate in the search process approaching 50%, attributed to strong competition from the Private Equity world, numerous industrial buyers, and a cultural reluctance of sellers to hand over their company to a young buyer.

5/ Which countries are presenting the most opportunities for you? Which sectors are the most interesting for you?

We anticipate increasing opportunities in Continental Europe, particularly in countries like Italy and France, consolidating strongly in the coming years. Additionally, Northern Europe will offer new opportunities. In Asia, despite legal setup challenges, we see incursions by searchers in many countries. Australia is expected to consolidate, and Latin America will continue to present good opportunities, though debt issues hinder its expansion. Regarding sectors, we still prioritize deals in industrial or healthcare sectors. While atypical in not focusing much on the technology sector, our historical venture investments guide our preference for other sectors in the SF model.

6/ How do you see the market’s evolution in the future? Do you think excellent returns will be maintained in this industry in the future?

We anticipate a split between those continuing to favor an LBO model towards small deals and those leaning towards a Private Equity model with growth through build-ups and larger transactions. As private investors, we remain focused on the former. The influx of many new actors raising funds of funds is concerning, steering the trend towards the second model, which we believe deviates significantly from the traditional SF philosophy. Despite these concerns, we still believe it is the best asset class in terms of returns relative to the risk assumed.

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