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Embark on a riveting journey into the world of Latin American alternative investments. Discover the intriguing story behind Spectra, the powerhouse managing over BRL 6.1 billion in assets through six successful funds. Dive into the nuanced realm of SF, as Rafael unveils Spectra’s strategic foray into this niche asset class. Uncover the diverse portfolio of 27 active SFs across the region and their first acquisitions. It’s an insightful conversation that transcends borders, offering a compelling exploration of Latin America’s evolving investment landscape and Spectra’s unique position at its forefront.
Spectra Investments is the largest asset manager specializing in Latin American alternative investments. Please briefly introduce your company.
Founded in 2012, Spectra is an Alternative Investments investor that focuses in Primary and Secondary transactions as well as Co-investments. We channel funds from a diverse group of investors, including families, pension funds, and international investors. To date, we have launched 6 funds that collectively have invested in over 650 companies, primarily in Brazil, while also expanding our reach to other Latin American countries such as Mexico, Colombia, Peru, Chile, and Argentina. Overall, Spectra oversees BRL 6.1 billion in assets.
Our investment strategy in the primary market targets private equity, search funds, and venture capital opportunities across various sectors, including Growth, Buyout, Venture Capital, Distress, Legal Claims, Mining, Search Funds, Special Situations, and more, within the region.
In the secondary market, we have successfully completed transactions such as the acquisition of pension fund portfolios, fund restructuring, and the purchase of defaulting limited partner interests, among others.
On the co-investment front, we collaborate closely with general partners, investing in targeted opportunities that promise exceptional returns.
In addition to all your activities, you have decided to venture into SFs since the inception of the model in Brazil. Why is such a diversified giant entering such a niche asset class? What was the trigger? What attracted you to the model?
We initially encountered the SF model in 2015 through interactions with Taqia Capital, Meissa Capital, and Colibri Investimentos. At that time, our understanding of the asset class was still in its infancy, leading us to hold off on investing.
By 2016, our path crossed with Joao and Rene from 220 Capital, a search fund that would eventually go on to acquire Voke in 2018. Since our initial exposure to the SF model, we have continuously deepened our comprehension of this asset class and gradually formed a favorable opinion towards it. Recognizing the favorable tailwinds for the development of the thesis in Brazil and the strong alignment between Joao and Rene with the SF model, we made the decision to kick-off our SF vertical.
You are the undisputed leader in Brazil in SFs, but now you also cover the entire Latam region. Tell us more about your portfolio and investment strategy. Which sectors are the most attractive to you? Being so large, do you engage in smaller operations (for example, those requiring only around €5M of equity)?
We have a portfolio of 27 active SFs, from 35 supported, that invested in 13 companies (i.e Agasus/Voke from 220 Capital, MK Solutions from TBG Investimentos, Labsoft from Kilimanjaro Capital, APS from Ducato Capital). Most of your portfolio is in Brazil & Mexico, with increasing exposure to countries such as Colombia and Paraguay.
We are particularly fond of the technology sector and rental services. We see several attractive attributes in these segments, such as recurring revenue, high scalability, and typically, a high switching cost. Despite the high capital requirements of the rental segment, the business model presents other strengths that make the risk-return ratio appealing for a SF.
Our ideal check size for investing in SF acquisitions ranges between 2 and 7 million dollars, but we are used to offer flexibility in order to assure a relevant cap table.
The multiple in the SF acquisition space ranges from 4 to 7x EBITDA. Transactions structure also varies, with transactions leveraging Seller, Acquisition Finance, Earn-out, among other instruments. Typically 50/50 between upfront payment and seller note.
The core of our investment strategy is to identify high-quality companies that resonate with the principles of SFs. This entails finding businesses that are not only growing and profitable but also operate within well-established business models and face no major immediate risks.
We recognize the pivotal role of the searcher tasked with managing the company. A searcher with more experience is generally better equipped to navigate the complexities of a larger or more intricate company or to structure deals that might not be immediately apparent. Equally important is the searcher’s specific area of expertise; for instance, someone with a background in logistics is more likely to excel at the helm of a logistics company.
One of Spectra’s key capabilities is to offer capital flexibly. As enthusiasts of the SF space, we rarely pass up an opportunity due to the size of the check being less than ideal. We strive to accommodate our position to be comfortable for us, the searcher, and the other members of the cap table.
Until now, Brazil and Mexico have been the two most powerful markets in Latam for SFs. However, the model is spreading to many other countries (Chile, Colombia, Paraguay, Peru, Uruguay…). Do you think they can experience the same boom as Brazil/Mexico?
When comparing countries, we observe the distinct significance of each economy, leading us to believe it’s unlikely that these diverse ecosystems will converge in scale. However, we are optimistic, recognizing that the conditions are favorable and there is room for the rise of SFs not only in these but also in other Latin American countries.
Therefore, we anticipate seeing new searchers and acquisitions emerging from SFs in such countries over the coming years.
We have already invested in SFs in Colombia and Paraguay, including an investment in ProAgro through the SF Bridge Capital, led by Anderson Gava and Alberto Velazquez, in Paraguay.
In Colombia, we have invested in Harbor Capital SF, led by Mauricio Torres, and in Kaoba Capital Partners, led by David Williamson and Antoine Crettex.
Is the inability to leverage operations in Latin America a hindrance? Will the positions of banks change? What are your predictions for the future? Regarding Spectra, do you plan to launch a fund solely dedicated to SFs one day, or will it continue under the PE umbrella?
We recognize that the term “Latin America” encompasses a wide array of regional differences. Furthermore, the economic cycles of each country do not move in sync, meaning that at any point in time, countries may be experiencing varying levels of interest rates. For instance, in 2020, Brazil’s SELIC rate dropped to 2%. We view such a rate as favorable for financing acquisitions. Therefore, by considering these regional distinctions, we can identify appealing opportunities for small Buyouts across Latin America.
As with many theses, we believe there is still room for increased penetration in Latin America. We observe in the United States that the asset class is more established, whereas the first acquisitions in Brazil and Mexico are more recent. Thus, we are experiencing the early stages of the rise of SFs in the Latam ecosystem.
In the context of our portfolio, the segment presents a size that makes more sense as a niche among our various investments. This is a fundamental issue; how much capital is possible to invest within a certain time horizon and still obtain above-average returns. Considering the timing aspect, our funds are projected to last 10 years, with an investment phase spanning roughly 4 years. During this first period, we aim to identify competent searchers, allocate funds to their search phase, and patiently navigate the process of asset searching and conducting due diligence. Subsequently, we will evaluate the deal to determine whether to proceed with the transaction. These numerous steps present a challenge in deploying capital at scale within a mere four-year timeframe. With our current model of consecutive funds we don’t have such limitation and can develop a long-time program.
