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Explore Marc Bartomeus’ entrepreneurial journey, Spain’s first searcher turned serial investor. From navigating fund challenges to strategic acquisitions, he shares insights on managing diverse portfolios, investing in foreign SF, and the evolving trends in the dynamic industry.
In 2011, you became the first searcher in Spain, successfully acquiring the packaging company Repli a couple of years later. Let’s review your entrepreneurial journey, from your beginnings with Ariol Capital, your phase as a buyer and manager, to your exit from the company in 2020.
I was introduced to the search fund model during my MBA. Intrigued, I decided to intern with Nashton Partners. They were searching for a business to acquire and ultimately bought a mosquito fumigation business. After completing my MBA, I returned to Spain to start Ariol Capital.
Raising the fund proved challenging. With no search fund investors in Spain, almost none in Europe, and only a few U.S. investors considering investing international, securing capital required persistence. Despite initial rejections, I eventually gathered support from twelve private investors, raising €200,000, allowing me to commence the search.
The search period was a great learning experience. I enjoyed exploring companies across diverse industries and engaging with business owners. However, my search exceeded three years and I felt the pressure of depleting funds. Perseverance paid off when I acquired a business in 2014, a distributor of plastic containers providing just-in-time logistics. Company was €16M in revenues and about €1,8M in EBITDA.
As a manager I made many mistakes due to inexperience. Managing a small business is demanding, with external factors often beyond control. Unforeseen events like COVID, a supplier bankruptcy, and critical staff conflicts tested resilience, fortunately the company was solid. Approximately 90% of our revenue came from repeat customers, ensuring stability. The company was cash generative, and this allowed us to pay off bank debt and vendor loan earlier than expected. That led to long conversations with the board about capital allocation and eventually, completed an add-on acquisition in Bergamo, Italy.
We intended to continue acquisitions, but found rising price expectations from sellers and competition from private equity firms who also saw a consolidation opportunity in our segment. In the meantime, we received interest from various buyers and eventually accepted an offer from Berlin Packaging in 2020. Based in Chicago, Berlin Packaging was the market leader in our segment and had already consolidated the US market. The sale provided top-quartile returns, and I reinvested a portion while continuing as CEO.
During my tenure with Berlin Packaging, I gained experience supporting multiple acquisitions and navigating integration challenges. Berlin Packaging completed ten acquisitions in Europe during that period. After a couple years, we organized a transition to a new CEO successfully, and I fully exited in 2022.
In parallel, you began investing in SF, becoming one of the most active in Europe, supporting around 70 entrepreneurs, if my calculations are correct. Tell us more about your portfolio, investment criteria, and geographical preferences.
I invest together with Jose Maria Clotet. Jose Maria’s first search fund investment was in 2014 and we started investing together in 2018. Over the years, our activity in this space has grown rapidly. While we don’t necessarily aim to be the most active investors in Europe, we firmly believe in the potential of this asset class for patient investors. And our enthusiasm often leads us to support more searchers than we initially intend.
We have no formal selection process of entrepreneurs. Our portfolio comprises a diverse array of entrepreneurs, and upon analysis, we’ve found no discernible pattern to identify those that will outperform. Then we only look for commitment and transparency.
We spend quite a lot of time analyzing companies. As traditional search fund investors, we prioritize companies with growth, recurring revenues, and low capital expenditure requirements, in that order. We actively look for honest owners and avoid concentration, fashion and technology risks. We love boring companies but we also invest in software companies, a sector in which we’re continuously learning.
Geographically, our investments are diversified, with approximately 80% of our portfolio situated in Europe, and the remaining 20% distributed across other continents, including America, Asia, Oceania, and Africa. While we have a preference for our local markets, we see value in diversification across regions and currencies.
Our SF portfolio acquisition ratio is close to 80%, a figure that has surpassed our expectations. I’ve often maintained that this ratio should be lower, recognizing the challenge of acquiring truly exceptional businesses at reasonable valuations. We anticipate this ratio to decrease over time, especially as the number of searchers in the market grows. In fact, we believe it’s beneficial if this decline is driven by more rigorous company selection criteria among both searchers and investors.
I love to see that more and more entrepreneurs have opportunity to buy companies, but as investors we should help them avoid buying the wrong companies.
3/ What challenges exist when investing in a foreign SF? How do you analyze the legal and fiscal aspects of different environments? Is the “SF” world quite standardized, or does each market have its characteristics?
Investing in foreign search funds presents a significant challenge due to the diverse legal and fiscal landscapes across different countries. While the core principles of the search fund model remain consistent, each jurisdiction has its own regulatory framework and tax laws that impact investment decisions. We collaborate with specialized law firms that produce “standardized” documents, but understanding the details of each new structure (investor protection, corporate governance, tax withholdings…) can be daunting.
In addition to legal and tax considerations, we also evaluate other factors such as market size, M&A activity maturity, debt availability and cost, business culture, social dynamics, currency fluctuations…
For instance, in Latin America, searchers have a strong focus on high-growth businesses and reliance on seller finance to offset the lack of traditional borrowing options. On the other hand, Europe has enjoyed access to debt, enabling low-growth companies to achieve decent returns.
The availability of information about target companies also influences the search process. In some countries, SMEs are required to report their accountancy to public registries. This facilitates filtering companies based on various financial and demographic parameters, including owner age in certain cases. However, this abundance of information also means multiple buyers may easily identify the same top-performing companies, intensifying the competition for acquisition opportunities.
In addition to engaging external legal and tax advisors to support us in each jurisdiction, we always co-invest with local partners that bring familiarity with local business practices. This collaborative approach allows us to invest in a wide range of geographies where we would otherwise not invest.
We’ve seen a surge in SFs establishing themselves in previously untapped markets in recent months: in Ireland, Scotland, or the Netherlands for Europe, in Uruguay, New Zealand, Egypt, etc. How do you view the market’s evolution, and what trends do you perceive?
The model has already proven to work in numerous countries, so there is no reason to think it should not work in other untapped markets. The SF ecosystem is booming with more searchers and more investors, all sustained by an increasing number of companies for sale. Beyond the aging demographics of business owners, social changes such as declining birth rates, new generations less rooted and longevity of parents, contribute to business succession pressure in many countries.
In this environment, entrepreneurship through acquisition will keep evolving with larger funds of search funds, more specialized investors, and new opportunities for secondaries among others.
Looking ahead, we expect the search fund ecosystem will self-regulate its growth with some investors coming in and out, although the extended timeline from search to exit complicates predictions. Seems reasonable to think that returns will taper as the ecosystem expands, but they are likely to remain attractive to many investors.
One of the major pending tasks worldwide (except in the U.S.) is exits to truly demonstrate the prosperity of this asset class. In private equity, many companies change hands after 4/5 years, while we observe that many searchers stay for 7-8 years at least. Does this trend hinder the market’s development since it takes longer to achieve substantial gains? Do you think this trend may change as the sector professionalizes with the emergence of many institutional investors in SF? Is it tough for a searcher to let go of their “baby”?
I am confident that we will witness an increase in exits in the future; it’s simply a matter of time. Most acquisitions outside the US and Canada took place in recent years. While not all companies will meet performance expectations or achieve desired exits, initial cohorts in Europe already include several successful exits, with others returning capital through distributions or share repurchases.
Holding periods will vary widely, with some investors seeking liquidity sooner while others may opt for longer-term investments. Moreover, entrepreneurs’ time horizons will differ. Ultimately, some companies will need longer than others before they become attractive to potential buyers. In my experience, the board of directors is crucial in navigating these scenarios, aligning investor and entrepreneur expectations.
From my perspective, private equity firms should closely monitor companies operated by search funds, they are a great source of potential investments – a trend already observed in the USA. Additionally, emerging trends such as secondaries or Long-Term Holds (LTH) may gain traction.
I’ve recently invested in a first Long-Term Hold in the UK alongside Compounding Labs, Nashton Partners, Will Thorndike and Simon Webster, among others. The prospect of holding a growing, cash-generating company managed by a trusted CEO presents compelling reasons to retain ownership.
