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Nuño was the third searcher to launch in Spain (the first two, Marc Bartomeus & José María Vara, have completed the entire cycle, acquiring Repli and Lodisna, respectively, and selling them years after the acquisition). We take this opportunity to review his beginnings, the ups and downs of managing an industrial company, and his vision of the SF market.
You were the third Search Fund (SF) to launch in Spain. Let’s go over your beginnings. How did you come across the SF model, and was it challenging to establish N Capital in 2014, a time when few knew about this asset class?
I discovered the SF model in 2013 through a colleague that worked with me in M&A and reading Stanford papers on the subject. I did the fundraising in 2014H2 as I was ending an MBA at IESE Business School and launched N Capital and the search in January 2015.
Although unknown at that time, I thought that entrepreneurship through acquisition (EtA) and the SF model made a lot of sense to me: firstly, it was a very appealing career option, secondly, I could confirm that the succession challenge was an opportunity and thirdly, the investment criteria was very robust.
I was intrigued by the idea of providing a solution to the succession problem for entrepreneurs and of course, the possibility of becoming the CEO of a company appealed to me. With over 10 years of experience in Corporate Finance, I wanted to transition to a managerial role.
I didn’t raise capital on a US business school campus (which at that time was the way) approaching the established serial investors. Instead, due to my personal and professional situation at that time, I decided to present the project (and the underlying fundamentals of the search fund model and investment criteria) to highly experienced entrepreneurs and business owners, leveraging my experience and professional network in M&A. I thought that they had three specific characteristics to be interested in SFs: all of them were sensitive to the family-owned business succession challenge independently of the size of their companies, secondly, they could overcome the “hurdle” of betting on an inexperienced young professionals, as they were investing their own capital (not third parties’) and in most cases were familiar to the situation of inheriting the helm of a their family business, and finally, from an investment point of view, the idea of investing in a company with attractive fundamentals in an underserved market segment was very appealing. I think that the concept of “give back” was also key (sharing experience and advise from a seasoned successful entrepreneur to a young aspiring one). I think that the vision of coaching me was very interesting for many of my investors. I ended up successfully enlisting 30 investors, professionals from different parts of the world, all sharing a common trait: none of them had previously invested in an SF.
At that time, I overcame two hurdles that probably today have disappeared as there is a developed base of serial investors in search funds. I did not have to compete with other potential searchers, but I had to convince investors of investing together with a big number of other investors (when the usual thing for individual investors is to invest with their two/three recurrent partners) and funding the search with no specific target identified (something unheard of at that time). If one is familiar with SFs this is a given. In my case it was not.
Fortunately, I was able to unite such diverse partners around a common project and align the interests of each, resulting in a fantastic board that has been extremely helpful in the development of the project and my professional development as well.
Can you tell us about your search process? How was it to explain the model to sellers?
When I started searching for companies, the market was quite obscure at the time. There were almost no brokers for this segment. I was convinced that the opportunity existed, but there were no intermediaries, so I had to approach many doors cold. I would say that over 95% of my search involved proprietary deals. The reality that I found was that there weren’t many companies that met the requirement: potential size aligned with my deal size (€10M) that were willing to explore a potential sale at a reasonable price. So, from an initial macro approach focused on specific industries I ended up identifying several profitable niche companies in initially non-priority industries. Ultimately, in December 2016, we acquire CERMER, the world leading manufacturer of ceramic food packaging. I was able to oversubscribe equity and debt to fund the deal. Nevertheless, CERMER as an industrial company (CapEx Intensive and managerial complexity) does not meet all preferable characteristics of SF target companies.
Tell us more about the company and your entry into it.
CERMER is a pioneering company that provides ceramic food packaging for different categories of the food industry. Our clients are yogurt, ice-cream, ready meals, dipping, dessert, etc. manufacturers that come to CERMER looking for a differentiation tool to communicate the superior quality of their premium/indulgent products. Besides they also appreciate the environmentally friendly characteristics of our ceramic containers as they are inert (non-polluting) and can be reused not only as packaging but as kitchenware and tableware.
From the strategic point of view the objective has been to make CERMER the world reference brand for ceramic food packaging and expanding the markets where the company was selling its products (over 85% of sales are generated out Spain, from Australia to the US West Coast). From the leadership and managerial point of view we established a new production plant in record time, implemented new business processes and a new management system based on the lean philosophy in order to scale up the business. We have successfully shifted the organization’s culture to one centered on the customer and data, redefined the organization with well-defined roles and responsibilities, changed the leadership model, developed new markets like North America and initiated the digitization of the company. When we acquired the company, CERMER had around 75 employees, generated €9M in revenue, and had an EBITDA of around €2M. We managed to increase sales by 40% and 50% Free Cash Flow in the first three years from 2017 to 2019.
However, if I’m not mistaken, after these first years of prosperity, there were more challenging times, right? Has the divestment process been postponed?
Indeed, after this initial phase of transformation and growth March 2020 marked a turning point to the company’s growth. The first setback came with the COVID period (March 2020 to end of 2021), which significantly reduced the new sales (special projects – “in and outs” as they are called in the industry) that we were generating mainly in the North America since 2018 and that loaded our new second factory that operated since 2018. This was compounded by the announcement of the “Green Deal” in UE also in March 2020, and the new circular action plan which aims at defining a new legal transformative framework for the packaging industry in the EU. So far, although we expect a very positive outcome for CERMER this year (an explicit positive recognition of ceramic packaging from the environmental and circularity perspective) the process of developing this Regulation has adversely affected us since 2020, given the global uncertainty European Food producers face to adopt new packaging alternatives as they wait for the law to be formally agreed and passed in Brussels. In 2022, as an export-oriented company, we had to cope with a disruption in international transportation which resulted in higher transportation costs and unreliable service, coupled with the energy crisis (we are a natural gas intense industry and natural gas price multiplied up to seven times the usual price in August 2022). Summing up, our 2017-March 2020 growth trend reversed and that forced me to lead the company in a completely different scenario. I have had to adjust costs (we have gone from 75 in 2017 to 140 employees in 2020 and back to 75 by 2024) and managing its financial structure while keeping the motivation in the organization and strengthening the pillars of the company to come back stronger. I am proud to say that we have used this complex phase to implement a new organization of our production systems by automating and digitizing the factories for which we raised €5M from Oquendo Capital in 2022.
Now, after these very challenging years (it has been very tough, but we managed to keep the company afloat), we believe we have much better foundations to grow again. I see 2024 as a turning point. 2024 will be a transitional year, we have a more scalable operating model paired with a very active commercial action and goodwill waiting for the expected positive legal environmental recognition which surely will foster our sales. The goal is to o reach €3M-€4M in EBITDA.
I think my experience is interesting for potential searchers as an example of the different phases you can live throughout this journey.
What lessons would you give to a searcher, and how do you see the market today? Would you support them if given the opportunity?
I think that the investment criteria (recurring revenues, low capex, etc.) is sound. From a professional point of view this is a very rewarding path, as you get to become a very “rounded businessperson” derived from the different stages you go through: analyzing sectors and companies, approaching sellers, negotiating and structuring a deal, running a company, managing the relationship with a Board and finally selling.
My advice to every potential searcher would be to visualize themselves running the kind of company that fits the search fund profile (different to work in consulting, a private equity fund or big corporations) to really be sure that this is where they want to work and spend a precious time of their professional lives. Besides, the obvious advice of getting to know the actual experience of previous searchers and be aware of what a search funds involves in every one of its phases.
I still think that the basis that attracted me to entrepreneurship through acquisition via a SF model are valid as they were 8 years ago. However, I see two factors that make the scenario different: the number of searchers seem to have increased up to surprising numbers (at least in the specific case of Spain-based searches), and furthermore, the number of professionals interested in launching a search fund is overwhelming, and there are new investing funds on search funds that are in their first years of operations.
On the number of SFs, I am afraid that competition may be fierce for the acquisition capital as there is such significant number of searchers. On the experience of new professional investors in search funds, this is going to be a phase to learn a lot from the different deals and situation portfolio companies may go through. This will translate into better selection of searchers, deals and coaching in the future.
For investors the increasing number of candidates is an opportunity but also a challenge and demands developing and optimizing the internal appraisal processes of these funds to really bet on the best candidates.
There could be a potential overselling of the SF topic which could affect negatively to some candidates. On the IRRs we still do not have that many exits in Europe, but the expectations have been set high. Not everything is as rosy as business schools may portray, and I believe we are living a boom. Management and day-to-day operations are very challenging, and sometimes I meet young entrepreneurs aspiring to buy a company, thinking they lack some maturity and realism. The market has consolidated a lot in Spain, and sometimes I wonder if it’s not too much. I was fortunate that when we bought CERMER, it was oversubscribed, both in equity and debt. However, I feel that some investors nowadays may be offering more options than their capital truly allows, which could be risky for the entrepreneur (this is why we may see some equity gaps).
However, I don’t want to end on a negative note, so I would say that many of my investor partners, after their experience in N Capital and CERMER as their first foray into the sector, have become regular investors, seeing the attractiveness of this market (I fell proud and happy about it). As for me, I would say that the model works, and no doubt I would repeat the experience if I had the opportunity again. I strongly believe in the concept of “give back” I mentioned earlier, and in advising and mentoring younger people, so I don’t rule out neither repeating the search fund experience nor supporting some future searchers.
