Search fund explanation and differences with traditional private equity firms.

A search fund is a type of investment tool that has been functioning for more than 30 years in the USA and Canada.  In Spain, this type of fund only became widespread recently. The first search fund in this country was created in 2011, and it successfully completed the acquisition of a business after almost three years. Since then, numerous search funds have arisen, and they are now in different investment stages, making Spain one of the most active countries in Europe in this matter.

A funded search is the process by which one or two entrepreneurs – with little or no experience – raise capital from various investors. They do this in order to pay their salaries and to carry out the search for a business to acquire within a period of approximately two years. In any search fund the number of investors will range from 12 to 18, and the average investment is between 300.000 and 500.000€.[1].

Normally, entrepreneurs  who head the search funds will have completed a prestigious Master’s degree or come from investment banking or strategic consultancy. In the case of the investors, we usually find former CEOs of large companies, family offices, former directors of private equity funds and, increasingly, fund of funds.

There are two stages to the investment process. During the first stage, money is invested to finance the search (paying salaries, administrative costs, travel, due diligence reports).  Investors acquire the right to invest in the capital of the company or companies found. The initial capital is usually converted into company shares which have a premium of 50% of the price paid. This is to compensate the early investors.

During the second stage, the entrepreneur that heads the search becomes the General Director of the acquired company and normally receives between 20 to 30% of the capital through various tranches. In the first tranch, a third of the company shares will be held in their name. Throughout the 5-7 years of the management of the company another third of the shares will be transferred to the CEO. A further third will also be transferred to the CEO but subject to the company reaching certain investment goals (internal return rate of 30-35%).

The collaboration between the investors and the entrepreneur is one of key aspects for success and it has to be reciprocal. Usually, investors become part of the board once the acquisition is carried out. There is also an alignment of incentives amongst the different parties (investors collaborating with each other and giving support to the new CEO by helping with the lack of experience in the management of the company). The alignment of the searcher with the investors is provided by the fact that there is a success tranch received by the searcher and new CEO of the company at the disinvestment stage.

There are some existing search funds that were created to invest in one single company and, at a given moment, ended up continuing investing in more businesses (via add-ons or the acquisition of two completely separate companies).

Differences between private equities and Search Funds

The difference between a search fund and a financial sponsor or conventional private equity is that, in a search fund, since the investment is usually in one single company, the entrepreneurs become the directors of the business.  On the other hand, in a conventional private equity there is a need for a management team in each acquired company. Private equity funds are created with the intention of having different companies in their portfolio and therefore diversifying risks. For this reason, a search fund is an effective alternative to selling a company if, for example, the owner is retiring or has issues regarding the succession.

30% of family businesses don’t succession plan according to a study by Centrem (“family businesses and succession planning”). 45,7% of family businesses are currently run by the first generation, 44,2% by the second, 7,4% by the third, and only 2,6% by the fourth.

The funds raised in 1983 have been invested in 200 companies in the EU and Canada. Of these 200 companies, there has been a sample of 134, with an internal return rate resulting in 34.9%[2].

Yields by fund type: search funds, private equity funds and venture capitals

Source: Stanford GS8, “2016 Search Fund Study”; IESE, “International Search Funds, selected observations 2016” Kaplan et al, “PE performance, what do we know?”, 2013.

Regarding timeframes, they are similar to those of private equities. The goal is usually to sell the company within 5-7 years.

The market niche – Low middle market

The market niche in which search funds operate in Spain means that there are few competitors. They usually invest in companies with EBITDA between 1 and 3 million, that is to say, businesses that are too big for seed capital funds or venture capitals but too small for private equities. This fact, together with the lack of an organized market, results in there being attractive target prices (between 4 – 6,5x EBITDA). Those same businesses are sold at a significantly higher multiple (up to 10 times EBITDA), when targets grow to a higher size and the buyer is a private equity or an industrial player.

On the other hand, as most companies in Spain are small and medium-sized businesses[3], search funds have a huge market to potentially invest in. Added to this, there is easy access to financing via debt; moreover, we are also undergoing economic change. GDP dropped by 11% in 2020, inflation has shot up recently, and in 2022 companies will begin to pay back covid debt.

Family-owned businesses in Spain

Source: Instituto Nacional de Estadística.

Usually, targets must meet the following requirements: a) to be within a growing market or, at least, one that is not declining b) to have been profitable over the last five years prior to the acquisition c) for sales to be recurrent with a diversified client base d) preferably, to have a low CAPEX and OPEX investment so as to support sales growth f) in addition, to have leverage capacity to boost returns.

The search is normally limited to one or two areas, but, currently, the most in demand are pharma and health, in addition to packaging. However, the investment decision is subject to a board decision, which means that the sector experience of the board plays a strong role. Logically, investors prefer sectors in which they have experience, where they can deploy and leverage their knowledge.

Search funds are not opportunistic or vulture funds. In general, they focus on solid companies with potential for growth, healthy balance sheets, and a lack of financial problems.

[1] Search Funds – What has made them work? Rob Jonhnson IESE Business School 2014.

[2] Search Funds – 2013: Selected Observations, Stanford Graduate School of Business, E-521, June 2014.

[3] “Family businesses make up 82.8% of the companies registered throughout Spain”. Pilot study on family businesses. INE 2016

Cristina Armijo

Cristina has a bilingual degree in Business Administration from CUNEF.

In 2018 she began her professional career at Inicia Corporate providing financial advisory services to different companies.

A year after graduating, she joined Banco Santander in the investment banking area, in the Global Transaction Banking Continental Europe department.

In 2020, she joined Ahorro Corporación in the department of mergers and acquisitions (M&A).

In 2021, she started working in the Financing department at Akerton Partners.

Alice Cadet

Alice holds a degree in Franco-Spanish Business Administration from the universities of ICADE and NEOMA Business School, specializing in Corporate Finance. She has completed financial courses in Spain and France.

In 2017 she joined Teva Pharma‘s financial department offering accounting services, payment and collection management, and operational flow analysis.

In 2018 she joined the M&A team of SD Partners as a financial analyst, in which he performs valuation tasks of technology startups and industrial property, search for financing and operations of mergers, acquisitions and spin-off.

In 2020, she joined the Corporate dept of Akerton Partners.

Olga González

Olga holds a degree in Bilingual Economics from the University of Oviedo. After completing her studies in July 2019, she joined an estate administration in Gijón where she worked in accounting, payment management, taxes and customer service.

At the end of 2019 she joined the Forensic department at Akerton Partners.

Arantxa Jiménez

Arantxa holds a degree in English Philology from the University of Alcalá de Henares. She has completed several accounting and finance courses at CEF and various language courses such as French or Italian.

In 2000 she joined the Fiat Group in Spain, becoming part of Fiat Ibérica, head of the Group in Spain.

In 2005 she joined Bergé Automotive Logitics where she carried out much of her work in the area of road transport insurance.

In 2013 she joined Akerton Partners.

Borja Hernández

In 2008 Borja began his career at Cajamar Bank as a private banking manager. In 2011, he joined the administrative department of Akerton Partners, S.L.In addition, he supports the different lines of business of the company (Back Office).

In 2017 he became part of the team of Annu Inversiones, S.L., where he participated in various transactions of assignment of receivables, loans and debt purchase.

Alberto Barquín

Alberto holds a degree in Business Administration and Management from the Carlos III University of Madrid, additionally he holds a Master’s degree in Higher Accounting from the U.N.E.D and a Master’s Degree in Business Administration and Management with a specialization in sports entities by the Polytechnic University of Madrid. Accredited with CAFI and EIP certificate required by MFID II for advice on complex investment products issued by the Institute of Stock Studies (IEB).

For two years he studied to be part of Inspector’s State Body for Financial Studies in Madrid. In 2012 he began his working career at Akerton Partners as a consultant in the financing department.

In 2016 he joined BBVA as a financial advisor in Commercial Banking, managing portfolios of private clients and SMEs, analyzing and managing financing operations, overdue risks and collective investment products.

In 2019 he returned to Akerton Partners to be part of the financial advisory team.

Juan Carlos Pomar

Area Manager

Juan Carlos holds a degree in Economics and Business Sciences with specialization in Auditing from the Complutense University of Madrid. In addition, he holds an MBA from the Instituto Empresas Madrid.

Juan Carlos began his career at Coopers & Lybrand in 1990 where he was responsible for clients in the commercial, service and Real Estate sectors.

In 1998 he joined Madritel (Auna’s Group subsidiary) as Administration and Accounting Manager where he led the implementation of the accounting processes and criteria and participated in the ERP common model definition (SAP) Chart of accounts and Administrative Manual of the Group.

In 2002 he moved, along with the Auna Group, to Barcelona as Administration and Accounting Director. There he was responsible for the integration processes of six of the cable operators of Auna.

In 2003 he returned to Madrid as Systems and Process Manager where his role was to determine, develop and implement ERP (SAP) Group improvements.

In 2005 France Telecom Group acquired Auna, and Juan Carlos continued as Systems and Process Manager, a role in which he was responsible for the process integration project of Amena, Auna and France Telecom Spain, and, later, Orange and (2007). He was also responsible for data migration and the new ERP (SAP) definition, collaborating on the economic budget (salary reviews, training, promotion, etc.) and acting as its representative on different committees of the Group.

He joined Ambers&Co in August 2008, and since July 2009, has been at Akerton Partners where he has participated in multiple financial projects for a group of companies across a range of sectors as well as the launch of the Lending platform.

José Luis Sanchidrián

Head of Public Incentives and Forensic

José Luis holds a degree in Economics and Business Sciences from the CEU San Pablo. He is registered as Auditor of Accounts on the Official Register of Auditors of Accounts (ROAC) , accredited to the SEC as Auditor of Listed Companies in the USA, and is a Real Estate Agent (API). He has experience leading consultancy and audit teams in projects at large companies.

In 1994 he joined Deloitte where he spent most of his professional career being responsible for financial auditing projects for national and international companies, financial consulting, review and internal control design (SOX), IPO processes, due diligence, business valuations, assessment on obtaining public incentives. He has experience across all sectors principally technology, media, telecommunications and energy (TMT – Energy). He has built up this experience and areas of expertise as a result of his last 8 years at Deloitte.

In 2009 he joined Akerton Partners as head of the Forensic department, a team responsible for the preparation of expert reports, economic estimation reports, advice on the application of accounting principles and the carrying out of Financing Due Diligence.

In recent years, he has produced various expert reports, such as judicial and judicial expert reports, which have been ratified in Courts of First Civil and Commercial Instance, Provincial Hearings, Higher Courts of Justice, Court of Auditors and the High Court.

He is also responsible for the Public Incentives department, the processing of R+D+i assistance and investment projects made by companies in all sectors.

Cristina Nieto

Head of the Financing Area

Cristina holds a degree in Business Administration and Management, with a major in Finance from CUNEF (part of Complutense University of Madrid). She has also completed an Executive MBA from ISEM Fashion Business School (part of University of Navarra). She has worked, while living in the United States (2012-2019), as a guest lecturer at the University of Texas, under the “Transportation Systems Management” program led by Dr. Walton to present the basic principles of financing transportation infrastructure projects.

In 2007 she joined the Project Finance Department of Cintra (Grupo Ferrovial) where she was responsible for Treasury. Within this role she acted as Project Finance Manager for several projects in Spain and Portugal.

In 2012 she moved to the United States (New York and later Austin) to develop new business opportunities as a Director, bidding and closing several projects across various states such as Virginia (US 460), Texas (North Tarrant segments Express 3A 3B) and North Carolina (I-77 Hot Lanes).

In 2015 she joined Miami-based VINCI Concessions (VINCI Group), as Head of the Project Finance Department for North America, bidding and closing the company’s first contract in Saskatchewan Province (Bypass Regina) as well as prequalifying and bidding on several projects in other jurisdictions (George Massey- Vancouver, South West Stoney Trail- Calgary, Gordie Howe-Detroit/Windsor or Purple Line-Maryland).

In 2017 she moved back to Austin as Director, joining PFM Financial Advisors, as Municipal Financial Advisor (Series 50) to develop PPP (Public Private Partnerships) projects advising different Departments of Transportation (Indiana Finance Authority, University of Georgia or Texas Department of Transportation, among others).

In 2019, she joined Akerton Partners as Head of the Financing Department.

Francisco Camacho

Founder and CEO

Francisco holds a degree in Economics and Business Sciences with specialization in Auditing from the Complutense University of Madrid, Advanced Direction programme in INSEAD (Fontainebleu). He has carried out financial courses in Spain, France and the USAC. He has also been a teacher and speaker at several universities, in addition to giving lectures. He is also a member of the REA, ICJ.

In 1984 he joined Arthur Andersen as Industrial Business Manager where he was responsible for several projects in both auditing and consulting.

In 1993 he joined Alstom as CFO and Council Secretary, working as Head of Finance and Advisor to several of the group’s companies in Canada, Mexico, France and Spain. Additionally, he was responsible for real estate projects in Spain, global cash flow, and financing projects in various countries.

In 2000 he joined Auna as Administration and Finance Director where he was responsible for various financing and debt restructurings, achieving in 2004, along with his team, the award for the best refinancing of the year (4.500M€), an award given by the magazine Euromoney.

In 2005 he was made CFO of the Auna Group, culminating in the sale of the Group to France Telecom (the mobile phone business) and to ONO (the fixed-line business) for € 12,800M. In 2006 he was appointed CFO Purchasing Director of Orange Spain by France Telecom Group.

In 2007 he was given the award for financial excellence in the category “Best financial manager of the year” by the Spanish Association of Financial and Corporate Treasurers (ASSET). This award aims to highlight actions implemented by the CFO of a company and their original financial solutions that have contributed to the success of the financial departments within a company and had an impact on the company’s performance.

In 2008 he founded the financial advisory firm today known as Akerton Partners.