We spoke to Ignacio Olavarría about investing in searchers in Europe.

How did you get started on the search fund path?  

I took the search fund course with Prof. Timothy Bovard during my MBA at INSEAD in[redacted]But after graduation I went to work in London and put aside the idea.

Fast-forward to 2015 and back in Spain, I partnered with Simón Bores –whom I had met at INSEAD– to do some work with SMEs. A friend of ours was just raising a search fund, Simón decided to invest and we dived into the space: talked to some people here and in the US, did some research and concluded that there was a clear opportunity for search funds in Europe. This was still early 2016.

We also launched Search Fund Spain, an initiative to promote the model here, and searchers started to approach us. We connected with investors in Spain, Europe and the US. Eventually we decided to launch Istria Capital, a fund to invest in search funds.

Will this fund invest throughout Europe?

Yes. We’re mainly investing in Europe for the moment, with especial attention to Spain given our home-base location and the market conditions here: lots of companies, cheap financing, etc. Ideally, we will do 35%-40% in Spain and another 35-40% in the rest of Europe, but we have a flexible mandate and are willing to back searchers globally, i.e. Latin America, US, Canada, etc.

What are you looking for when investing in searchers?

So far, we’ve invested in 16 searchers: 8 in Spain, 3 in Germany, 3 in the UK, 1 in France and 1 in Morocco.

We obviously want to see some professional trajectory –ideally with some entrepreneurial or operational angle–, a good business school, and a lot of motivation and commitment to the search fund model.

We greatly value sales skills because you must be capable of selling the model both to new investors and business owners, and then be the “first” salesperson in your company. Organizational skills always help, you’ll be doing many things. And of course, I believe resilience/determination is very important. It’s a very tough path for which you have to be really prepared; you have to be sure what you are getting into.

What are some indicators of commitment?

One indicator is that you have done the homework. You have gone through the available materials such as the Stanford primer and other publications. You have talked to searchers and understood what this is about; this is vital. We like if you have thought about the whole process and really put time into this.

Also, the search fund has to be your first option. We try to understand your cost of opportunity. We like searchers that really want to do this.

Do you find any differences in searchers based on geography?

The profile of the searcher is quite similar in general, although there may be some differences among countries due to education and business dynamics (e.g. spending more time in college or working before getting an MBA means searchers are older on average)

Beyond the profile, how developed is the search fund model locally is a factor too. Having a group of “local serial investors” that you can approach vs. not having it obviously affects your fundraising plan. You can see this very clearly in Spain or Germany, where there are at least 5-6 “usual suspects”, compared to other countries in Europe.

Another issue is the lack of industry focus. Searchers in European countries are normally generalist; it is difficult to focus on just one sector as it’s probably too small. Logically this affects the search strategy, but may also bring some nuances to fundraising talks with investors.

I was speaking with a potential searcher in Europe who was concerned about an older business owner being reluctant to sell to a younger person. Have you seen that?

I’ve seen that. Business owners here may be a bit more conservative than in the US, but I don’t think it’s a big problem. Even in Spain –allegedly more conservative than other countries in Europe–, four out of five search funds have acquired a business, not a bad percentage at all. I’ve seen a seller rejecting higher offers and accepting the search fund’s because it offered him a more flexible transition, a better approach in terms of legacy and, above all, because he had “decided to sell his business to this guy”. This is to the searcher’s merit, this is what they have to do.

The searcher must build credibility in front of the business owner, he has to explain and “sell” the model and its benefits, leveraging their investor group if needed, etc. He has to use the model to his advantage, as the value for the seller is material.

How much mentoring can one of your searchers expect from you?

Quite a lot. Most often on his demand, of course; we believe there are many tasks and decisions the searchers have to take themselves. Obviously, it also depends on the country and whether we are in the advisory board or not.

We have experience in many fronts: industry analysis, commercial due diligence, growth plans, succession and board issues, legals, etc. so searchers can count on us for most of what they face during the process.

We know we can’t provide the same value as a serial investor who has been doing this for 30 years, but we are fully dedicated to searchers and committed to help them as much as we can. For example, I got a call from a searcher today and I will find time to discuss with him either today or tomorrow.

Because of this, and also maybe because we are closer to them in terms of age, I think some searchers find us more accessible and use us as first port of call, which can be quite valuable.

We are also ready to leverage our LP network. Most of our LPs are family offices with an industrial background, experienced business owners or asset managers, so we can cover lots of sectors and situations by bringing their experience to the table. Again, an example, one of our searchers just acquired a company and two of our LPs have invested directly as some gap funding was needed. Not only that but their contribution has been very helpful to close the acquisition.

What kinds of questions do you get from searchers?

The range is quite wide. At the beginning, it’s all about setting up, such as which lawyers to use and whether the price requested is fair or not, or where and how to recruit interns, or how to measure efficiency / effectiveness during the search process. Later, logically, it is about specific companies or deals they are considering, negotiation, deal structure, etc.

Also, from Search Fund Spain, we provide basic advice to potential searchers, e.g. how to decide whether this is the right path for you or how to plan the fundraising.

Once your fund is fully running, how many searchers will you have at any one time?

Our plan is to invest in c. 45 search funds in total, during the first three years (we already have 16 of those). Then we expect to follow on[redacted]acquisitions (we already made one), but this number could vary, depending on the quality of the deals.

So I’d say we’d have about[redacted]searchers in different stages at any given time.

Anything else you would like searchers to know about you?

We do believe in the search fund model, love its spirit of collaboration and are committed to promote it, especially here in Europe. We hope it continues to expand, while keeping that spirit, as there are many great small businesses out there that offer excellent investment opportunities and deserve a second life.

What seems to make this community unique is the spirit of cooperation you mention which has remained as it has grown.

Yes. We are fully committed to that vision. We even tell our LPs that this spirit of cooperation is a key aspect in our fund, so they are welcome to bring their expertise to the table.

Summary of Insights

Here are our a few of the key takeaways from our discussion with Ignacio:

  • • Search funds have a lot of potential in Europe. Even in a purportedly more conservative country like Spain 4 out of 5 search funds have acquired a business
  • • Key attributes of the searcher profile are: a solid professional trajectory, commitment to the search fund path, knowledge of the model and resiliency.
  • • You may wish to consider how you can leverage your investor network in addressing issues that come up.
  • • The search fund community is unique in that it has maintained its spirit of cooperation as it has grown and expands globally.

photo: Simón Bores (left) and Ignacio Olavarría (right)