INVESTING AFTER BEING A SEARCHER




SEARCHFUNDER INTERVIEW OF ANGEL ALVAREZ CADAVIECO

We spoke with Angel Alvarez Cadavieco whose search fund, Lottus Capital, acquired Universidad Tres Culturas (UTC). Angel is now a partner in ALZA Capital, an investor in search funds. In this Part III, we discuss what he’s looking for in the searchers he now invests in.  


Following your exit, you're now an investor?  

Yes.


Tell me about your focus at ALZA Capital.  

Guillermo and I launched ALZA Capital in July[redacted]ALZA is a global fund of search funds with total commitments of 50 million dollars. ALZA invests globally and has a focus on three main markets: Mexico, Spain and the United States. At least two thirds of the fund will be deployed in those three countries and the remaining third of the fund could be invested opportunistically in some other strategic countries, mainly in Latin America and Europe.


We have offices in Monterrey and Madrid. Guillermo manages the Mexico office, and I manage the Spain office. We have a 4-member investment and administrative team that works with us and provides ongoing support to all of our searchers. That's a brief summary about ALZA.   


Tell me about your investments. 

Since we launched ALZA in July 2018, we have invested in over 25 search funds and have already invested in 5 search fund acquired companies in different sectors and geographies. This is all in addition to the 7 companies we had already invested before ALZA -- we started investing in search funds on a part-time basis in[redacted]So we currently have a portfolio of 12 operating companies if we combined these previous investments. Both Guillermo and I are involved as Board Members in a number of these companies and also participate as active advisory board members in a number of our portfolio search funds.


We currently have investments in 10 different countries which include: Mexico, Spain, US, Colombia, Brazil, Peru, Germany, UK, Italy, Israel. 


What are you looking for in your searchers? 

There are three main things that we look for in searchers:

First, is having great conviction in the model and being 100% committed to the project. When we first meet or speak to a searcher, we like to see that they have done their research, understand the model well and have spoken to other current or former searchers. If they have done an internship with a search fund -- either on the search side or the operational side -- that's also a big plus. We also value searchers who are facing a big opportunity cost, and by that I mean that they are quitting a great job or rejecting a high-pay post MBA opportunity in order to start their search fund. That tells a lot about their commitment to the project.  

Second, is having an outstanding academic and professional career. We like to back searchers who have been on this outstanding track and that have been exposed to challenging work environments. The search fund path is something I highly recommend and can be a lot of fun and very rewarding, but it´s not easy and definitely not meant for everyone. Searchers typically face tough and complicated situations along the way and the search process can be at times an emotional roller coaster. Having a top MBA and having demonstrated a solid career at a top firm, whether in consulting, banking or industry, is something that gives us additional confidence as to the ability of the searcher to overcome those difficult situations both during the search and operation of the acquired company.

Third, is having put together a first-class group of investors. At the end of the day, we think that having the support and guidance from a solid group of investors is almost as important as the searcher itself. So, we love to see searchers that have surrounded themselves with excellent investors who can add value throughout the different phases of the process. We like to see a combination of local investors who are knowledgeable with the local market dynamics and can help with introductions and on-the-ground support, and some of the more serial or institutional search fund investors. These serial and institutional investors not only can contribute with their experience having invested in numerous searchers and operating companies, but can also contribute with larger tickets and help to close a potential equity gap the searcher may face at the time of acquisition.


In talking to searchers, one of the things they are looking for from their investors is the mentoring opportunities to help them along. What do you feel will be the strength for Alza Capital in that vein?

We always look for opportunities to mentor and guide our searchers, and I think we definitely have a number of important advantages in that sense:

The first one is that we are dedicated full-time to search fund investments. And as such, we are fully committed to helping our searchers in all of the different phases of the process. Searchers can always count on our support and advice on whatever we can be of help.

The second one is that we have spent the last five years as searchers ourselves. We've been through all the different phases of the process: we conducted a 21-month search; we analyzed over 200 companies; we closed a complex transaction with equity and debt, we operated and tripled the size of the business -- growing the university from 5,000 students to 15,000 students and from 3 campuses to 9 campuses in a 3-year period --, and we successfully exited the Company. This has given us a great investment and operational expertise that we hope we can leverage in order to help future searchers.

The third strength is the size of our fund[redacted]million dollars -- and our capacity to deploy large investment tickets. We aim to deploy tickets in the range of 1 to 4 million dollars, and reserve additional capacity for potential follow-on opportunities that arise in the growth phase. Searchers can expect from us to take our pro-rata investment amount and in many cases be able to take a portion of the potential equity gap. We believe this can be of a lot of value to searchers.

The last aspect I would remark is the personal relationship we have been able to build with most of our portfolio searchers. Given our similar age range and the fact that we have been recent searchers, it has allowed us to build a strong personal relationship with deeper trust with searchers that the one they typically have with most other investors.


I think Mexico and Europe are markets that are ripe for this model. So, I'm happy to see that you're in there and are going to take it forward.

Yes, our headquarters are based in Monterrey; however, I decided to relocate back to Madrid and open a second office to be closer to our Spanish and European searchers. Having the dual office was a very natural process for us given that Guillermo is from Mexico and I'm originally from a Spain. We are convinced that having presence in both regions will makes us a much closer and value-added investor to our searchers.


Is there anything else you'd like to add?

I would just highlight that we are very excited about our new role as search fund investors, and very happy to share my experience with Searchfunder. I would invite everyone interested in the search fund asset class to contact us, as we are always motivated to speak to potential searchers and contribute to strengthen the search fund community around the world.


Thanks for your time.

Thank you.


Summary of Insights

Here are a few of the key takeaways from our discussion with Angel Alvarez Cadavieco:


    • A trio of partners can successfully conduct a search where their skills are complementary. Also, their economic expectations and the operational company’s size should also be in alignment.  

    • Strongly consider using interns to enable you to concentrate on value-added tasks.

    • Try to have a former searcher as part of your investment group.

    • Anticipate and plan for an Equity Gap by having one or two institutional investors on your list.

    • Begin the conversations with lenders as early as possible.

    • Try to be effective in your search by avoiding companies that don’t fit the model or where the seller’s expectations are too high.

    • In assuming the operations, consider the messaging and inspiration you need to provide to various constituents of your company.

    • You may wish to consider exit opportunities even if they don’t fit your timeline.

    • Assess your commitment level to undertaking the search fund path.



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