OPERATING & EXITING A BUSINESS
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 II, we discuss his experience operating the University and the decision to exit.
Tell me about your first day at the company?
The first day was definitely very exciting! But if I had to be 100% honest, it was also a bit scary at the same time. Each of us took different roles within the Company. In my specific case, I oversaw operations, human resources and academics. I also took responsibility as the University Dean.
I was most concerned on that first day about how the faculty would react to having a new University Dean. I was 30 years old at the time and didn’t have a Ph.D. These two factors -- experience and academic credentials -- are very important to the academic community. That first day, the University had organized a conference about education for the whole faculty. So, we took that opportunity to introduce myself as the new University Dean. I prepared a speech with the help and guidance of the Associate Dean about the new vision and mission of the University with a big focus on improving the quality of the academics as well as introducing new undergraduate and master degree programs. And, that was very well taken by the faculty.
You were received well?
Overall, I was received well, but it definitely took some time to gain the trust and confidence from the whole faculty. I always tried to be very involved in all the academic parts of the University. I spent considerable time meeting regularly with students and faculty, attending University conferences and student-organized events.
That’s awesome. I suspect that there must be some difference between professors in America and Mexico (chuckles). At least in America, it seems professors are quite a cantankerous lot.
Definitely. The conversations that I had with the faculty and with the students had a completely different focus from those that I had with my operations team. The talks with the faculty were always centered on improving academic quality, having better facilities, campuses, and libraries. I always tried to use a more inspirational tone on those conversations and put significant emphasis on the educational aspects, as that was what really mattered to them. I would never discuss with them about how important it was for us as a company to increase the student population or increase our revenue or EBITDA levels. Those were conversations I kept strictly for my operations team.
Looking at it from your audience's perspective: “What did they need to hear?”
Exactly. Different speeches for different audiences; that was very important to keep in mind from the beginning.
Did you have experience in the education sector other than going to school, such as in your private equity background?
None. Before launching the search fund I had spent 6 years in the financial industry, mainly in investments, private equity and M&A, and I never had the chance to work on an education project. I also had very limited experience managing teams; the most responsibility I had was managing a small team of analysts.
Do you remember any of your early managerial challenges coming in?
Yes. At the time we acquired the University we didn´t really have a middle management team. The company was operated in a very efficient and family-oriented way. In the first few months, we were 100% absorbed by the day-to-day operations. We didn't really have time to focus on strategy and other valued-added tasks. So, one of the main decisions we took from the start was hiring and building that middle management team. Today, the University has a strong middle management team, which includes a CFO, a COO, a head of HR, and a head of Sales & Marketing.
Building that team from the very beginning and aligning the vision with them was probably the biggest managerial challenge that we faced as Co-CEOs, and also a critical factor for success. Having the team in place since early on allowed the three of us to dedicate significant time to more critical tasks and to execute the growth plan we had envisioned at the time of acquisition.
Did you have a consultant or advisers that you could turn to?
We only had a few consultants on the regulatory aspects of the education sector, such as dealing with the Secretary of Education when opening a new campus. Other than that, we didn't really have any advisors. We had a lot of support from our Board of Directors. The President of our Board had previous experience in education, and this was extremely valuable. At the beginning, especially during the first year, he dedicated a considerable amount of time to us, which was of invaluable help. Apart from this, it was the three of us pushing and helping each other out to be able to grow faster, and to be well aligned to execute the growth plan we had in mind.
Tell me a little bit about your decision to exit. You had great success at the University; why not just continue?
Exiting the business was a very natural process for us. Our original idea was to run the University for about five to six years. However, a great opportunity to sell the business came up earlier than expected and, together with our investors, we decided to accept the offer and exit the business.
During the first years of operation we were approached by a number of potential acquirers; both strategic and financial. We were always very open and very welcoming to having those conversations. Some people are more close minded and reject having those conversations if the timing is not the correct one. In our case, we took the opposite path. We always welcomed interested parties to our campuses and we were willing to have those kinds of conversations. Anyways, to make a long story short, a strategic buyer made a very attractive offer for the business, and this offer was soon outbid by another offer by a group of financial sponsors. This second offer implied a multiple expansion from entry to exit of over 50%. Given that plus the growth we had accomplished in those first years of operations, it resulted in a very attractive offer, so we decided to accept it. We achieved a very attractive transaction IRR of nearly 65%, and the investors were obviously very happy with the outcome.
I hope they were giddy. (chuckles).
At the beginning some investors had doubts about whether or not it was the right time to sell. The company had been growing at a very fast pace and the future of the business was still very promising. However, it is not always easy to get such an attractive offer on the table, and after performing a few sensitivity analyses we reached to the consensus that it would be best to execute the sale of the business; and that´s exactly what we did.
The closing process was faster than the acquisition itself. It took about four months. It helped significantly the fact that we had conducted a very rigorous due diligence only a few years back and had everything well organized. Also, having that middle management team in place allowed us to dedicate considerable time to focus on the sale process. So, in about four months, we were able to execute the sale from the initial conversations to the end.
Did you have any commitment to the University post-Exit?
Yes, the new buyer asked for three conditions in order to execute the transaction:
First: One of the three of us would need to continue as the CEO of the business for at least three additional years. After a few internal discussions among the three of us, we all decided that it would make more sense for Jesus to take that role.
Second: The other two partners, in this case Guillermo and I, would continue working on the business for 1 year on a full-time basis, and help Jesus build a stronger middle management team that could replace both of us in our main operational functions. We completed that transition period in March 2018.
Third: The three of us would need to reinvest a significant portion of our common equity proceeds into the company and remain involved both as shareholders and board members. Both Guillermo and I are still shareholders and members of the Board of the company -- and continue to be actively involved in most of the strategic aspects of the company -- and Jesus continues to run the University as the solo CEO of the business.