Angel Alvarez Cadavieco, a former search fund entrepreneur and current NCA advisory board member, was one of the earliest pioneers of the search fund industry in Mexico and Latin America. As someone who helped pave the way for this asset class to take root and flourish, we are delighted to share Angel’s personal story and insights into the world of search funds.
IN SEARCH (AND ACQUISITION) OF SOMETHING MORE
One could almost say that Angel Alvarez Cadavieco’s first foray into the world of search funds happened by chance. After working for four years in the corporate world of investment banking, M&A, and private equity, Angel found himself craving something different in finance… but he wasn’t exactly sure what he was looking for. While pursuing a master’s degree in finance at London Business School, he attended a private equity club panel about search funds and discovered a whole new career possibility he had never heard of before, and an idea was born.
“It was just a perfect fit,” explained Angel. “My background in M&A and private equity combined very well with the search fund model because, at the end of the day, the first piece of the process is to look for a great company and buy it, and that’s what I’d been doing for the past four years. But search funds also gave me the possibility of doing something more hands-on because, once you buy the business, you actually have an operating role leading the company. I was looking to get out of the huge corporate investment banking and private equity world and do something more operational and entrepreneurial. The search fund model combined everything that I was looking for.”
Realizing he didn’t yet have the level of operational experience he needed as a young 26-year-old, who was fresh out of graduate school, and recognizing that he didn’t want to raise a search fund by himself, Angel returned to work at JP Morgan for another two years. But his dream of an entrepreneurial future never faded. Then at the end of 2012, together with partners Guillermo Zambrano and Jesus Lanza, Angel decided to launch a Mexico-based search fund (Lottus Capital), making him one of the first active searchers outside of the USA.
“I believe we were the third or fourth search fund ever launched in Mexico and among the first few in all of Latin America,” said Angel. Breaking that kind of new ground certainly came with its own set of unique challenges. When Angel and his partners launched their search fund, there were very few search funds raised outside of the USA, and thus very few international investors who had experience investing in the asset class. “That meant we really had to rely on our own personal and professional network to raise our search fund,” Angel emphasized. “We knocked on a lot of doors. And we not only had to sell ourselves as potential CEOs and searchers, but before even doing that we had to explain the model and convince investors that the model works.”
In addition to introducing investors to the concept of a search fund, and proving its value as an investment model, Angel’s team also had the difficult task of laying out all the legal foundations, structures, and documentation necessary to make their search fund a success. There were also very few people they could turn to for advice who had experience in the field. Starting from scratch proved to be a challenging, tedious, and time-consuming process. But Angel and his partners forged ahead into new territory as they kicked off their search across multiple industries. Over the next 21 months they thoroughly analyzed some 120 companies, gradually whittling it down until their search and acquisition phases came to a close with the successful acquisition of Universidad Tres Culturas, a private university in the central region of Mexico (through the creation of Lottus Education as a holding company in the educational sector)
EXPLOSIVE GROWTH AND AN UNEXPECTED EXIT
At the time of acquisition, the university had about 5,000 students and three campuses, but once Angel and his partners dove into operations, they kicked off their ambitious plans for growth. They opened six new campuses in the first three years, doubled the number of degree programs on offer, launched three master degrees, and added a new line of business through a “nights-and-weekends” executive education format. “We started growing and growing and growing,” Angel explained, never missing a beat. “The combination of opening all those new campuses, adding those additional degrees, the masters, and the executive education programs created tremendous growth for our business over the first three years.”
This exceptional and rapid growth led to another unexpected surprise: an early liquidity window. While their initial plan had been to grow the company through operations for five to seven years, the team received an unsolicited and very attractive offer after just under three years. And while most of their investor base decided to accept the offer, their new financial sponsors also allowed some of their investors to stay on and reinvest, and Jesus stayed on as CEO (and is still CEO to this day).
Their exit proved to be one of the most successful stories in Latin America’s search fund history. “It was a bit of an atypical exit because it was actually a partial exit for us from an equity point of view,” Angel clarified. “That allowed us to complete the full search fund process yet still participate in the continuous growth of the business. Today, the company is about 10 times larger in all of the metrics – from campuses and students, to revenues and EBITDA – than it was when we acquired it six years ago.”
SEARCH FUNDS = A GREAT INVESTMENT OPPORTUNITY
In August 2018, after his successful exit, Angel and his search fund partner Guillermo launched ALZA Capital Partners, an institutional $50 million fund for search funds. Since their launch two and half years ago, ALZA Capital Partners has backed over 50 searchers globally and is halfway through their investment period, having already invested in 20 company acquisitions that make up their current portfolio.
Given Angel’s history of success in the industry, he’s perfectly poised to explain why search funds are a great investment opportunity. He begins by explaining what he defines as the perfect acquisition: “The perfect acquisition is the right company at the right price,” Angel says. “It can be easy to make an acquisition. The challenge lies in making a really nice acquisition at a very attractive price.”
That being said, one of the key advantages of search funds is that they provide a structured path to finding great businesses to buy, explains Angel. Many of the companies targeted by search funds (which tend to have an EBITDA in the range of $1-4 million) exist under the radar of most private equity firms and financial sponsors. And because a searcher is given up to 24 months to find the right company to acquire, the searcher and their teams are able to analyze several dozen businesses to finally arrive at the perfect acquisition. “One of the attractive things about search funds is that you’re looking to buy a solid business with a history of profitability, recurrent revenues and a diversified client base. You’re looking for an opportunity with a very attractive risk return profile. You’re not looking for turnarounds. You’re looking for companies that are doing well, which also turns out to be a very natural reason why current business owners want to exit their business.” A win-win for both, buyers and sellers.
Additionally, search funds by their very nature require that the searcher be in alignment with the company and their investors as they all have common equity. “The searcher is usually a top talented entrepreneur who’s poised to become CEO, with a capacity to really grow the company and bring an added level of professionalism to the business in many cases,” says Angel. Professionalism that comes from the searcher’s strong academic and professional background, paired with guidance and advice from a professional board of investors who invest alongside the searcher. In search funds, there’s a knowledge-sharing that is empowering for every stakeholder.
“As the ecosystem has been growing, there’s been a significant number of more institutional investors joining the asset class who do this full-time,” adds Angel. “That professionalism is reflected in the structure of the program, the board dynamics, and in the guidance that’s provided to the searchers on a day-to-day basis. Some of these investors have invested in over a hundred companies, so they offer a great critical eye and provide important feedback when searchers are trying to figure out whether a company is a good investment. All of these features combined is what creates an amazing profile for search funds, allowing for great returns with moderate risk on these types of investments.”