Episode 14 - Javier Puig, Arada Capital Partners

So the big question is this. How are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? How do acquisition entrepreneurs find businesses, buy them, and then create generational wealth while taking on less risk?

Welcome to Search Funded the Entrepreneurship Through Acquisition Podcast I'm here today with Javier Butch. He is a partner at Arada Capital Partners, a search fund investment firm that he started straight out of his MBA and obviously pretty impressive. I'd love to learn more about that. I mean, a lot of people launch search funds out of the MBA by becoming investors. Straight out of the MBA is pretty interesting path. Looking at your background, you have professional experience in finance and consulting prior to getting involved in surge funds. I was wondering if you could talk about what unique perspective you bring that's different from other search investors and why you felt that you would have a unique perspective when launching a search fund investment firm.

Well, thank you very much Nick for having me on your podcast. As I mentioned, during the first time we spoke I listened to many podcasts while running and driving. It's not that I was familiar with the podcast, but I had also listened to all your episodes. So it's really a pleasure for me to be here today and hope that my experience in the search ecosystem will be of the interest of your listeners. Regarding your question, there are many skills I learned from my consulting and investment banking experience that I apply on a daily basis as a investor. During my years in estate consulting, I had the opportunity to work with various companies across different sectors. I was involved in numerous projects spanning industries such as automati, construction, tourism, public infrastructures, even renewable energies and this was fast paced learning experience for me. It afforded me the chance to gain insights from the inner workings of diverse companies in various sectors. This valuable experience significantly enhanced my understanding of how companies operated and improved my ability to analyze them effectively. And Afterwards, during over nine years working at an international investment bank in the M18, I had the chance to develop the various skills that I now apply on a daily basis and these skills can be of great help I think for the search funds with whom we partner. I gained for example, extensive experience in conducting in depth research and due diligence potential investment opportunities. This involves evaluating financial statements, analyzing market trends, assessing competitive landscapes to make well informed investment decisions. I now apply many of these analytical skills in collaboration with searchers on a daily basis. Of course, as you may know, we spent many hours in investment banking working, so I also had the chance to learn a lot of financial modeling and valuation techniques that are also applied when Acquiring SME how? However, what I find most helpful for entrepreneurs is the experience again in structuring M and E deals, negotiating LOIs or SDAs, conducting various aspects of a due diligence or even structuring acquisitions in the most advantaged way. I think that these skills insights are particularly beneficial when partnering with entrepreneurs in the search fund context.

Sure, definitely. I think that's why when investors are finding searches, a lot of times they look for people with consulting or investment making or private equity experience because those skills are extremely relevant to search. And since you're able to provide both sides of that to searchers, I think a lot of them may have a spike in one area but not have both. So it's definitely very helpful to have the full suite of skills. What would you say in your philosophy sets erratic capital partners apart from other investors?

In Europe, we are an institutional investment firm with the spirit of a private investor. Let me elaborate a bit further. As a private equity fund, we raised funds from RRPs. We understand that we must now allocate these funds across various European companies located and managed through search funds. That's our investment thesis. But however, when I mention that we possess the spirit of private investors, what I mean is that we have a limited number of search funds and companies within our portfolio. We invest with a commitment to support entrepreneurs through every stage of the search fund journey, the search acquisition operation and of course the exit. We regard ourselves hands on investor, which is why we've deliberately constrained the size of our funds. This allows us to maintain a restricted number of search funds investment companies, ensuring that we can dedicate enough time and attention to each of them. We actively support search funds, but we empower them to take the lead when seeking assistance. Since the inception of another Capital Partner almost two years ago, we expect to close 2023 with partnership involving 17 search firms and a successful acquisition of four companies. So Nick, our philosophy is to be an institutional investment firm with the heart of a private investor. We just decided to make things maybe go more slowly than other investors, but with a good and a steady path.

That's great. I think especially in Europe that's helpful since there are maybe more financial type investors. But since you bring kind of the approach of search fund investor, it is a differentiator. You have a pretty multidisciplinary team. I was wondering if you could talk about how they support the success of the search funds that you advise and invest in.

Yeah, sure. Capital Partner. As I mentioned previously, it's a private equity firm and it's regulated by the authorized Bodies here in Spain. We are a professional firm with big team as you just mentioned. But first, to better explain who we are and what's our multidisciplinary team coming from. First I must refer to Tresys. Dresys is our strategic partner and it's a private bank offering different alternatives to their high net worth clients, mainly entrepreneurs and family offices. And Tresis, it's a pretty important part of Arada Capital has not only its general manager serving as members of the investment committee at Arada Capital Partners, but also the operation team of Tresys are in charge of the operations that need to be done to ensure the activity of the fund. With Tresis, all operational responsibilities are managed with a high degree of professionalism and efficiency. The this encompasses activity ranging from fundraising capital calls, LP management, legal advisory or communication with external auditors or the regulatory bodies just mentioned. And this is just part of the team as I just mentioned because in addition to the operational and investment team supporting NADA Capital, we also have an advisory team comprising former searchers who are presently managing their own companies, private equity professionals or also we have some advisors from different specific sectors that can add value to searchers when searching for a potential acquisition. This advisory team holds significant influence within Arada Capital partners as they represent a valuable source of knowledge and experience. Let me tell you for example Nick, recent example that we recently facilitated an export session between a search fund and one of our advisors. During this session, the entrepreneur and myself had the opportunity to deepen our industry knowledge and gain better understanding of a specific niche where the target company was operating. Following this call, for example, the searchers were equipped to initiate an analysis to try to differentiate what was the really the potential red flags. This actually ultimately led to the decision to abandon the deal. So I think that in many cases these advisors of Arada Capital are pretty helpful not only during the search, I mean they are also available during the management or operational part of the search and path.

Sure. And I think that's one of the strongest reasons to go for a traditional search versus a self audit, for example, is that coming in as relatively inexperienced entrepreneur as you are after the mba, trying to do all that on your own is actually quite hard. So having the support of a firm like Errata, where you have a team that can help you in so many different ways, is what makes the traditional search a lot more attractive. Getting more to you, I was wondering if you could talk a little bit about your decision to launch Errata and what went into that decision making process. I mean you are an MBA student you had learned about search funds I guess can you talk a little bit more about that? And you decided to take that bold step of becoming a search fund investor straight out from the mba?

Yes, I first learned about the search for model many years ago through a friend who studied his MBA at Stanford. And actually I was pretty lucky because following that I personally knew various entrepreneurs who were in the process of launching their own search funds which ultimately led me to begin investing as private individual. When I told you that I personally knew these searchers, it was a big coincidence because actually some of them they were cousins of my wife, other they studied in the same university as I did, so I had a close relation with them. So it was for me very interesting to deepen in this investment thesis for me that time, thanks to my experience and the success of my initial investments, I made the decision to establish a capital partners. I didn't choose to pursue my executive MBA at ESA motivated mainly by the business school active role in the European search and ecosystem. It was during my second year of the MBA program that I resigned from my position in investment banking and officially launched the private equity firm you mentioned. It might appear to be a bold move, but it was actually a very blunt and therefore something I had been working on for for quite some time and also counting from the very first moment with a strong partnership, as I just mentioned, that provided valuable support during the launch of Arada Capital Partners. Raising capital, as you may know, and most of the searchers listening to this podcast will know, is pretty hard. So I was also there, you know, raising capital for Arada Capital and without the help that I had with Tressis, that would have been a really tough or complicated path.

Sure, yeah, it makes sense. Definitely helps to have the right partner to help you guide you along. And a lot of times what looks like a big move on paper may be something that actually being worked towards for a long time. So it's great to get that inside perspective and I guess follow up to that would be Once you launched Errata, was there any thought about where you were going to focus on? It seems that you're focusing exclusively on Europe. So I was wondering what unique opportunities did you see in the European market that might not be present elsewhere and just in general why you decided to focus on Europe alone as a search fund investor?

Well, it's not the kind of opportunity matter of the type of opportunity. The main reason why currently focusing on Europe is due to the active role that the firm wants to maintain. As I previously explained, we invest willing to help in every phase of the search fund. Therefore, half a limited size fund help us to ensure that we accomplish this objective. Because we have a limited number of search funds and companies in our portfolio, we prefer to focus on geographies where we can add more value. Our primary focus is to ensure that we can contribute value to search funds whenever it's required. So expanding into different continents always represents substantial challenge.

Sure. Do you envision any expansion in the near future? What's your thoughts on the next five to 10 years?

For Arada, we will certainly consider investment in our geographical regions beyond Europe, but it won't be within the scope of our current fund. Now we keep speaking with entrepreneurs from all geographies. Australia, Asia, Africa, US Always open to have a quick call and learn. We see a lot of talent actually outside Europe and therefore we have had several internal discussions in this respect. This geographic diversification will happen in the future, but within next spots.

Sure, it makes sense. I think it's good to start out also where you can add the most value. You mentioned on your website that the interests of Errata capital are aligned 100% with those of search funds. I was wondering if you could expand on that a little bit and talk about how you 100% align interests.

Yes, for us this is key. I mean when both investors and entrepreneurs are on the same page and share common objective, it builds a foundation of trust and confidence. This trust makes it less complicated to make difficult decisions and preserve through challenging times as each party believes in the others commitment to success on the business. So I have always seen that alignment between entrepreneurs and investor is one of the main advantage of the search fund investment model. And it's something that we want to make sure that we have with those searchers with whom we partner with. In Arada Capital Partners we like to say that we partner with search funds as I previously mentioned. And so we partner with search funds and we invest in companies. And that is because our relationship with entrepreneurs tends to be closed. We always leave them to be proactive, manage the relationship. But we invest in a limited number of search funds and therefore we like to feel that we are considered a value added investor. The fact that we decided to limit the number of entrepreneurs with whom we partner with make for us crucial that we have the correct alignment. We are determined to ensure that the entrepreneurs we collaborate with excel in the search acquisition operation. Of course also in the exit.

That's great. It's pretty clear that time and effort was limited more than capital. And so if you want to provide quality of those you need to limit your number of surges you invest in. You spoke to this a little bit already in terms of what got you interested in surge funds. But I was curious, what is it about surge funds versus other forms of alternative investments that you could have pursued that made you decide the search funds were what you wanted to invest in?

Well, I first started as a private investor, so for me this is a straightforward question to address because in my view the advantage of the search fund model have always being clear. The challenge of this question lies on choosing the most significant advantage to avoid prolonging the podcast for the benefit of the listeners. But now, jokes apart, let's start with what we just been talking about. I mean the alignment between investors and entrepreneurs. I believe it's one of the primary advantages of the model. In traditional private equity there are various methods for steering management in the right direction, but the alignment fostered by the search fund model is unparalleled. In my opinion. This alignment and the incentives of the model also attracts exceptional talent. Talent that with the support of investors and has been generating great returns over time. With this in mind, I must say that supporting very talented entrepreneurs that will become the management shareholders of our portfolio companies is without that something that attracted me from the very first moment because it's not something that you see elsewhere in other alternative investments. In addition, I would like to remark on the fact that we acquire companies in good shape at a new talented CEO with the correct motivation. The companies that we acquire are typically below the rather of more traditional private equity firms and therefore we can find great businesses with sellers with the correct reason to sell. And it's amazing the quality of companies that we have come across during the last years. Nick?

Yeah, definitely. I think that's one of the more exciting parts of search is that it's a much more personal affair. The searcher itself is someone who's taking over the business and you're working with them. The seller is often someone who's built this company over the course of their life and you're taking over a really great company. So I think that's definitely a lot more attractive than other models where it's just more about the numbers than the personal story. For those looking to venture into the search fund model or private equity, I was wondering if you have any advice based on your experiences on how to get started or what they should think about when they're getting started.

Well, private equity and search funds might appear similar to some, but this is not the case at all. And in private equity we invest in companies but we do not manage them. A search firm begin. Maybe it begins as a small private equity firm, but that is not the ultimate goal. Searchers do not establish their search funds solely to search. The primary aim is to acquire and manage a business. Consequently, the principal objective of a search fund is to operate a company with growth potential from a CEO position. Explain that. And focusing on search funds. This entrepreneurial path can be highly regarding, but it also represents significant challenges. 100% commitment is essential in my opinion as the journey is marked by many highs and lows. Making a steadfast dedication is mandatory. My advice would be to first speak with as many search funds as they can in order to learn and get answers to every questions they may have. And once they are absolutely certain that this is their path, commencing their fundraising within their close circle of contacts is always a wise initial step. Signifies that those who are familiar with them, such as former bosses, family or friends, have faith in their potential and dedication. So maybe that would be a good advice.

That last point is really important, I guess going along with that. I think we spoke to this a little bit already. But how important is it for potential search for entrepreneurs to have a mentor or advisor in the field whether they're doing a self audit or a traditional search?

Well, having a mentor or advisor in the field is of immense importance. I mean it's very important for potential search fund entrepreneurs. You know, these system mentors can offer invaluable insights, share their industry expertise or provide guidance based on their own achievement and experiences. At times these advisors may come from the entrepreneur's inner cycle, but in many instances they are introduced by one or more of the investors. This is why closing a cap table of investors with whom the entrepreneurs feel comfortable with is crucial for the demanding work ahead investors relationship extend over many years constituting a long term commitment. Therefore it's prudent to dedicate time and analyze them. Seek input from other entrepreneurs who have worked with these investors. Use calls to ask questions and address any concerns that you may have beforehand deciding if they are the right investor for your cap table. It's vital to get to know each other well and this is a two way exercise. Both investors must learn of course from the entrepreneur, but I feel that also entrepreneur must learn from the investor slowly. To assess and pre plan your ideal cap table, consider the number of private investors, institutional investors, the local participants, as well as for example the hands on investor that you're going to be having on your cap table. It's really important some of the advisors that we just mentioned are going to come from those investors. So the cap table really should be custom tailored to suit the unique requirements of each entrepreneur. This is why in many occasions the mentor advisor comes from the search fund Cap table.

I think that's really good advice in terms of how to build out the cap table. It's a common question, but one that people don't often think as deeply about as they should. Looking back at the past two years since founding Errata Capital Partners, what has been your most rewarding experience?

To be honest, Nick, the whole experience itself has been incredibly fulfilling. There are always concerns and risks when embarking on such a journey, which is why it's essential to have a clear vision and a well established long term plan surrounding actually yourself with an exceptional team. It can be really obvious, but getting involved and surrounded by individuals is absolutely vital for executing the set plan and strategy and I can be proud of doing so. When looking back analyzing all the rockstar entrepreneurs with whom we've partnered, to provide you a concrete example, I'd like to highlight another capital partner's most recent acquisition, Lifnova. Lifnova is an innovative Spanish firm established in 2009, initially specializing in digitalization services. However, it has evolved into a SaaS B2B company with primary focus on digital preservation, offering support to organization in safeguarding their digital assets. But what is important is the search fund behind this acquisition. Cardio Capital. It was a searcher led by Jacob personally, having been involved in assisting Jacobo during the months of the search and analysis of various opportunities such as I remember, Project Mula, Project Vision, Project State makes the ultimate acquisition of Lip Nova particularly important to me. It's a remarkable company with enormous potential and Jacob was the kind of CEO that the company like this truly deserves. So being part of the cap table of companies acquired by entrepreneurs with whom we have had the opportunity to establish a close and professional relationship during all the ups and downs of the search is truly rewarding experience.

Yeah, definitely. I think just working side by side with with entrepreneurs and seeing their successes is really rewarding. And to the example you gave, I think some of the most successful search funds have actually been ones where they took over a company that was doing one thing and then kind of evolved it into being a platform for offering other services. So that's definitely sounds like an interesting acquisition and would love to hear more about how that goes. Looking at your website, I had one question that it seems compared to other search fund investors I've seen, I hadn't seen so much of a focus on sustainability and you actually have a section on your website that mentions that you invest in sustainable companies that generate a positive impact on society. And I was wondering if you could talk a bit more about that focus, where it came from and how you see search funds being able to implement sustainability.

I mean esg, as you know, it's environmental, social, so it's. Every time we speak about esg, we people tend to focus on the environmental part that's important. But I personally believe that our capital partners has a significant social impact compared to other more traditional, let's say private equity firms. Our investment strategy, it's built, and I mean the search fund strategy is built on supporting highly talented and experienced entrepreneurs while providing a solution to the succession problem that many European, in my case SME space. So the fact or our investment strategy has a big impact in the social part. But when speaking in investing with ESG principles that we mentioned in our web page, you know, investing with ESG principle has evolved beyond just a site consideration or something done to meet regulations. In long term investment strategies like those of search funds and private equity, ESG really should be seen as a crucial factor in ensuring that the investments create lasting value and profitability. Investing with a focus on making a positive impact isn't just about achieving financial success. It also helps investors assess a company's long term sustainability and identify any hidden ESG related risks that may come up in the future. So for us, investing in ESG is not optional. For us, we think that we really need to take account.

I definitely agree. And sustainability, it's not just environmental sustainability, it's governance, it's all of that. Small businesses interact with their communities, they employ the local people. And search funds are a way to continue that legacy and make sure it's done in a sustainable way, which is probably one of the best ways you can actually do it, I guess. I just have one final question. What's the next big milestone you're aiming for with Errata Capital Partners?

This is not such an easy question. I mean, it's fantastic to see Arada Capital Partners already making significant strides on its journey. One of the standout achievements for Arada Capital Partners has been its ability to complete its first three investments. These accomplishments speaks volumes of the firm's capability in identifying, evaluating and successfully closing deals. But in the short term, our focus is on the shorthand we have partnered with over the last year and a half. We aim to continue assisting them in successfully acquiring businesses with significant growth potential. For 2024, we have an ambitious investment plan that has already been approved by our internal investment committee at Rada Capital Partners. Our primary objective and most significant milestone are centered on the successful execution of our investment plan. We are presently allocating capital within the portfolio of our initial fund, but our strategy involves launching a series of successive small funds. This consecutive small size funds approach guarantees sustained investment of over many years, allowing us to expand while we also continue to provide value to talented entrepreneurs in the long term. Our milestone with this context would be the full deployment of Fund one, I guess and successfully raise Fund two. For Fund two, we will have solid portfolio of vested companies already and also of course managed by standing CEOs. So getting back to the starting point of my answer, Nick, what we are truly focused on is sustaining our investment in exceptional individuals and delivering outstanding value during the next month and next year.

Amazing. I wish you the best of luck. Thanks so much for joining. Really enjoyed talking to you.

No, thank you very much Nick. I really enjoyed this is my first podcast so I hope I did it correctly and I answered you all the questions as I should.

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