The beginnings…
Spain’s first search fund – Ariol Capital – was founded by Marc Bartomeusin 2011. The fund went on to acquire packaging companies Repli in Spain and Pentapackaging in Italy, and exited them approximately 10 years later.
The fund “ultimately completed a successful exit and realized outstanding returns for investors,” Marc writes on his LinkedIn page.
… and the ripple effect
Since then, several search funds have been created in Spain, a market in which there are more than 40,000 companies with more than 2 million euros in turnover. Of those companies, a significant number are expected to change hands in the coming years, according to Search Fund Spain.
Over the past decade, Spain has cemented itself as the nation with the biggest number of first-time search funds globally (excluding the US and Canada) – 42 to be exact, according to IESE Business School’s biennial search fund study.
Just recently, a company called Bennu Capital – EtA (Entrepreneurship Through Acquisitions) Hubemerged on the Spanish market. Acting as an accelerator for searchers, the company accompanies searchers from the moment they fundraise up until they close a transaction. This, accordingly, also includes the search phase.
This causes overcrowding sometimes, specifically for SaaS companies…
There are so many searchers and search firms in Spain, making the search for a solid company to be acquired much more difficult and competitive. Currently, search funds are very interested in software-as-a-service (SaaS) companies, of which there are quite a few in Spain. But they are already oversaturated with potential offers.
“Due to the high rate of search fund activity in Spain, almost every company that you could be interested in acquiring has already been approached by others,” Arturo Alvarez, founder of Nobis Capital, says. “That’s why they often don’t even want you to contact them anymore.”
This high demand also drives up the prices of these SaaS companies, making it difficult to find an appropriate acquisition price point.
… which is why it may be beneficial to be a sector-agnostic searcher
“You have to be very open-minded when you look for possible acquisitions in Spain,” Arturo explains. If search funds in Spain focus on one sector or one geography, it could dramatically decrease their potential of finding a deal that suits their conditions and circumstances.
But why is Spain such a hotspot for search funds?
You have to look at it from a searcher’s perspective, who has just completed his MBA. Salaries in Spain for MBA-graduates are much lower in Spain than in Germany, Switzerland or Denmark, for example. However, the cost of living in Spain is much lower – “you can have a decent life in Spain with a lower salary,” Arturo says. This incentivizes MBA-graduates to set up search funds in Spain, since the cost needed to sustain themselves is lower.
Moreover, the IESE Business School has been working hard on promoting the model in the country. Last year, Barcelona even hosted the 5th International Search Fund Conference, organized by IESE Business School, with the aim of connecting search-CEOs, active searchers, new searchers, and search fund investors from around the world.
Making the model exciting for everyone may cause the bubble to burst though.
“The reputation of search funds in Spain today is not great. I think there’s a risk that we are pushing the model too hard,” Arturo adds.
Mostly, the SME market is vast – and getting older
“About 99% of Spanish companies employ less than 100 employees,” he explains. This is a perfect size for search fund targets. And while there are many company owners in Spain, most of them are between 55 and 65 years old. They started their companies about 40 years ago, at a time when the country was leaving a dictatorship behind and the emergence of democracy caused a huge boom in Spain’s economy. This baby boomer generation now has multiple companies with an EBITDA from 1-3 million euros, and they want to retire, Arturo says. Ultimately, these are the perfect conditions for search fund acquisitions.
And company owners are open to the idea, but again, overcrowding can cause problems.
The response rate of company owners to search funds that are reaching out for possible acquisitions is higher than in many other countries, Arturo says. However, owners are getting tired of hearing about the search fund model.
“We’ve seen companies that were approached by over 20 searchers, which means they probably received 40-60 emails, calls or letters,” he explains. What adds to the oversaturation are a high number of M&A boutiques in the country.
The deterrence of taxes may not be a great incentive for Spanish companies in general
Spain’s capital gains tax currently lies at 28%. Hence, when people decide to sell their companies, they sometimes retract and opt for setting up a holding company in a tax haven somewhere. Additionally, the income tax also lies at about 30%, which is extremely high, Arturo states.
Think about it: if you raise 100,000 US dollars, for example, and about half of it is spent on taxes, you won’t be doing anything productive, he adds.
A lot of energy is also spent on finding ways to optimize taxes, instead of focusing on running the search fund or SME itself. For example, the Spanish Parliament recently approved the Law for the Promotion of the Startup Ecosystem, which allows startups to enjoy some tax benefits and simplified procedures, under the main condition that they need to be tech-based, Juan GONZALEZ-VALLARINO FIDEO, Partner at Dealingroom Global Company S.L, explains. Some SMEs may try to fulfill the condition in order to enjoy the benefits of the law.
But companies are expressing discontent about Spain’s business environment
In March this year, Ferrovial, the giant Spanish infrastructure company, sparked controversy by announcing its intention to relocate its head office to the Netherlands. The decision prompted Spanish officials to accuse the company of betraying its indebtedness to Spain.
Ferrovial‘s founder, Rafael del Pino, had previously expressed dissatisfaction with Spain’s business environment, tax policies, and legal reforms. Despite the company’s assurance that the move would have no material tax impact and would preserve employment and investments in Spain, the government and opposition parties expressed worry about the potential loss of investment and urged measures to retain Spanish companies.
Nevertheless, in June, Ferrovial took a significant step by listing and trading its shares on both the Spanish Stock Exchanges and Euronext Amsterdam.
You gotta know where to look
In terms of finding sufficient information about companies in Spain, Arturo uses Sabi. The platform lists public data from all companies in Spain, helping searchers identify potential target companies.
Other websites recommend the Registro Mercantil Central (RMC), Spain’s official trade register, which is available in Spanish and English. It allows users to search for company information via its name, VAT Number (also called CIF/NIF), key officers, or business projects. For more in-depth information, (physically) heading to the Regional Mercantile Registers could be beneficial. Mostly for a fee, these offices can additionally provide information on accounts, financial statements, other companies where administrators or legal representatives also operate, as well as a project depository including information on approved mergers, dissolutions, etc.
To manage the potential acquisition pipeline, Arturo uses Pipedrive, a CRM system that allows him to simply organize and keep track of companies that Nobis Capitalis targeting.
The other side of the coin
Searchers in Spain tend to use the same tools to approach potential target companies for acquisition, which results in most of them talking to the same companies. That is the core of where the problem lies.
“The issue is not necessarily with running out of companies to invest in because there are too many searchers out there,” Ibrahim Abdel Rahim, Managing Partner of Moonbase Capital, explains. “The problem is that everyone is approaching the same companies because they use the same tools to find them.”
Searchers will need to find new ways to find and approach companies, which requires a lot more effort than simply relying on public databases. But generally, it remains a big mystery of how the search fund market in Spain will evolve, Ibrahim believes.
