Have you ever wondered what it takes to be a successful Search Fund entrepreneur in a developing economy? In this edition of Search Fund Squared, we speak with Antonio del Valle Sierra, a Search Fund entrepreneur based in Mexico City, to explore his unique journey and the challenges and opportunities in the Mexican market.
Antonio began his career in accounting, seeking exposure to various industries and functions. This led him to management consulting at McKinsey & Company, where he gained valuable business insights. However, his passion for entrepreneurship was sparked while working for a small family-owned textile manufacturing company. As Antonio puts it, “Even though it was much smaller than my consulting clients, being responsible for every penny and overseeing 300 employees gave me a real sense of responsibility – and it was super fun.”
During his MBA at HEC Paris, Antonio discovered Search Funds, realizing it was the perfect blend of his passion for running a business and acquiring one. After graduating, he returned to Mexico to launch AVS Capital and begin his journey to find the ideal acquisition.
MC: Which countries and industries are you focusing on in your search, and why did you choose them?
Antonio: I’m focused on finding a business in Mexico. It would take a very unique opportunity in the U.S. for me to consider acquiring there, but I’m open to the possibility, though I’m not actively searching for it.
In Mexico, you can’t afford to be industry-focused like in Europe or the U.S. because the market isn’t as large. You need to be industry agnostic, but have an anchor. I’m focusing on macro trends in Mexico that apply to various industries.
The biggest trend right now is near-shoring-relocating American supply chains from Asia to Mexico. This stems from two factors: the increasingly difficult U.S.-China trade relationship and the supply chain disruptions caused by COVID-19, which led American companies to prioritize regional, more reliable supply chains, even at higher costs.
MC: What are the challenges and opportunities you’ve identified in your target market that make it an attractive space for Search Fund investments?
Antonio: Everything I’m going to mention is both a challenge and an opportunity. Some are endemic to Mexico, long-standing issues, while others are more time-specific, presenting unique opportunities today.
First, Mexico has a very informal economy, like many developing countries. Not all transactions go through the banking or financial system, making it hard to get accurate financial information from companies, especially those dealing in cash and underreporting earnings to tax authorities.
Additionally, the M&A ecosystem in Mexico is underdeveloped compared to the U.S. and other developed markets. Business owners aren’t accustomed to buying and selling companies. Many are family-owned and passed down through generations, with limited experience in institutional M&A. As a result, owners may be skeptical or unfamiliar with processes like a Search Fund.
The opportunity here is finding “hidden gems”, businesses no one else is targeting, available at a price much lower than in a developed economy. Once you introduce formal processes and modernize these businesses, they have significant growth potential, far surpassing competitors who are weighed down by the informality that limits their expansion.
MC: How do valuations in your target market compare to global benchmarks, and how do you manage seller expectations when negotiating deals?
Antonio: There are two sides to this. If you find a brokered deal through an M&A agency, expectations are usually higher, making it harder to close. First, brokers promise higher multiples to secure exclusivity, which aren’t always realistic. Second, brokers provide access to international benchmarks, which sellers often anchor to, making it difficult to agree on a reasonable multiple.
On the other hand, with a proprietary deal-where you source the opportunity and the owner wasn’t initially considering selling-it’s easier because you control the flow of information.
Seller expectations in Mexico differ from other markets, partly because of its proximity to the U.S., which is often used as a comparison, even though it’s not always appropriate.
For search funds, Mexican multiples are typically lower than international benchmarks due to factors like size, stability, and growth. Multiples in Mexico generally range from 4x to 6.5x at the high end.
MC: Has the availability of debt in your market impacted your acquisition strategy in any way?
Antonio: In Mexico, there’s virtually no access to debt for acquisitions. Institutional or bank debt isn’t a reliable option, as banks aren’t accustomed to financing these types of deals and don’t trust Search Funds or the companies they acquire. Out of around 30 Search Fund transactions in Mexico, only one had access to bank debt, and that was due to the company having significant fixed assets as collateral.
As a result, Search Funds rely on two strategies. One is expensive mezzanine debt from private funds, though this can be costly. The other is full equity deals, often with a heavy reliance on seller financing or seller notes. Without access to debt, there’s much more pressure on growth, as most of the return must come from organic growth rather than debt repayment.
