Colin Barry

INNOVA-MEX; Mexican search fund (EF, Wednesday, Week 9)


American search fund: a Mini-LBO. Returns from leverage in acquisition and operational improvements (margin expansion). Growth industry increases likelihood of good exit.
Mexican search fund: a Mini-VC fund. Not much leverage; too risky to buy bad business and try a turnaround; primarily banking on either top-line growth or operational improvement/multiple expansion.

Challenges with non-American search funds:
-- Raising capital is hard. Bank debt is expensive or unavailable (niche between small-business loan and full-on LBO).
-- Macro environment risks. Currency risk for foreign investors, financial statements are unreliable, hard to find comparables for valuation.
-- Harder to find good targets. Culture resistance to selling businesses.
-- Investors are harder to find; model is not well understood. Need foreign investors to reassure Americans about the target; need American investors to reassure foreigners about the model.

Acquisition-stage => two-sided negotiation with fund investors (selling them on the target and the deal) and with seller. If seller wants a higher price, need to raise more equity => messy, non-obvious impact on returns for LPs and for searchers. Solutions: seller financing, earn-outs, seller retains some equity stake.