Search funds in emerging economies

May 12, 2017

by a searcher from Universidad de Los Andes in Bogotá, Bogota, Colombia

Hi all,

We are currently in the phase of raising search capital for our fund in Colombia for which we have several local investors on board and ready to talk to some international investors as well so we may start the search phase in a few months. After speaking to various searchers from US, Canada and Europe I have seen a common ground in the challenge of finding good deals that fit their parameters. Can anyone from other regions/emerging economies share their experience and perception of the opportunities they have found on this matter?

Thanks!

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Reply by a searcher
from University of Calgary in 3553 31 St NW, Calgary, AB T2L 2K7, Canada

Dear Raphael, I can give you some perspective from my experience expending half of my professional career in Colombia working with mid-market entrepreneurs and from successfully raising a search fund in Canada (still searching). In terms of a country like Colombia, SF and Private Equity in general are still in their infancy. The market does not have a lot of depth and owners are very unsophisticated. That said, competition for deals is less but there are not that many deals to be had. Also you have to factor in the cultural aspect whereby most owners in the middle market in Colombia don't really plan their exits or think of selling their companies to third parties. A lot of them prefer to keep the business "in the family". I would expect that broker deals would be better than proprietary ones as there is less competition from other PE firms. All and all, I think Colombia is a good market given that PE is still in its very early days. Most targets would be on the smaller side though. On the investor side of things there are several groups that like to invest in international search funds like Relay Investments and Pacific Lake Partners. Have you talked to Daniel and Alvaro from 23Park? I know they raised a SF in Colombia last year. I hope this is helpful. Feel free to give me a buzz if you want to chat in further detail.

Reply by a searcher
from INSEAD in 10 Rue de la Chasse, 77000 Melun, France

Dear Raphael, I speak from the position of someone who failed to raise a search fund, so I am confident there's something you could learn form my mistakes. International investor have a clear perspective: they do not pretend to know the country's risk/reward profile, and they cannot only accept your perspective on it as you've never invested in a search fund before. At the end of the day, a SF investor will invest in a country where SF is new/nascent if : - The forex risk is "manageable" : hedging x typical IRR is equivalent or better than investing in established geographies - The country is "big enough" in terms of number of "search fund compatible" deals, it's up to you to prove that (you need a combination of stats/numbers and/or anecdotal evidence from seasoned investors) While ideally one would wish that investors' criteria doesn't change from country to country, their familiarity and exposure to deals in your geography, and their specific context drive most of their decisions, so might want to orient the conversation by giving them "typical deal size and features" to help them project themselves. Best regards, A.C.

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