Latitud Capital: 5 Key learnings from our fundraising
1. Start early
As soon as you decide that the Search Fund path is right for you, you should start drafting the fundraising documents and mapping out the investor landscape. Searchers can begin reaching out to investors up to a year prior the fund starting date. We began our fundraising process on September 2018 and started our search in September 2019. Most Search Fund investors typically allocate their commitments 6-12 months in advance, so being one of the first conversations that investors have when they kick off their commitment season is very helpful. If searchers wait too long, they can face increased competition or can reach out to investors that are already fully committed for the year. Being early also has the advantage of increased flexibility while defining the final cap table.
2. Do your homework
During fundraising meetings, Investors expect searchers to have a deep understanding of the Search Fund model and the conviction that it is what they want to do. Dedicate a significant amount of time to calls with current searchers/operators to develop a thorough understanding of the model. If possible, try to have calls with searchers and operators with both positive and negative outcomes. We completed 20+ of these calls prior to our first fundraising call. Doing part-time or summer internships in Search Funds/Operating Companies is also very helpful to both understanding what you are getting into and showing commitment to the model.
3. Leverage the SF community
The Search Fund world is close-knit and highly collaborative community. In our experience, the response rate when reaching out to searchers was virtually 100%, every searcher went through the same process and has a high sense of giving back to the community. Leverage this as much as possible to develop a thorough understanding of the model, seek fundraising advice, and request investor feedback. Former or current searchers were our best assets throughout the process, they were particularly helpful when we wanted to better understand the fundraising process and for introductions to investors. Of our 19 investors, 10 were introduced by former searchers with which we built rapport.
4. Look for partners instead of investors
Pick your partners wisely because they are going to be around for at least 5-7 years. Before engaging investors, take a step back and think about your ideal investor base in terms of the mix between international vs. local investors, and institutional vs. former operators vs. high net worth individuals. We ended up with the following mix: 40% locals/60% international, and 47% institutional / 19% operators / 34% high net worth individuals. Make sure that you select investors that are going to add value either during the search or operating phase. It is also important to be honest about what you are going to look for during the Search (e.g. we were very upfront about being industry agnostic). Also, know that if your investors say they only invest in companies that fit the traditional Search Fund criteria, they mean it.
5. Build a strong local investor base
This point is more relevant to international searchers. Having a strong local increases the credibility of the Fund when approaching sellers. In our experience, sellers are not used to being approached by investors looking to acquire their businesses, so there’s a level of skepticism on their part that can be mitigated when they realize that you have established local investors backing you. A strong local investor base will also be an asset during the operations phase as you can leverage those relationships to add value.
About Latitud Capital
Founded by Isauro Reyna and Pedro Eguren, is a private investment firm focused on the acquisition and active management of a middle-market company in Mexico, with a focus on growth and long-term value creation.