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Colca Capital: From Goldman to Peru’s First Search Fund

Nicolás is a Peruvian-American who began his career as an analyst at Goldman, Sachs & Co. in New York.  After a year in that role, he left to run the sales and business development team at SumZero, a financial technology start-up where we briefly overlapped as colleagues.  After hearing about the search fund model, Nicolás joined Relay Investments, a Boston-based institutional investor in search funds.   For over two years he led due diligence efforts in Latin America while assisting aspiring searchers, and participated in over 50 search fund investments, operating company acquisitions, and follow-on transactions.  He has recently launched Colca Capital, the first search fund in his father’s native Peru. Kevin Harris from Forbes sat down with Nicolás to discuss his experience launching Colca, and the burgeoning search fund industry.

Nicolas Lulli

Colca Capital

Kevin Harris: What is a search fund?

Nicolás Lulli, Managing Partner Colca Capital: A search fund is an investment vehicle, conceived by Stanford GSB Prof. Irv Grousbeck in 1984, through which investors support entrepreneurs’ efforts to find, acquire, and operate a privately held company. Since conception, more than 300 search funds have been raised in over 20 countries. According to Stanford’s most recent study, the asset class has produced an average aggregate pre-tax IRR of 33.7% and an ROI of 6.9x.  Unlike traditional private equity, the entrepreneurs who raise the search fund (“the searchers”) focus on acquiring one business and actively taking part in its management for the long term, often as CEO and/or CFO.

Harris: How did you learn about the search fund model?

Lulli: In the fall of 2016, I attended the Invest For Kids conference in Chicago. Every participant received a copy of The Outsiders, by Will Thorndike, the founder of Housatonic Partners. After reading the inspiring stories of the eight CEOs described in the book, I researched Will’s background and discovered he was also an experienced investor in search funds. At that point, I dove into the online treasure trove of information on the search fund model and discussed the topic  with several friends in the financial industry. One of them was applying to business school at the time and mentioned that many MBA students learn about the model as an efficacious way to become the CEO of a small to mid-sized business. In fact, 75% of search funds are founded by MBA graduates within two years of their graduation. The more I learned about search funds, the more I became convinced that this was the path for me.

At the time, I didn’t know anyone who had any connection to the search fund world, so I began a broad outreach to current and former searchers.  Most of my 50 cold emails received a reply within a few days. I had never seen such a collaborative community of brilliant and humble entrepreneurs. The nascent industry’s pay-it-forward culture resulted in a series of introductions that led me to Martin Steber and Sandro Mina, the founders of Boston-based search fund investment firm Relay Investments (“Relay”).

Relay is one of the largest and most successful global institutional investors in search funds. When we first met, Martin and Sandro had just launched their second fund (Fund II). I proposed a two-year apprenticeship during which time I would join Relay and learn as much as possible about the search fund model. I told them about my hopes of one day raising capital to buy a business in Peru, where my family is from. After a rigorous interview process, they offered me the opportunity to join the firm as its first employee. Over the next two years, we raised a $78.6mm fund, hired three more investment professionals, and executed 16 operating company investments around the world for a total transaction value of $350mm. Martin and Sandro have been incredible mentors, and I’ll always be immensely grateful to them.

Harris: Tell us about your new  search fund, Colca Capital

Lulli: In April 2019, Diego Febrero and I launched Peru’s first search fund, Colca Capital (“Colca”), in Lima. I met Diego shortly after joining Relay, following his MBA internship at one of Relay’s portfolio companies in Mexico, AlphaCredit Capital. Following being awarded his MBA from Columbia Business School, he worked as head of M&A and Investor Relations at Alicorp, a multibillion-dollar public CPG company based in Lima. We have an industry-agnostic approach in our search, but avoid cyclical, capital-intensive, and extractive businesses. We’re conducting a nationwide search with a primary focus on the Lima region, which represents one-third of the country’s population and half the country’s GDP. Our investor base is comprised of current and former CEOs, institutional investors, and serial entrepreneurs from the United States, Europe, and Latin America. Relay Investments and Housatonic Partners are our lead investors and we’re  honored to have had their support from the beginning.

We’re dedicating most of our time to businesses in the $2-10mm EBITDA range with margins over 15%. The ideal target generates recurring revenue from providing B2B services to a blue-chip client base. We’re especially interested in industries growing faster than GDP with significant fragmentation and no dominant player. Colca aims to build on the company’s legacy, providing a transition for the seller of a family business who may be seeking his or her retirement, or perhaps simply a change of pace. We bring the operational expertise of a strategic buyer (from our investors’ network of operational advisors and industry experts) and the financial sophistication of a private equity firm without the disadvantages of either for the seller and the company. We have the flexibility to accommodate the structure of the transaction to the needs of the seller, as well as the resources necessary to execute a rapid and strictly confidential acquisition process within 90-120 days.

Harris: Why did you choose Peru?

Lulli: Peru has the fastest growing major economy in Latin America with the lowest projected inflation and currency volatility . Although the country has private equity activity, almost all the major funds focus on acquiring companies with over $10mm in EBITDA, leaving our target EBITDA range of $2-10mm almost untouched. We estimate that there are roughly 4,000 family businesses in our target range, so the market also has more than enough depth.

Harris:  What makes your fund unique? Are you innovating at all on the traditional search fund model?

Lulli: Over a year ago, one of my cousins introduced me to Julio Ramirez, another Peruvian interested in search funds. Diego and I spent a lot of time with Julio prior to launching our fund, and we decided to cooperate together as no other search funds have before. Julio received his MBA from Wharton and previously worked as a VP at Advent International, a multibillion-dollar global PE fund, in Bogota and Lima. His search fund, Vira Capital Partners (“Vira”), officially launched June 3, and nearly all its investors are also investors in Colca to avoid any potential conflicts of interest.

This unique partnership gives us the flexibility to buy two separate businesses, or unite the funds to buy one larger business. Our collaborative model allows us to combine our individual networks, which has already proven useful in obtaining warm introductions to business owners and industry experts. We bring all potential deals to a collective investment committee meeting every Monday, which facilitates a robust discussion and forces us to better understand the companies we’re analyzing. We’re all direct, process-driven investors who don’t take criticism personally, so we work well together. We currently share offices with Vira and we gain economies of scale by splitting legal and accounting expenses (among others). To come full circle, Will Thorndike, whose book The Outsiders sparked my personal interest in becoming a great CEO, invested in both Colca and Vira. We’re thrilled to have him and his team at Housatonic Partners supporting us on this entrepreneurial journey.

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