Tiago: We were there meeting with them, he had a few pictures on the wall about the company, the evolving business, and he started saying, “So this is how the business is right now, this was five years ago, this was ten years ago, and this is how I started,” and we see a picture of a very small kind of container and I say, “Oh, so you started the business in the container?” and the guy is like, “No, no, this is where I used to live. I lived in this small container and I was doing my business at the same time.” And he’s like, well, okay, that’s kind of a life story.” So those little things that I think make me the search, I mean, loving it every day, meeting these kinds of people that have such incredible stories and can teach you a lot without even having a business degree.

(intro)

From SMEVentures, it’s The Search Fund Podcast, a show about hungry entrepreneurs who, instead of starting a business, decide to buy one. These are their stories of success, failure, and the lessons they’ve learned.

Jake: This is Jake Nicholson of SMEVentures and on today’s show, we’re joined by Tiago Paixão. Tiago is an example of a search fund entrepreneur with a fairly traditional MBA background, bit of banking, bit of consulting, who decided to take quite an atypical career path post MBA. And what made Tiago’s search fund experience so remarkable is that he launched his search fund in Portugal at a time when only one other search fund had been raised and zero acquisitions had been made. As you listen to this conversation, pay attention to how Tiago describes his decision making at each stage of his journey. His drivers to make changes and take leaps are not always what you might expect, but I’d argue they will equip him well to outperform the average CEO of a small business. 

(interview)

Jake: Tiago, thank you so much for joining us today. We haven’t had anyone from Portugal join the podcast so far and I’m very excited to hear your story and share it with our listeners.

Tiago: I’m glad to be here and thank you for having me.

Jake: Let’s start, as usual, from the beginning. Where did you grow up? Are you Portuguese by birth?

Tiago: Yes. So I’m Portuguese by birth, I was born in a medium city in Portugal called Coimbra. It’s a city very well known for its old university. I came from — I mean, my parents are both in the academic, but they’re both academics so they’re professors at the university. And so, during high school, I never actually had contact with the business side or the entrepreneurship side of business. And so I mean, yeah, I did my studies there. I schooled in Coimbra and was not only when I moved to Lisbon for university that I actually started having contact with more economics and business side of entrepreneurship as well.

Jake: Got it. So, business was not part of your childhood. What did your childhood look like? Your parents were academics, were you academically inclined as well?

Tiago: Well, not really, actually. I would describe myself as a good student. I was probably not top of the class, but I had good grades. I always tried to have a balance between being good at school but also have some social life. And, I mean, looking back right now, I wouldn’t say that I had a very strong interest while I was growing up or while I was in high school in any particular subject. I mean, I liked math, I liked I mean economics a bit, but I think at that point, I wouldn’t see or I never had in my mind what I wanted to do when I was an adult or what type of career I wanted to pursue.

Jake: Did you have childhood dreams? Did you wanna be a professional soccer player or a police officer?

Tiago: Yeah. I guess everyone, I mean, especially here in Portugal, when they’re young at some point in their lives, they wanted to be a professional soccer player, but I guess, for me, when I reached like at least 12 or 13 years old and I realized that I wasn’t that good at soccer, that, I mean, those dreams passed a little bit.

Jake: Sure. So you went to university in Portugal. For those of us less familiar with European universities, can you tell us a little bit about Nova School of Business and Economics?

Tiago: Yeah, sure. So, yeah, so I went to university in Lisbon and so it was — I moved from parents’ house to Lisbon. I mean, Nova University is, I mean, one of the top schools, business schools in Portugal. And that was basically why I wanted to go there as well. I think the first reason was obviously because of the quality of the university but second one was also I had this wish to leave my city and go to a bigger city where I can, I mean, have contact with the front line of business, I mean, being in the financial capital of Portugal and being able to interact with business leaders or even economists or politicians so that at least I can, well, start my journey or have more contact with people in this environment, which, at that time, I didn’t know if I wanted to pursue or not but at least I was in the center of things and I could see if this is what I wanted to do or not in that case.

Jake: So did you know — can you remember when that seed of interest in business started? You said it wasn’t there as a child and your parents weren’t businesspeople but you wanted to go to the big city to be closer to the business world. When did that start?

Tiago: Yeah, I think it started, well, back in uni. Well, this was interesting, so I was in uni while there was this big financial crisis of 2008 and since I was in economics, that’s where my interest by economics, economy started following what happened in the crisis, following the macro trends, the markets, and that was my first outside interest when I was in university, not actually in the business side but more on the economic side. And I guess it changed over the years, even during uni, my last years of the university, I started to get more interested in finance, not only in economics but in finance, in the stock markets, in all those investment banking things. I read all the typical books at the time. And that’s what made me actually afterwards pursue a master’s in finance in the same university but more focused on stock markets, on corporate finance, and that’s what I did after my undergraduate in economics.

Jake: And what was it about finance that captured your interest?

Tiago: I guess it was a very hot topic at a time, not for very good reasons, actually, but it was after the financial crisis and when I was learning about the economic — what happened economically after the crisis, I started to be more interested in what exactly caused it and the financial systems and the instruments. And when I started to get a bit more interested in that and I started to read more books about it, it sounded quite exciting. And the more I read, the more excited I would get about things and the fact that I was, well, in the master’s in finance afterwards and I was learning not only on the academic side, then I would see things everyday happening in the news, I guess it made me want to experience that live in the field. And that’s where I’ve, well, after my master’s in finance, tried to, well, find a job in London, and I did, and I spent a year in London in investment banking.

Jake: So it sounds like, Tiago, what really fueled you was less, at least in those initial years, we’ll talk about later, but was less professional accomplishment and more really academic interest and intellectual curiosity that brought you to finance. Did you have any hunger to build wealth at that early age?

Tiago: I mean, obviously, that always comes into perspective. I mean, especially when we are in a business school, in the competitive school where you see, you know, your colleagues striving for success, for good careers. I mean, obviously, that was top of my mind as well. And the finance thing, I think one of the things that also interested me is that you can conciliate the intellectual stimulus with the financial part as well, right? And so I think, at that point, both things weighted in my decisions, but I’ll be honest, I think at that point, I really just wanted to be exposed to different things and that was an interesting thing and I said, okay, let’s do it, let’s have an experience in London and whatever happens happens. And it’s interesting because what ended up happening was that I was in investment banking in London and I ended up understanding that this was not exactly what I wanted to do.

Jake: Yeah, a year is not a very long time to spend in a job.

Tiago: At first it was interesting, I was learning a few things, but at some point, I said, okay, I mean, this is interesting but it felt to me like we’re actually playing a game where everyone knows the rules but no one really knows what the ultimate goal is or the ultimate objective. I mean, I was dealing with things that I knew what I needed to do but the exact underlying of the structure of the complex financial product, I didn’t actually understand it and I didn’t understand what was the ultimate goal of what I was doing. And so, at some point, I said, okay, this is interesting but I miss the understanding the impact that I’m having on the economy or on the community or something like that. And so I found that, okay, it’s interesting but probably I think not what I want to do in the future, and that’s when I decided to leave after only one year. Also, it coincided with a period where I had a very interesting invitation to get back to Portugal and join a recently created private equity firm in Lisbon.

Jake: OxyCapital, which, as an American, “oxy” means something a little bit different. I presume it didn’t have anything to do with illicit pharmaceuticals.

Tiago: No, no, no, no, far from that, yeah. Yeah. I actually don’t know the origin of the name but I think it was something that could be pronounced the same way in Portuguese, Spanish, and English and so they chose that name. I mean, when was hired, the name was already chosen, and I was hired as an analyst so I didn’t have much say in it.

Jake: It’s not your fault.

Tiago: Yeah.

Jake: So a boutique private equity firm working with SMEs. Can you tell me a little bit about the deals you had exposure to there?

Tiago: Yeah, sure. So, it was kind of an interesting period of my career. I think this is probably where I learned the most and faster because I joined in 2012, it was a very tense period in Portugal at that time, during the sovereign debt crisis, Portugal was severely hit by a big economic and social crisis and so the business feeling was also a bit tense and the firm started, well, as you can imagine, by restructuring business and so we would work with banks and kind of restructure the healthy business that had too much debt and so that’s how it started, then it evolved to other types of funds, growth equity fund, mezzanine fund, real estate fund, and so I think I was very lucky being exposed to that company that grew so much in three to four years. I mean, coming from zero to probably one of the biggest private equity companies in Portugal. I mean, when you grow so fast, even when you’re an analyst, you always — you have to grow as a professional very quickly, right? Because there are things to do, you cannot hire experienced people at the same pace. And so I had the opportunity to do things that probably in another firm, an analyst wouldn’t be able to do, like negotiating deals, lead some smaller deals with SMEs, being on a board of a couple of companies. And that’s where I think I saw myself, okay, this is the environment I want to be, this is what I like to do, being with the companies, being with SMEs, understanding the impact that my decisions or the decisions of the management have not only in the company but in the community around and I was very lucky to be able to be with such, well, bright people that worked in the company. They were all experienced, or either consultants or bankers, and that’s where I really learn not only M&A but business wise a lot.

Jake: So you spend about three and a half years there, you get to enjoy this ride of not only a fast growing company but also the work of a private equity professional, which sounds like, for you, was a big step away from equity trading at Nomura and more aligned with your underlying interests and drivers, correct?

Tiago: Yeah, no doubt, exactly. That’s where I actually understood that probably the finance side that I really liked was more on the corporate side and less on the market slide, so to say.

Jake: When and how and why did your time at OxyCapital come to an end? I think you went straight from there to INSEAD to do your MBA. 

Tiago: Yep. 

Jake: Sounds like you were on a pretty good ride there and had you stayed, I imagine the ride would have continued. Is that right?

Tiago: Yeah. Yeah, that’s right. I mean, I got into a point where, I mean, I really loved what I was doing but I was at a time in my career where, okay, I could go all the way and probably stay there for another five, ten years, but I wanted to have this thing about being exposed to different realities, environments, and cultures and countries and so I thought that it was the right time for me to try to do something different and trying to go abroad, see other things, be exposed to other cultures, other types of people, other mindset, and I felt the best way to do this was to go to the most international MBA in the world. And so that’s what I did. I applied to INSEAD and I did my MBA in 2016. I spent a couple of months in Singapore, a couple of months in France, and, curiously enough, I did not do the Entrepreneurship Through Acquisition course at INSEAD but I did it in the exchange period I had in Wharton Philadelphia and so that’s where I had the first contact with the search fund.

Jake: Just to belabor this point a little bit, I’m fascinated hearing you describe your decision making process at different points in your career. Again, here it sounds more introspective and driven by intellectual curiosity, wanting to surround yourself by different ideas and different people from different parts of the world. You didn’t say, as most people do, you know, “I wanted to change industries,” or, “I wanted to advance more quickly to the C suite and I saw the MBA as a way to get there.” You saw it as a way primarily of rounding out yourself as a person, which I think is really interesting.

Tiago: Yeah, I mean, if I could say so, when I was in my MBA, if after the MBA, I could have gotten a job that was similar to what I had at OxyCapital but probably in a more international environment, I would probably be fine with it and so it was not the specific kind of job that I wanted to change, it was more, yeah, the context and my personal side of it, I thought it was an opportunity for me to see other things. And, obviously, I mean, when you do an MBA, there’s also career opportunities that come up and that goes with what I was expecting as well. 

Jake: So you didn’t do the ETA course at INSEAD, which is kind of provokingly titled Realizing Entrepreneurial Potential, but presumably that’s where you learned about the search fund model>

Tiago: Yeah, exactly. I took the Entrepreneurship Through Acquisition course in Wharton, as I was saying. I learned — that’s where I learned the search fund model. And, to be honest, at that time, I thought it was very, very interesting but it never occurred to me to do it, at least not on the short term. I was, as I said, I always had this idea of being exposed and trying to learn as much as possible before I do something more permanent or more long term. And so I think, as 80 percent of people in an MBA, I was looking to find a job probably in consulting and so I came to know the search fund model while at the MBA, not at INSEAD, but at Wharton, but at that point, it sounded interesting but it didn’t sound like something I would do, probably not in the next few years. Probably also because the course I did was very focused in the US, as probably most of the courses in US business schools. I mean, never having worked that often outside of Europe and outside of Portugal, it didn’t seem to me like a viable option to do something like this in the US. And it was still a very slow market I’d say in Europe at that time, the search fund market there.

Jake: So then you went to Blue Ridge Partners, which is a boutique consulting firm focused on revenue growth, as I understand it.

Tiago: Exactly. 

Jake: Back in London. Was this a deliberate choice or would you have rather gone to one of the big firms? Or how did you make that decision?

Tiago: It was a deliberate — I mean, obviously, I thought a lot about it. I interviewed with a lot of firms. I interned at another consulting firm during the summer. I think my choice here was I was looking for a consulting company, but I really wanted to first have projects that are specific on one kind of activity, so to say. I mean, I wanted to learn and be exposed to a specific type of project that is not looking at the company and find out what the problem is but coming already with solutions and learn from a lot of projects that have been done in other companies or other countries, the same firm. And so Blue Ridge, the fact that it’s specific only on revenue growth projects, it really appealed to me and that’s because I saw — I mean, I had a lot of friends in consulting and I heard about, I mean, stories of projects of cost cutting or operational projects and I always thought that the type of projects that I really liked was more on the growth side, growing the company, growing the business, how we should achieve this value creation lever, and so the fact that they only focused on that was key for me. And the second thing is the fact that I could work with mid-market companies and Blue Ridge focused more on the mid-market sector. I’d say 90 percent of the companies we worked for were owned by private equity firms. And so that was also, I mean, coming from a private equity background, really interesting to be a little bit in a more niche consulting firm rather than a generalist consulting firm on the other big consulting firms. So that was my — the reason why I decided to go for Blue Ridge.

Jake: When you finished your MBA, the search fund was an interesting concept but not a near-term reality for you, but two and a half years later, you launched a search fund. What happened during those two and a half years at Blue Ridge Partners that led to that decision?

Tiago: So it’s an interesting story. So, at some point in my Blue Ridge Partners life, as I think it happens with almost — with a lot of consultants after MBA, I started to think about, I mean, what’s the next step, right? I mean, I didn’t feel I wanted to do the whole career, the whole consulting path, and so I started to think, I mean, what should I do next? I weighed several options. I mean, going to a startup or going to management position and, at that point, probably midway or after one year and a half or two years, I didn’t have the search fund in mind and it was not only up until a friend from high school, a very good friend from high school, Leonardo, he was doing an executive MBA at LBS and, fortunately, I had a spare room in London and so he was staying at my place every two weeks that he was coming and he was just learning about the search fund model at that time. He was very excited about it, about the search fund model. We would discuss his lectures and his classes and that’s where, well, okay, I remember the search fund model from my time in MBA and let me look into it again, let me go back and see what is the model again. And that’s when it all started. Then he had a similar background as me so we were together in high school, we’re both from the same city, Coimbra. He did PwC for a few years and then he was working at a private equity firm that was actually competing with Oxy at the time and so when we were both in Lisbon, we would go out for dinner and discuss other deals that we were doing or friends that were launching in the market or specific companies that we liked. And there was also this — there was always this thing about somewhere in the future, we would do something together, we don’t know exactly what but the feeling was there. And so it was like this set of events that all happened at the same time, me being in London, him being at the executive MBA, he’s staying at my place that the search fund model, well, came up to our lives and we started investigating whether we should do it or not.

Jake: And this is Leonardo?

Tiago: Exactly. Yeah.

Jake: Leonardo Cavalho, who is still with you as your partner today. 

Tiago: Yes. Yeah, indeed. 

Jake: If I could dig a little bit deeper into that, what was it that pulled you upon that second review of the search fund model? Was it the presence of Leonardo that made it more feasible? Was it some light that he shed on the possibilities that drew you in or some development in you that made it more feasible and attractive? What did you see that second time around?

Tiago: I think it was a mix of several things. Definitely some of what you just said. I think when I’ve looked back at the model, at first, we were very skeptical that we would be able to fundraise for even if it’s a search fund but for a fund, because for us coming from a private equity background, and especially probably in Portugal where investors are very risk averse and our idea that people that can fundraise funds are like people with 40 years’ experience and partners at consulting firms or partners at investment banks that have a real track record and so we were — I mean, it was an interesting idea but we were very skeptical that we would be able to do it just because we feel that investors would invest in us, and I think that change when we were investigating the model and I had an informal conversation with investor, with the Spanish investors, as I remember, and I just explained, I’m like, “Look, this is very informal. I’m still working in consulting but I was exploring about the search fund model,” and he basically told me, “Well, with your profiles and if you are up to it, we’ll be happy to invest in you and I think you have the right profile to do it.” And I think that’s where we kind of changed the perspective and said, okay, maybe this is something we should definitely look into it because it’s feasible to fundraise for it. And so I think, answer to your question, I think it was more of an eye opening that we were able, we can do it. I mean, the search fund model was always there but I never thought that it would be feasible for us without a big track record or a lot of management experience to be able to fundraise a fund for a small country like Portugal. And when we started at least with investigating and we understood that there would be a way to do it and investors were hungry for it, that we started to see it with other eyes, I’d say.

Jake: What was the history of search funds in Portugal when you decided to launch your search fund there?

Tiago: So, the history was there was one search fund still searching, one other searcher. We spoke to him a couple of times. I mean, this was, I think, he was a year and a half in his search and he still hadn’t acquired. I mean, he ended up acquiring afterwards, so it was it quite of not that nice of a track record for Portugal when we started fundraising because there was only one and he hadn’t acquired yet. And so that was it. That was the whole landscape of search funds in Portugal. And so we also had a few investors saying, “Okay, I don’t think the model is yet approved in the market. I haven’t seen any acquisitions,” and so had some investors that backed down because of that. And so that’s also another reason why for us it was — when we first started to think about it, we said, okay, we’re gonna be probably the first or the second ones to try to prove the market and try to prove the model in this specific market. And so it was not — there was not a big track record at the time in Portugal.

Jake: Which is interesting because your neighbor, Spain, already at that time was quite a developed market in the search fund space. But did you limit your search to Portugal or were you also looking cross border?

Tiago: No, we — there was also an interesting conversation we had at the time, so there was the option of doing Portugal and Spain. I think we were honest since the beginning and saying that we wanna do it in Portugal. We think there’s opportunity. It’s the market we know. I mean, we both work there. We both know the channels, the brokers, the companies. And so there’s no point of doing an Iberian search where in Spain, you have probably ten searchers already searching, Spanish-based and native, why would we, two Portuguese, would be searching in Spain? So we decided to focus only in Portugal, in our market. And it’s true, at that time, Spain was already booming with searchers, and Portugal wasn’t. I think there’s also a difference between sizes of the market. But I think mainly it’s because search fund model in Spain is very hot through the — I mean, is a subject that was very hot at the university at the time, at IESE, and so they really pulled out the model from an academic perspective and we didn’t have that in Portugal so the model was not well known in Portugal at the time.

Jake: When it comes to the search process, the search phase, on a scale of, on one end, you’re loving every day of it, to kill me now, how much did you enjoy the search process? 

Tiago: Well, I would say it was very close to loving it every day. I think it was actually a very, very good experience. I mean, I remember — and here, I think, we were also quite lucky, both of us, because, I mean, we — I mean, Leonardo was working in the PE firm in Portugal so he’s been working with SMEs for the last six years and with brokers and with banks and I had the experience as well and so from day one, we kind of knew where to start and what to do and so it was very, very interesting. I really liked the first few months of search, for sure. So we started the search in September 2019 and so the first, I’d say, four or five months were very — I mean, I was loving it every day, for sure.

Jake: One of the elements I find most enjoyable, or at least entertaining, is meeting the business owners, such a variety of business owners, who are all entrepreneurs themselves but very different types. You can, you know, find some real characters in that community. Did you come across any particularly colorful business owners during your search?

Tiago: Oh, yes. Oh, yes. A lot of them. And I think that’s definitely one of the most interesting parts of the search. I mean, generically, you are dealing or you’re talking with people that they have a very interesting job and you want to take their job because you wanna manage the company, but at the same time, they’re completely different from your background. They have completely different backgrounds. Some of them did not go to college, did not even finished high school, and they created this profitable business out of nothing, only with their street smarts. It’s very interesting to see this kind of profile, I mean, thriving in the business community like without even having one business class. So I think that was very, very interesting. We met mainly with older founders. I mean, we have a lot of interesting stories about, for example, one of the owner would really — I mean, I think he really liked to have us there and there was this huge room that he had full of papers where a meeting that should last 45 minutes would last for four hours because every time we asked for a number, just the sales of last year, he would say, “Okay, wait,” and he would stand up, he would look into this pile of paper, he would stand like two or three minutes, he would take your paper and say, “Here it is.” And it’s like, okay, every time we wanted a number, we had to wait three minutes for the guy to find it out in this pile of paper that he had at his desk so it was it was very, very, very interesting. I mean, there’s also an interesting story, and really eye opening, we were there meeting with them, he had a few pictures on the wall about the company, the evolving business, and he started saying, “So this is how the business is right now, this was five years ago, this was ten years ago, and this is how I started,” and we see a picture of a very small kind of container. And I say, “Oh, you started the business in the container?” and the guy is like, “No, no, this is where I used to live. I lived in this small container and I was doing my business at the same time.” And he’s like, wow, okay, that’s kind of a life story. It’s those little things that I think make me the search, I mean, loving it everyday meeting these kinds of people that have such incredible stories and can teach you a lot without even having a business degree.

Jake: Sometimes, searchers worry about credibility with the seller. As you say, they come from quite different backgrounds a lot of the time, they’ve been in the industry for 20, 30 years, they’ve built this business up to a substantial size, and searchers worry about being taken seriously when sitting across the table from one of these business owners offering to buy their business. And even if they manage to get a seller on the phone or to a meeting for a serious conversation, they worry about the seller taking the deal seriously and actually committing to it. What was your experience on that front?

Tiago: It’s true. I think, for us, as I said, we were quite lucky because we were in the business, on that type of business before and so we already had the experience of trying to do these deals and approaching the sellers. And so, at some point, we had that challenge. But we could always say, I mean, look, we’ve worked with this fund or with this company and so, and knowing the sector well or knowing your country well or knowing the companies of your country well, it kind of gives you credibility, even if you talk to the seller and you say, “Yeah, wanna buy your company,” or something of that sort but I see that you are in this sector, I see that this competitor is doing this, and I know that this guy acquired that guy so I think giving a bit more color on the sector on what’s happening gives you a little bit more credibility with the seller, even if you’re just a young guy that wants to buy his company. And I think that resonate well with the sellers. We thought the fact that we had some local knowledge of the companies and of the M&A activity made them at least understand that we, I mean, we knew what we’re doing, or at least we know what’s happening in the market and we are serious about this. So I think that’s how we ended up overcoming that challenge. There was another interesting story about a business owner we met for the first time, I mean, we didn’t even know what the company do in detail, we met him, we discussed the business. I mean, we didn’t have the figures yet. We asked for just sales, EBITDA, something like that. It was one hour, an hour and a half conversation then, “Okay, we’ll send you an NDA and we’ll send you an information request,” and when we left it, after a few days, we ended up knowing through an employee at the firm that knew a guy that knew Leonardo that, he after the meeting, kind of announced to all his employees he was selling the company to us. It was kind of particular situation, it was like, okay, we didn’t even have an NDA signed so it’s kind of a funny story how this guy was already preparing everything even before we looked into the company. So these kinds of things, I think, he was very excited with the possibility and so he wanted to, well, to get the employees excited, I don’t know. I think that was probably the aim of the communication.

Jake: Can you talk about the lending environment in Portugal? How open are Portuguese banks to a typical search fund-type deal or did you look internationally as well? How did your hunt for debt evolve? Did you know what the debt environment looked like before you launched your search or was it a process of discovery? How did that happen? 

Tiago: Yeah, that was what we, since the beginning, saw as a possible challenge to the search fund model in Portugal, because there were some private equity deals but the banks are not very used to do LBOs or lending for this purpose and so we had some challenges in the beginning to have the meetings with banks, but I think I can, well, summarize the lending scene in the story that led to our acquisition. So, we’re doing our search, we started in September, we get to know a company through a broker. This was a company called TECLENA, which we ended up acquiring, and the company was in a conflict, the shareholders had a conflict with each other. We spoke with one part of the family and, at that time, we were very open to any kind of opportunity. And so it was November, we spoke with one side of the family, they went radio silence after a few months. And in December, we realized that they were actually negotiating with this big multinational company the sale of the company. And so, I mean, we said, “Okay, we lost the deal.” In any case, we send kind of a non-requested proposal so we said, “Okay, I know you guys are in a deal with a multinational company, but we will send you this proposal anyway so if you, in the future, you want to talk to us again.” So that continued, we continued our search as nothing happened. And then March 2020 came and the world changed. Obviously, our search changed as well. But like a month, two months after March 2020 so April, May, we get a call from this broker who said, “Look, the multinational company froze all M&A activity in Europe, both families, they were in conflict with each other so they really wanted to sell as soon as possible, they say that they don’t wanna deal with them anymore and so they’re happy to get back to you on the table.” And so we met with them again and that’s — I remember exactly that meeting, they had our proposal on the table and they said, “Well, if this proposal still stands, we’re happy to do the deal with you only with one condition, you need to do this in three months.” And that’s where the challenge started. We were like, “Okay, let’s do it.” So it took a long way to start now with the challenge of the banks, because we’re like, okay, the big challenge here is gonna be how are we gonna make this, the lending part, work. And so that’s where the big challenge started, as I said. We spoke with more than 20 something banks in Portugal, in Spain, everywhere, and there were only two banks that showed some interest in doing the transaction. One of them told us, “Look, it’s gonna be impossible to do it in three months, I’m telling you right away. We will look into it, we will do it, I think we have appetite to do it, but in three months is gonna be very hard.” And we said, “Okay, we’re gonna go with you anyways, just to have a backup plan.” And the other bank said, “We’ll do it and we’ll do it in three months, I think we can do it, let’s do it. Send us some information and we’ll start the process.” And that’s what we did. We went with those two banks, this first bank that said that they could do the deal, they asked for everything, the due diligence, we sent the business plans, all of that, we had several meetings, the bank said, “This was approved in the credit committee, in the audit committee.” Now the committees they had at the bank were already taking care of the admin things. This was two weeks before the three months’ deadline. And they were already telling us, “You can open the account in the bank, in your local bank, we’re gonna do this, we’re gonna schedule the closing,” and one day, they just come up to us and say “Look, this went to the board of directors of the bank, we thought it was a pro forma decision, but somehow we don’t know even how to explain it, they just rejected the deal. They declined. So we cannot do the deal with you.” And we were two weeks before the deadline of our exclusivity agreement. And that’s where — this was the hard moment in the whole of our search, we said, I mean, “We’re done.” All of this work, we were already almost one year into our search, this was the deal we wanted to be working on. We knew that this multinational company was back in the game, the seller was showing us the messages, they were saying that we wanna do this deal, we would pay right away and we do only the due diligence after, we really wanna go back into the game and so — and basically what we decided was, I mean, to be honest, we sat with the owners and said, “Look, we are not gonna be able to do this in two weeks. This happened. We had everything set up but the bank lending fell through at last minute.” And we were quite lucky to, I mean, and we already had created a relationship with them and et cetera and so we were able to extend the period for one month. We started with full force on the other bank and, fortunately, we were able to close the transaction with the other bank one month after what we predicted. And so this is a big story but just to summarize how hard it was or the trauma we had with the lending in Portugal.

Jake: Wow. So you were running both bank processes in parallel? That’s how you were able to get the second one done in just a month?

Tiago: Exactly. Exactly. Yeah. Otherwise, it would have been impossible, yeah. 

Jake: Certainly a lesson there. 

Tiago: Yeah, yeah, for sure. I mean, at least here — I mean, we never believed that they could have done this at the last minute. I mean, we always thought, okay, I mean, it’s done, it’s done. But just as a backup plan, we will always have this second bank that was interested in doing the acquisition and, yeah, and that was what made us being able to deliver. Otherwise, we would be done, for sure.

Jake: So you completed the transaction, you are now owners of TECLENA. What does TECLENA do?

Tiago: So, TECLENA is what we call an MRO distributor, maintenance, repair, and overhaul. So, in other words, it’s a value-added distributor of automation products. So, basically, we source and sell to any kind of manufacturing business or OEM parts, automation parts. The company is divided in four different areas of expertise: hydraulics, pneumatics, electrical motors, and electrical automation. And the first big challenge of a company like TECLENA is we were not technical guys. So the product was very technical, all of our sales reps are technical sales, the founders were both engineers and they started the company based on their knowledge but then we would go, these new owners don’t know anything about hydraulic or pneumatics or whatnot and they were the new owners. And so that was the first big challenge we had at how we’re gonna run a company that is run by or that most people are engineers and kind of the authority comes from your knowledge and your engineering knowledge without knowing a single thing about engineering? So it was quite interesting the first few months on that, yeah.

Jake: Searchers sometimes shy away from distribution businesses that are, if they’re seen to be in the wrong part of the value chain, it could be — margins can be squeezed from either side, and you mentioned it’s a value-added distributor and that value add becomes the key to defending those margins. What is the value add in TECLENA?

Tiago: Yeah. So that’s an interesting question. So here, we — I used to say this, so we do everything since selling a part of one euro at the counter to selling a big hydraulic station for a dam or for a big machine that the station costs 300,000 or 400,000 euros, so everything in between, TECLENA others. And so not only the business is a bit technical, it’s also complex because it has so many nuances, business wise. So we have the value-added part, as you asked, which we think is the knowledge, being able to — any of our customers goes to either the counter or asks or talks with our sales reps and has a problem in the machine, has a problem in their assembly line and we can solve that problem by advising them on the right part to purchase. But not all clients are like that. We also have a counter business. We have four branches across the country. And so it’s a mix between a purely distribution business and the more value-added distribution with knowledge. With some projects that we do, we have to design the product, that we have to customize it for our customer, and so the value of the business — not for the customer but for us is being able to be in all of these types of customers and have a value for each one of them, either it’s stock, either it’s knowledge, either it’s price, and we can navigate to these different types of customers, which also creates a complexity in the business.

Jake: Just a little over a year after acquiring TECLENA, you added another company, JUNCOR, I don’t know if I’m pronouncing it correctly — 

Tiago: Yeah, exactly. 

Jake: — to the family of businesses. What was the structure of that transaction and why did it make sense? 

Tiago: Yep. So, the good thing about this sector of TECLENA is that both me and Leonardo had some experience, or at least had been in contact with companies in the same sector. I had done a few projects while I was at Blue Ridge with companies in the sector and Leonardo also had one of the companies which invested in his PE firm that was kind of on the sector, and so we, although we didn’t understand a lot about the technical part, we had some notions about strategic where we should go and how we should settle the group, so to say. And one of those strategic drivers that we saw was the market was very fragmented and so there were a lot of smaller companies, a lot of small companies, and in Portugal, they were very focused on a specific product. And so every time someone asks me, “What’s the TECLENA competitor?” I have to say, “Well, it depends because these four areas that we work have competitors, per se,” right? The hydraulics competitors are not the same as the electrical motors competitors. And so we had the good thing at TECLENA of being one of the only companies that had such a wide portfolio and that was the way to go. That’s what we wanted to do. So we wanted to add products to our portfolio. And one way to do it was definitely through M&A and so we started investigating what were the companies that could have a better fit to the business of TECLENA, what are the products that would be easily sellable with the products that we already have to our customers, and we found a couple of companies and JUNCOR was one of them and we reached out to the owner and, well, the rest is history, as they say. We started engaging with them and see if he would be interested in transaction. It was a similar type of search fund acquisition, he was a founder who is 60 plus years old, didn’t have any sons or daughters in the business, he was willing to sell, and here we did — it took a little bit longer than the transaction of TECLENA but we did an interesting transaction, a mix between cash and shares purchase and the founder that had a lot of value of JUNCOR is now an investor in the group, so to say, and he’s helping us with the development of the group as well.

Jake: Interesting. So you and Leonardo, who have now been together for a number of years, decided to be co-CEOs. Looks like your official title is co-CEO. Not a common leadership decision. How did you arrive at that structure?

Tiago: We — I mean, even before we started the search and when we started, we always knew that we had kind of complementary backgrounds, or at least that we wanted to focus in complementary areas, so I, having had the experience at Blue Ridge on the revenue growth side, on the sales force effectiveness, we used to do a lot of that, I was more into the commercial side, into organizing the sales teams, to that part of the business, and he, having worked a lot in M&A, in finance, working with at PwC, he was more on the finance side, on the operation side and that, since the beginning, that’s how we started to at least divide the areas of expertise. And we’ve decided, I mean, it wouldn’t — we are, I mean, obviously 50/50 on this. We have the same power, obviously, and we wouldn’t see the title as something very important for either of us. And so the simplest way to do it, instead of trying to find the title that is perceived as similar, hierarchical for the company and for the employees, we just kept it simple, okay, we’re both CEOs. Why think about it? We’re just co-CEOs and our employees know which areas we work more. We are in constant contact every day so we don’t feel the need of having different titles, well, because we’re actually — all of the main decisions and strategic decisions have to be agreed by both so we’re actually co-CEOs of both companies.

Jake: You made both acquisitions, the platform acquisition and the add-on acquisition, during COVID. How has the pandemic affected these businesses? I assume somewhat similarly, given they’re in the same industry. And how have you managed through these unusual times?

Tiago: So, good question. So, the pandemic, it had an effect but I wouldn’t say we are the business that is more affected by the pandemic. So we sell — it’s quite a diversified business. We have more than 4,000 customers. We don’t have a concentration in either customers or suppliers and we’re basically exposed to all industry. And so we had an impact when there was a period in Portugal where actually everything was in lockdown and some of the factories had to close for a few weeks. That’s where we in fact fell, a little drop in activity. But then, when they got back to work, I mean, we got back to the levels of activity we had before as well. So I cannot complain a lot about COVID because I don’t — in all the businesses I’ve seen and I’ve heard, we were not the most affected ones by the COVID pandemic. We are, in fact, the most affected ones by the supply chain crisis that we have right now because, obviously, we are an importer and so, I mean, products that used to take two or three weeks to arrive now take four or five, ten months to arrive and that, in fact, has an impact in our operations. But I guess it’s a macro challenge for everyone and also our competitors are having it so we just have to — the customers have to start thinking about other ways of doing business and probably doing more stock and planning more ahead. So I would say that, COVID wise, we were a little bit affected but not as much as other businesses, but now with the supply chain, we are in front of the hurricane, I should say.

Jake: Interesting times ahead. You launched a search fund a couple of years ago, because you had some goals in mind, goals that probably had been forming and accumulating for some years. Now that you are almost a couple years into running your own business, do you feel like you are on your way to achieving those goals? Do you feel like you’re in your element more so than you have been in previous jobs? Or are there things that still need to change that you need to seek in order to sort of reconcile your current self with your ideal self, I guess?

Tiago: No, yeah, I think so. I’m really enjoying the journey. I’m learning every day and I think one of the most interesting things about managing a company or being a CEO is that you can learn as much as you want. I mean, you can sometimes be a little bit more curious and try to take it to another level of sophistication, I mean, a specific area of your company, either marketing or sales or finance side, or if you just wanna run the operations on a day-to-day basis, you can. And so it gives you this level of flexibility where you can go as fast as you want. And that’s very, very interesting and very good for me, at least, that sometimes when I really want to focus on something and I really wanna take one element of the company to another level of sophistication, I can just focus on that and grow as a professional on that specific area as well. And so I think the fact that I can do that at my current job, also the flexibility of being able to focus where I think I should focus, and having a very experienced group of professionals around me, the company is now 160 people and so it’s a big challenge. We have a strong leadership. And I think all of that, I probably — I wouldn’t see myself having this type of exposure in any other kind of work, honestly.

Jake: Twenty years from now, what do you think you’ll be doing?

Tiago: Twenty years from now? Well, I think I would — I feel that, at some point, I will have for my myself a moral obligation to give back my experience, or at least to help younger searchers or younger entrepreneurs with what I can help, with my experience over the years managing company and doing a search fund and so I would like to be in some kind of role that I can have that, either through being an investor or a mentor or being in a board of a company. I don’t have any particular ideas about operating or not at that point or being in managing or not at that point. I know that I wanna have also this coaching and kind of investor or mentoring role, for sure, so that I can pass on my experience to younger entrepreneurs that wanna make an impact and have an impact in their communities and grow their company, especially in this SME space, which I think is a space I wanna be in, I wanna continue 20, 30, 40 years from now as well.

Jake: I wanna give you an early opportunity to pass on your wisdom and coaching to our listeners, many of whom are aspiring searchers who are deciding either they just encountered this idea of a search fund or entrepreneurship through acquisition or they’re midway through their research process and trying to decide whether this is the right path for them. Given that you have now launched a search, ran a search, acquired two businesses, have not exited yet but are sort of in the middle of that operational phase, what guidance would you give to that listener avatar who is in that decision making process?

Tiago: That’s a good one. Well, I would say, first and foremost, based on my experience, that any — I mean, you don’t need to be or to have a lot of M&A experience or prior experience, I know I had it, but I don’t think you need to have that if you really wanna be an entrepreneur and so the first idea that I wanna transmit is if you really wanna do it, I mean you can do it. You have a lot — the search fund environment has a lot of experienced people willing to help, willing to coach you, and so it’s just a question of if you really want to do it or not, you really want to be an entrepreneur or not. And the second point I would make here is that it can be a lonely job sometimes so you need to have profile if you’re not doing with a partner. If you’re doing it with the partner, you need someone that you can really trust and have some past work experience as well. But I would definitely, definitely recommend the search fund path and not only because of the thrill that it is to manage a company, the search fund company, but also because you will be entering an environment, ecosystem, so to say, with a lot of people that can help you and coach you, even if you don’t have the right or the specific knowledge in a specific aspect. There are always investors, ex-searchers that have been through it, like me or others, that can help you achieve your goals. It’s a process that you can also do it as you like, not every searchers are the same, not every searchers have done exactly the same. Some people are leaning to some sectors, some people lean to other sectors, and so it’s not you, if you have a passion in a specific sector, you can still be a searcher and buy a company on that sector. So, I mean, bottom line, I would definitely recommend if you really wanna be a manager and I would be confident that — I wouldn’t think too much about the challenges or the things that you probably wouldn’t be able to do because you are gonna have a big or an interesting environment around you that can support you during your search and fundraising.

Jake: Thank you, Tiago. You can’t know how perfect those words were for a prospective searcher that I was just speaking with today so I’m certainly gonna send him this episode to have a listen to and I’m sure it will be helpful to other prospective searchers out there as well and current searchers. Thank you so much. Best of luck over the next couple of years, especially now as you’re managing the supply chain issues, but I look forward to following the success of TECLENA and JUNCOR and hearing great things from you and Leonardo in the near future.

Tiago: Thank you so much and I hope I was able to help with my stories. Thank you, Jake.

(outro)

Jake: Listening to Tiago speak, you likely noticed that he’s a sharp cookie who really enjoys a good intellectual challenge. What you also heard is that he learned throughout his career that he enjoys being closer to the operating businesses more than spending his time with higher level investment activities. This preference for proximity to the operating businesses is commonly found among successful search fund entrepreneurs from a variety of backgrounds. And I’d even argue that this preference is almost a prerequisite for achieving outcomes that are both economically and personally rewarding for the searcher. Tiago is now having a great time and is currently evaluating more acquisition opportunities. I look forward to having him back at some point to tell the next chapter of his search fund story.

Thanks so much for listening to this episode. If you enjoyed it, you can find more at the searchfundblog.com or wherever you listen to podcasts. I’m Jake Nicholson of SMEVentures and you’re listening to The Search Fund Podcast.