Istria Capital: Year in Review 2023

Coincidentally, Istria made the same number of investments in 2023 as it did in 2022: 26 search funds, 12 acquisitions. Capital deployed was much higher though, c. €12m in 2023. As in previous years, I’ll try to offer some insights beyond the basic figures:

Invested in 26 search funds, 23 of them in Europe.

· Coming from 2022 when we supported several in Latam and the US and entering 2024 with two more invested in the US already.

· The average ticket was c. €60,000, representing 11.7% of the cap table pre-dilution (>12% in European funds, ~9% in the others). This amounts to €1.5m deployed in search during the year.

· The ecosystem is growing so much that our ratio of funds invested vs considered has gone down to 30-40%, even lower in some countries. It’s tough to pass on someone we like and would have certainly partnered with two years ago, but there’s a limit in the number of entrepreneurs we can back. We hold internal debates about this periodically, but the strategy is still the same: we only invest when we are sure we have the bandwidth to provide full support.

· Since January 1st we have already invested in nine more funds and committed to another eight that will launch before June.

· As of now, there are 55 active search funds in the portfolio. I expect this number to stabilise somehow, given the acceleration in turnover. Out of them, 16 have companies under LOI.

Invested in 12 deals (France x2, Italy x3, Poland, Brazil x2, Spain x2, Germany, UK)

· This amounts to ~€9.6m deployed in acquisitions, with one small ticket of ~€400k and all others in the €700k-1.2m range. Additionally, five portfolio companies completed add-ons; for which we deployed an additional €600k in two of them.

· Excluding two that closed in Q1 2023 (still fund I), the average figures for the ten companies in fund II are: €3.1m EBITDA (range €1.5-6.1m), 34% margin (range 14%-71%), 5.4x EV/EBITDA (range 2.8-8.7x). Which point towards slightly bigger and cheaper businesses (on paper) vs those in fund I (see last year’s note).

· Acquisition ratio (acquisitions divided by terminal funds) in the aggregated portfolio sits now at 79.7% (51/64). Istria participated in 37 of those 51 deals, for a hit ratio of 72.5%. So while the percentage of new funds invested has gone down, our hit ratio in acquisitions is still very high –a sign of our involvement and commitment to support entrepreneurs all the way. That said, I expect these figures to decrease a bit in the coming years, in line with the development of the asset class. One of the most experienced US investors once told me: “at the beginning, I was investing in 90% of the search funds that reached out to me, then in 80% of the deals they brought; eventually both numbers went down to the range 20-40%”. As of now I can’t see Istria going that low.

Some thoughts on the market. The usual disclaimer: I mostly follow the European ecosystem.

Until recently, most searchers with a strong profile and a good understanding of the asset class (having done the homework in advance) were able to put together a strong cap table and launch. Sadly that is not the case anymore. Now we see candidates fulfilling both conditions who can’t manage to raise. This is the main change I’m seeing in the market.
Four recommendations on that: 1) timing may be important, hence plan in advance and reach out to investors several months before your target launching date, 2) provide relevant information on sectors or investment theses, as a way to demonstrate your ability to detect opportunities, 3) show that you understand well the asset class and its dynamics, and 4) do your due diligence and choose deliberately which investors you want to partner with –the first few names in your cap table may determine how the rest develops.
Another relevant change. For some time, considering the macro environment, it seemed that any ok company at 5x was a good deal. Not anymore. Aim to acquire an exceptional business at a reasonable price. Occasionally, a very good one at a great price may also be worth it. With the arrival of new capital, more average deals will happen. Some of them will turn out well (hopefully all of them do!), but that’s not the kind of deal and the kind of risk for which most entrepreneurs left successful careers.
As I repeat so often lately, the main learning during the first few months of search is developing a sense of what is good enough for you. If you’re 100% convinced of your deal, without fooling yourself, it’s much easier to convince investors too. Aim to set a bar as early as possible. If then you decide to adjust it, that could be fine as long as you’re conscious of the risks.
Growth is bringing a lot of noise, especially on the marketing side. The more information that gets out there to mainstream channels, the more attention the ecosystem attracts, the worse for entrepreneurs and their chances of closing proprietary opportunities (except maybe in countries where search funds are very new). I guess this is an unpopular opinion, but I hold my ground firmly.
It’s great to see the search fund model spreading to more countries, even if Istria is not yet ready to invest in them. With the launch of fund II, we had the idea of expanding to other regions, but the activity in Europe and our own role here keeps us busy and unable to cover more geographies, except for the frequent investments in Latam and the US.
A story that almost closes the circle: Luiz Felipe Pereira S. interned with us three years ago before going to INSEAD, where he became President of the INSEAD ETA/Search Fund Club, then launched his fund D1 Capital in Brazil with his friend Matheus B. Silva, and a few weeks ago they acquired what we believe is an exceptional company. We are proud investors and hope to continue the ride for a few more years. We also expect to repeat this story with others, very soon.