Andrei Papayanopulos started at the University of Chicago Booth School of Business with the aspiration to raise a venture capital fund in his native Mexico, where at the time, he said, VC “was pretty much nonexistent.”
But after visiting several VC firms in New York, he felt the model too risky. So he explored different paths, and found a fit in search funds.
Papayanopulos in 2014 partnered with Vicente Ariztegui Legorreta, a Harvard Business School alum he met at an event for Mexican MBA students studying in the U.S., to launch Arpa Capital in Mexico City. Within seven months they raised a search fund and acquired Mexican insurance brokerage Sekura – a remarkable sprint, given that most searchers take one or two years to get to acquisition.
Between 2015 and 2020, through both organic growth and acquisitions, Sekura grew over 6 times revenue and over six times EBITDA. In January, less than six years after the transaction, private equity firm Australis Partners took a majority stake in Sekura and Arpa Capital exited.
Papayanopulos, MBA ’14, is Chicago Booth’s first “round trip” for an international search fund entrepreneur, said Alex Hodgkin, a Polsky Center Entrepreneur-in-Residence and senior advisor to Booth’s Entrepreneurship Through Acquisition (ETA) program.
“In accomplishing this he also generated a fantastic outcome for investors, hopefully inspiring others to support these endeavors,” said Hodgkin, CEO of the financial services consultancy Intrinsic. “He sets a great example for international students at Booth seeking to embark on the journey of acquiring and operating a business, demonstrating not only that it is possible, but can also be incredibly rewarding.”
Hodgkin played a key role in setting the stage for Arpa Capital’s success, Papayanopulos said. He offered counsel when the ETA program was in its infancy and, critically, introduced him to Arpa’s first U.S. investor, whose involvement made other U.S. investors more comfortable getting on board.
“I always tell searchers that the initial anchor investor is key,” Papayanopulos said.
Papayanopulos worked at private equity firm Nexxus Capital in Mexico City for several years before enrolling at Booth. He has his bachelor’s degree in industrial engineering from Universidad Iberoamericana in Mexico City.
During a recent interview, Hodgkin asked Papayanopulos how he steered his debut search fund to such a successful finish, what he learned along the way, and what he’s up to next.
The conversation has been edited for length and clarity.
Alex Hodgkin: You guys were fairly fast in your acquisition. What did you do?
Andrei Papayanopulos: There was a pretty fair amount of luck there. But what we did when we started to search was we basically mapped out all of the participants in the investing ecosystem here in Mexico. We talked to PE firms that that were in Mexico and essentially were looking at larger size deals. And we told them, “If you see a good deal that is below your investment scope, then it would be great if you could actually give us a contact and see if we can close that transaction.”
And by reaching out to PE firms, I reached out to Juan Quiroja, who is a Booth grad. He was working at Darby here in Mexico. And he said, “I don’t have any deals that we can actually give you, but we invested in Central America in an insurance brokerage firm. We rolled it all over and we acquired several other competitors, and it was a great transaction.” He said, “Here in Mexico, we want to execute the same type of transaction, however we know from the transaction we did in Central America that we have to have an operating arm to actually execute this, and we simply don’t have it.” So he said, “If you look into the space, and find a company, we would love to co-invest with you guys.” And that’s the first time we really heard about the insurance brokerage space.
So I reached out to the insurance broker that sold all of the insurance for the private equity firm I used to work for prior to going to Booth. I told him, “Can we have a cup of coffee, just so that I can get to know a little bit about the space.” My partner Vicente and I went with him, and he said, “Listen guys, you’ve come at the best possible time. It’s not public, but we’ve got an offer from a strategic investor, but we don’t want to sell 100% of the company.” And also, he said, “We want someone to take care of all the operations, finance and whatnot so we can be purely focused on selling and growing the top line.”
So once again, it was luck, it was a perfect match for us, because Vicente and myself, we don’t have the selling profile.
Alex Hodgkin: There are a couple things there that are worth noting. The first one is you guys did a very effective job going to private equity firms and cultivating not just deal flow, but dialogue, and flushing through investment theses and identifying opportunities. And then acting on some things that may have been below their threshold with regards to execution and deal flow. That was something unique that you guys executed on that I haven’t heard about other searchers doing, frankly, well.
There is one other thing I’d like to focus on, which is you guys are international and you were one of Booth’s first international search funds, and certainly our first international full round-trip success. In raising the capital for the search and raising the capital for the acquisition, as an international searcher what were some takeaways that folks should take note?
Andrei Papayanopulos: We had this conversation with many prior search funders here in Mexico towards what would be an ideal composition of local investors and U.S. investors. And I think that’s a big thesis if you’re not searching in the U.S.: what should be your investor composition? We had a lot of feedback towards both extremes. There were some search funders here in Mexico that told us, “You have to raise 100% of the capital in the U.S., because investors in the U.S. know the model.” And there were other search funders who said, “No, you have to raise 100% of your capital here in Mexico, because once you invest in the company local investors are the ones that are going to be able to create a network and open doors and help you grow the company.”
So the way that we thought about it is that both opinions were spot on. There was value in both the U.S. and Mexico. So we actually ended up raising close to 60% of the capital here in Mexico and 40% in the U.S. And I guess that was the right model, looking back. So that would be definitely a key take away for international search funds to think about what should be the right mix when raising the capital, because investors in the search fund are involved. And picking the right investors definitely helps towards the outcome.
Alex Hodgkin: Moving on to the operating part, what was your biggest surprise when you stepped into the business on Day One?
Andrei Papayanopulos: You tend to underestimate the time and effort you’re going to spend in the company. And this may be my experience, because prior to investing and raising a search fund I did not have as much operational experience. The vast majority of my experience was on the investing side. And on the investing side you have a lot of time to be on a spreadsheet or in PowerPoint thinking about strategy, thinking about executing X, Y and Z. And once you go to operations there’s someone that has to pull up the switch every day and pull off the switch every night.
And it was a big surprise the amount of time initially you end up dealing with the tiny details, and having 100 emails per day, having people lined up outside the office to get your take on whatever. It was definitely a strain, it was stressful and it entailed a lot of hours. Then at 8 o’clock at night we ended up starting to think how we were going fix many things and focus on the strategy of the company.
Alex Hodgkin: Tell us a little about the exit. How did that happen?
Andrei Papayanopulos: We ended up exiting probably in a weird time frame, because essentially it was during the pandemic. We thought it was the right time to exit because the company had grown over six times revenue and over six times EBITDA. And so what was initially a small company was at that time the second-largest Mexican broker and top 5 including international players here in Mexico. And our roles within the company were more purely operational in the sense that given that it was a larger size company you start getting roles that really focus on individual areas of the company. We thought that my partner and I were not the right guys to keep on running the company, we thought the company should get a CFO from the industry, a CEO from the industry — people that had vast experience in the industry. And we also thought that there were a little bit too many cooks in the kitchen.
We hired an investment banker to do the process and bring those exit opportunities to all of the shareholders in the company because that third party would not have any conflict of interest.
Alex Hodgkin: What do you think you did differently or special that resulted in this fantastic outcome? I don’t want to hear “it was luck.”
Andrei Papayanopulos: One part was my partner and me being really aligned towards knowing what was the objective, what was the end game. And not only the end game, but how we’re going to get there. There’s many paths to getting to the same end goal and if your vision is aligned, then that helps. We thought that should be the motto within the company. So we spent a lot of time, a lot of resources hiring consultants and bringing the expertise from the periphery and a lot of time aligning the management team of the company and the shareholders that were involved on a day to day basis.
Alex Hodgkin: Tell us about what you’re doing next.
Andrei Papayanopulos: We’re now raising a pledge fund, which basically is a mix between a private equity fund and a search fund. With a search fund you’re getting involved operationally, however, we don’t want to get involved on a day to day basis. But we do believe that to generate value, especially here in Mexico, you have to get involved. We also like the thesis towards investing in resilient industries and companies. But, as opposed to investing just in one company, we are looking to invest in one, two or three companies here in Mexico. And the model, the way that it works is that, as opposed to a private equity fund where you have committed capital and basically it’s a blind pool of money, here investors would have the opportunity, when we are looking into the investments, to either invest or opt out and not invest.
So basically we want to replicate what we did at Sekura at other companies here in Mexico. But we think there are industry experts that need to fill that operational gap, and that our greatest value-add comes from the strategic part, both in finance, operations, HR and whatnot. And by building that team at Arpa and spending time in these companies, we believe that we can generate a good value to investors.
Alex Hodgkin: What would you look at differently now as an investor, versus when you were investing prior to your journey? In terms of due diligence.
Andrei Papayanopulos: When we look at companies right now, we spend much more time assessing top management teams and culture than we did. So when we invested previously in the insurance broker in 2015, we spent all our time looking at the numbers, the financials, the returns and building on the financial model. We learned that essentially if you’re investing within the search fund model, you’re looking probably at three traits, which are recurring revenue, a growing industry and low CapEx. If you look at those traits basically you’re looking into the services industry. If you’re looking into the services industry, you’re looking into companies where human capital is their main differentiator. Then culture comes from the top down. You can have a great vision towards what’s going to be the culture of the company, but if you don’t have a top management team that buys that culture, that is aligned, there’s no way that that culture would will live within the company.