ONCE THE sick man of Europe, Spanish private equity is experiencing something of a renaissance; though statistics remain depressed, the country has piqued the interest of global heavyweights in the buyout space.
In early February, buyout behemoth KKR opened a Madrid office, joining the growing list of international investors with a local offcina. Prominent local hires such as Blackstone\u2019s appointment of Inaki Echave as managing director for Iberia have also bolstered the market recently. And the current portfolio held in the $2.2bn fund raised last year by Trilantic Capital Partners reflects its increasingly bullish take on southern Europe \u2014 all are based in the region. After the inevitable retrench of international buyout houses and the demise of several local players during the financial crisis, the return of international GPs reflects warming sentiment.<\/p>\n\n\n\n
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\u201cInternational investors realise that the Spanish economy is exporting itself out of recession and that the country is more competitive as a result of structural reforms,\u201d says Carlos Lavilla<\/a>, president of Spanish industry association Ascri and managing partner at Corpfin Capital<\/a>. \u201cWhen you combine the status of the Spanish economy, the investment opportunities and the fact that competition is low because there aren\u2019t many private equity houses here with dry powder to invest, that results in a very attractive scenario.\u201d But are LPs equally convinced?<\/p>\n\n\n\n
\u201cWe just raised a new fund; it was a very successful fundraising and many of the questions from LPs were on Spain,\u201d says one pan-European firm with a Spanish presence. \u201cThey were very keen that the fund invests in Spain, because they feel we will have a few difficult months in front of us, but then hopefully we\u2019ll have tailwind.\u201d<\/p>\n\n\n\n
Meanwhile, for Altius consistency is key, regardless of the recent improvement in the country\u2019s economic climate. \u201cNot that long ago, American clients used to say they wouldn\u2019t touch southern Europe,\u201d says Rhonda Ryan, partner and head of EMEA investment at Altius Associates, \u201cbut I think that swinging between \u2018we want it, we don\u2019t want it, we love it, we hate it\u2019\u2026 that\u2019s dangerous. It is not the way to get long- term sustained performance from any portfolio. You have to be very selective when investing in Spain, so I will probably only look to back the top player.\u201d<\/p>\n\n\n\n
For others, the relatively low numbers of active GPs is a hindrance. \u201cOur approach has always been quite bottom up; we look for the best managers rather than following country allocations,\u201d says Paul Newsome, head of private equity investments at Unigestion, previous backer of Mercapital and Portobello. \u201cAround 10-12 years ago we invested in Spain like we did any other country in Europe. Up until a few years ago, there had always been a good supply of managers\u2026 but in che past couple of years, there haven\u2019t been any funds to invest in; there has been a lack of opportunity.\u201d<\/p>\n\n\n\n
The burgeoning Spanish renaissance could, therefore, present opportunities to new players. \u201cWe would say it is time for new blood in Spain,\u201d says Mounir Guen, CEO of MVision, the placement agent involved in the \u20ac1.25bn fundraise of Investindustrial V in 2012 \u2014 the largest fundraise of a southern European fund. \u201cThe incumbents are set in their ways with just a handful of the smaller groups being popular. You see this every 10 years or so; it happened in the last cycle in Brazil. We are expecting new groups to come into the marketplace.\u201d<\/p>\n\n\n\n
Perhaps new players would have more luck in convincing LPs to knuckle down and write the cheques. While investors seem wary of putting skin in the game too carly, commitments do not seem far off, according to local GPs in fundraising mode. Several have said that meetings with LPs are no longer dominated by macroeconomic discussions, leaving time instead to focus on dealflow and strategy. Nevertheless, the shift in sentiment is yet to show in the statistics.<\/p>\n\n\n\n
Leading by example<\/h2>\n\n\n\n
Fundraising reached an all-time low last year; not a single Spanish GP held a final close. Though a handful of venture funds reached a first close, the only private equity players to hit fundraising milestones were Suma Capital for its Catalan vehicle, and N+1 Mercapital, which has since postponed fundraising following the departure of its CEO. But this could be about to change thanks to the Fondo ICO Global.<\/p>\n\n\n\n
Managed by Axis, the \u20ac1.2bn state fund-of-funds made its first commitments in the closing days of 2013, allocating \u20ac190m across three private equity and three venture funds. \u201cWe realised that the Spanish market is relatively small as a percentage of GDP, The venture capital segment is particularly underdeveloped; we estimate that it is at 50% below potential,\u201d explains Jos\u00e9 Abad, chief economist at the Instituto de Cr\u00e9dito Oficial (ICO), Spain\u2019s state-owned bank attached to the Ministry of Economic Affairs and Competitiveness.<\/p>\n\n\n\n
\u201cWe also realised the market is small because the players are small. If you look at the average assets under management of Spanish players, it\u2019s half the size of other players in continental Europe. The idea was, therefore, to support the enlargement of private equity and venture capital markets by enlarging the average size of existing players and by attracting new players to the market,\u201d he says.<\/p>\n\n\n\n
The second tender process began at the end of February, with a third scheduled for July. And recipients do not have to invest solely in Spain. Says Abad: \u201cWe want to attract international funds, but we know they have to diversify. What we require is that they have a certain percentage of their investments in Spain, or at least that they invest an amount of at least twice the amount of our commitment to the fund.\u201d But the gargantuan fund-of-funds is only one part of a dual programme to lure international investors back: the Spanish government is also working on a new regulatory framework to attract foreign fund managers to Spanish soil.<\/p>\n\n\n\n
\n\u201cTt\u2019s the more domestic companies, which have the potential to be internationalised, that can still be bought at very low prices\u201d<\/p>\n\n\n\n
Paul Newsome, Unigestion<\/p>\n<\/blockquote>\n\n\n\n
ICO\u2019s contribution works on a matching basis, sidestepping any artificial maintenance of the local market. Given that the number of cajas, the Spanish savings banks that historically accounted for 30-40% of commitments to domestic GPs, has dropped from 50 to eight and the allocation to private equity has dried up entirely, its role is more crucial than ever.<\/p>\n\n\n\n
But in a market otherwise devoid of dry powder, could increased liquidity have a negative effect on pricing? \u201cThat is something we\u2019ve been thinking about,\u201d says Abad. \u201cThe good thing about how we are managing Fondo ICO Global is that if we find there are negative effects created by capital injections, we could delay and adjust the next bidding process. We could also select different sectors; debt funds for example.\u201d<\/p>\n\n\n\n
Should the fund-of-funds seek to diversify its commitments, there would certainly be no shortage of debt investors to back. Indeed, the outcome of macroeconomic challenges has played to the advantage of debt funds. Says Lavilla<\/strong>: \u201cSpain has traditionally been a market where banks have accounted for a very high proportion of the debt market; around 85% was provided by banks and cajas, with the remaining 15% provided by the capital markets. So there is a real opportunity for debt funds to come to the market and support SMEs.\u201d<\/p>\n\n\n\n
In fact, a number of credit funds have set their sights on Spain. Local player Oquendo held a \u20ac110m first close on its latest debt fund last year. And a number of large buyout firms present in the region are also known for their activity in the credit space, such as HIG\u2019s credit arm Bayside. There has even been movement in the venture debt space, pioneered by Inveready, which has completed five investments from its venture debt vehicle.<\/p>\n\n\n\n
Hand-picking the best assets<\/h2>\n\n\n\n
Increased liquidity and financing would give stagnant dealflow a much-needed boost. But which segment is most appealing? General consensus suggests that opportunities are strongest in the lower-mid-market. \u201cThe more attractive deals are in that space,\u201d says Newsome. \u201cThe pan-European or global GPs are clearly more interested in the larger Spanish companies that have already expanded their businesses overseas, considering them as any European deal and pricing them accordingly.\u201d Indeed, all deals valued upwards of \u20ac500m in the Spanish market last year were completed by GPs without a base in Spain. \u201cIt\u2019s the more domestic companies, which have the potential to be internationalised, that can still be bought at very low prices. All the large intermediaries that used to be covering Spain went away during the downturn, so there is no competition for these local companies whatsoever. It\u2019s the lower-mid-market firms with the network that are able to source these deals,\u201d he continues.<\/p>\n\n\n\n
As a result, proprietary dealflow is more important than ever, \u201cSpain, more than any other market, is very imperfect in that sense. You really need to be on the ground, turning every stone to make sure you find the odd deal you can work on as a proprietary transaction,\u201d says one local player with an international presence.<\/p>\n\n\n\n
Though hesitancy may linger among the LP community, the decision of international players to establish a physical presence in Spain has been a smart one. HIG was recently strengthened by the hire of Riverside\u2019s former European head of origination Juan Barnechea. Staffing will be crucial as the new kids on the block seek to build that vital network to snare those coveted off-market deals.<\/p>\n\n\n\n
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