European fundraising: Less pain in Spain?

Some investors are starting to look at Spanish funds again – but the country still has a long way to go to convince most LPs.

In August, PEI revealed that Corpfin Capital and Portobello Capital, two Spanish firms, have decided to brave the stormy fundraising conditions and return to market: they’re looking to raise €200 million and €300 million respectively for their latest funds. 

Since the demise of Lehman Brothers, most investors have considered Spain to be a no-fly zone. But there are signs that sentiment may be softening. Corpfin has secured some “good, verbal commitments” from both Spanish investors and international LPs, including a big American investor, one source told PEI recently. Equally, it is understood that both local and international investors are currently performing due diligence on Portobello’s third fund.

“We are monitoring managers to assess their position,” says John Gripton, managing director at Capital Dynamics (which has not committed to either fund). “If the economy does gather momentum, good companies will benefit from a more buoyant economic situation and increase profitability, [which will] possibly improve PE multiples,” he says. 

The investment climate in Spain is “much better now” and it’s “a good time to acquire companies there”, another source tells PEI. “There are a lot of people exiting non-core assets. There’s little equity so there’s low competition, and that means prices are very attractive.”

Additionally, the Spanish government has done a good job in making the labour market more flexible and making Spain more attractive to investors, according to a second LP. For instance, in March, Instituto de Crédito Oficial (ICO), a Spanish state-owned bank, launched a €1.2 billion venture capital fund of funds to invest in small and mid-sized enterprises.

Both Corpfin – which has exited two businesses from its prior fund, including a 4x return from restaurant group Restauravia, owner of the La Tagliatella chain – and Portobello have both done well, says the LP. Corpfin’s last fund is currently showing a money multiple of 1.4x, while Portobello’s last fund is valued at 1.83x. 
According to the LP, these figures would have been much better if the macroeconomic backdrop had been less challenging. “If these two funds had not been faced with such a bad crisis, they would have fared even better than they have done.” 

Nonetheless, as the LP points out, it remains very challenging for most LPs to convince their investment committees to invest in Spain, especially relative to Northern Europe. In a country where the economy is still flat-lining, LPs will need a lot of convincing that there is growth potential to be found.

Overseas sales are clearly important. “It’s important GPs can support companies to grow revenues on a global basis rather than revenues being dependent purely on the Spanish economy,” says Gripton. 

But domestic growth is also achievable “if you pick the appropriate local trend”, according to one Spanish GP, who cites the ageing population and the outsourcing of public services as two big growth drivers. 

The trouble is that deal flow is still very slow. “Trade buyers are more reluctant to acquire Spanish businesses,” says the LP. “This means that the holding periods for these funds are longer.” This creates a danger that capital will be committed but not invested, which will drag down returns, according to Gripton. 

In short, Spain remains a risky choice. As the second LP puts it: “Unemployment has improved, the fiscal deficit has improved. But there are still a lot of problems and we probably need a longer period of time to feel comfortable to go back in.”