There is no doubt that the global financial crisis took a tremendous toll on the Iberian Peninsula, and its effects are still being felt today. Despite strong economic growth – 3.2 percent in 2015 according to the European Commission, higher than both the UK and Germany – unemployment figures still stand at a troubling 22.3 percent, a marginal improvement on the 24.5 percent in 2014.
It’s no wonder, then, that international investors have been slow to return to this market. Although Spain’s macro-economic indicators have been “firmly positive” following post-crisis reforms, including in banking and labour markets, with domestic consumption rising, according to S&P Capital IQ’s EMEA Private Equity Market Snapshot released last October, this is not yet leading to an increase in deal activity.
However, caution from international investors coupled with these strong economic indicators has created a plentiful investment – and even fundraising – environment for established local teams with a strong track record.
Spanish firm Portobello Capital closed its third vehicle on its €375 million hard-cap in September 2014, and has since made five acquisitions and two add-ons.
“As we haven’t had that much competition, we have been able to have good multiples for a number of acquisitions,” said Luis Peñarrocha, a founding partner at Portobello. “During 2015 I think the prices and the competitive dynamics were reasonable – not super cheap, but we haven’t closed any deal above double-digits.”
Prior to the global financial crisis, there was an “oversupply of equity providers” in Spain, many of whom were savings banks, Peñarrocha told Private Equity International. Following the reshuffling of the financial sector, many of these have been restructured, shut down, or merged with commercial banks, and are no longer active in private equity.
“They were providers of equity with low IRR expectations, so to some extent they were cheap equity providers,” Peñarrocha said. “They are out of the market now so this means lower supply of capital. We have the same flow of opportunities as before, so in terms of competition I believe that we have a better competitive environment now than we had eight years ago.”
Just three Iberia-focused funds closed in 2015, raising a combined $543.7 million, according to PEI Research & Analytics. Today there are more than 20 Iberia-specific funds in market seeking more than $4 billion combined to invest in across the spectrum from mezzanine and debt to venture capital to buyouts.
These include Meridia Capital, a Barcelona-based real estate specialist which has launched its first private equity fund, Meridia Growth I, an industrial-focused fund targeting €125 million.
“In 2016, if there are more funds that have raised we may have a bit more pressure, but still the dealflow is attractive enough,” Peñarrocha said. “The question for us is which assets to pick and to make the right choices, but the supply of assets and opportunities is there.”
Portobello and its peers have also benefited from the availability of debt at attractive interest rates, mostly from domestic banks, although Peñarrocha expects access to debt to be more challenging in 2016.
Portobello exited the remaining seven assets in its €331 million second fund through a secondary transaction led by HarbourVest Partners, creating its first secondary vehicle, Portobello Capital Secondary Fund I.
The firm is looking to make between eight and 10 investments from Fund III. With the vehicle already more than 50 percent invested in five companies and a strong pipeline ahead, Peñarrocha said returning to market with a new offering in 2017 is “a real possibility”.
Investors are still interested in Spain, but they are more selective, he said.
“We’ve performed well, which is the most important thing,” Peñarrocha said, adding that foreign investors are “a bit more cautious” on Iberia-focused funds in general following the Spanish general election last December.
“They are taking a bit of time to make the final allocations, they can wait a couple of months to see how the situation finally evolves and then take a decision.”