Spain: continuing to mature

For private equity, Spain continues to be Europe's place of the future and many new players have been lured there over the past few years by the promise of hefty returns.

Despite reporting a relatively buoyant end to 2002, where the total invested in Spanish enterprises was down only 22 per cent on 2001, the market got off to a slower start this year. Nonetheless, the first half of 2003 has been better than the same period last year according to the Spanish venture capital association ASCRI. The biggest deal so far this year is Caixa Capital's €200m LBO of supermarket group Caprabo. And ASCRI says the market may be set to return to the record levels it saw in 2000. There remains some uncertainty though about how many transactions will actually close due to mismatched pricing expectations. ?A number of deals in the market are failing to close because the valuation gap is still there. But by the number actually being negotiated, total investment this year could be 20 to 30 per cent over 2000,? says Javier Loizaga, executive partner at private equity house Mercapital.

There is certainly a significant amount of private equity capital ready to be deployed. Besides such heavyweights as Mercapital, new funds run by firms such as Nmas1 (which closed a €175m fund earlier this year), Qualitas Equity Partners and MCH Private Equity are also busy tracking down opportunities.

However, the volume of money chasing the same deals is raising the price expectations of some of the more sophisticated potential sellers. The depth of available opportunities remains a concern for some therefore. Many companies that could attract the interest of private equity funds are unaware of the potential benefits of private equity and may well be suspicious of it. What is still required, declare many practitioners, is a change in attitude and to that end education remains key to the market's continued development.

This level of market awareness is unsurprising in light of the relatively late industrialisation of Spain though. According to Jaime Hernandez-Soto, a partner at MCH Private Equity in Madrid: ?Most industry in Spain was created in the late 60s and early 70s as opposed to the early 50s like in the rest of Europe.? But this 15 year gap is closing fast and there are plenty who want to benefit from it.

As ever, the buzz about Spanish private equity centres on companies in the relatively opaque mid-market that fall roughly into the €10m to €150m enterprise value category. There are a large number of these companies in Spain. ?Often a sector will have one or two leaders and the rest will be fragmented,? says MCH's Hernandez Soto. Many of these companies are second generation family-owned. Issues they face regarding succession and liquidity provide opportunities for private equity deal flow and consequent buy-and-build. As a counterpoint, there is the need for private equity houses to devote more time to help and advise the companies as to how best they can grow than would be necessary with more sophisticated targets.

A growing range of investment options
In Spain most private equity transactions are not buyouts but rather development capital investments in medium sized companies. Quite often a company's owners will not wish to completely sell out but may tolerate cohabitation with the development capitalists. ?Albeit reluctantly, the family may find the best solution for some liquidity or to grow a business is to rely on private equity,? says Javier Gómez-Acebo, a partner at Freshfields Bruckhaus Deringer in Madrid.

One explanation for the paucity of buyouts may be the sheltered life that Spanish companies used to lead. Mercapital's Loizaga says: ?For historical reasons, we don't have a big buyout sector because you need to have corporate buyers who then become corporate sellers. Until the mid-80s Spanish companies were sheltered from competition from foreign companies.? Another missing ingredient may have been the availability of leveraged banking finance. Frequently, private equity players used to take a minority stake in an existing leveraged company. Now there are an increasing number of banks that are willing to finance 100 per cent buyouts in the Spanish mid market. Eric Halverson, a partner at Qualitas Equity Partners, says this has been helped by the arrival in Spain of foreign banks willing to finance buyouts. ?Most domestic banks were unfamiliar with even plain vanilla buyout structures,? he says. ?Now we will increasingly see private equity groups buying majority stakes?there are quite a few opportunities for mid-market buyouts.?

But there have been relatively few leveraged deals in Spain so far this year. According to Javier González-Tovar, head of acquisition finance at Credit Lyonnais in Madrid, this year there have been only a handful of pure leveraged deals requiring that size of debt, including Nazca Capital's €118m BIMBO of wine producer Cosecheros Abastecedores, Suala Capital's €120m MBO of the transportation and logistics operations of Grupo Paconsa and the just-announced MBO of homeware appliance retailer, Menaje del Hogar, also to be acquired by Suala. González-Tovar feels there is a change of culture underway, as private equity becomes more widely recognised in the business community. He adds: ?Owners are now more willing to sell at reasonable prices and managers of multinational companies are less afraid to make an offer to buy a company from its owners, which used to seem like a betrayal.? But while the number of Spanish MBOs is growing, the deals tend to be much smaller than the typical European €150m and up LBO transaction size.

Public-to-private deals are also becoming more familiar in Spain and Advent is about to complete its first PTP there with a €160m offer for leisure park owner Parques Reunidos. Success is not assured though as delisting can be a problem without a high level of acceptances. ?There is not much experience of delisting here without a 90 per cent acceptance rate,? says Freshfield's Gómez-Acebo. ?But this could open the gates for PTPs.? There are a relatively large number of listed companies in Spain that do not comply with minimum trading requirements and the Comision Nacional del Mercado de Valores is said to be keen to find a way to take them out of the market. ?This could be an elegant answer to the problem,? says Gómez-Acebo. One difficulty will remain: Spain does not have a squeeze-out mechanism and none is proposed at the moment.

Some things have changed
There is a regulatory change that has occurred this year that provides a new ?playing field? for international private equity structures, as Spanish legislation now finally contains specific provisions to regulate the tax transparency of foreign vehicles. Thus to the extent that the vehicle is considered tax transparent in Spain, Spain will, in very broad terms, ?look through? the fund and allow the application of the investor's tax treaties or other tax benefits related to the jurisdiction of the investor.

One cloud though that has hung over the Spanish private equity market is the suspicion that the government sometimes seeks to influence the outcome of transactions, particularly those in media and infrastructure. There have been a number of auctions this year where bids backed by large houses like Apax Partners and The Carlyle Group have failed, including television network Retevision Audiovisual, toll road operator ENA and windmill generator EHN.

Some local players feel that this is simply sour grapes. One says: ?As those large groups have to justify their due diligence and advisers' fees back home, they do so by claiming the government is playing favourites?the truth is others offered more money.? However, one adviser to the Apax and Carlyle bid for Retevision thinks otherwise. He comments: ?We got the distinct feeling that the last minute exclusion of the consortium might well have been for political reasons.?

The Spanish mid-market also presents opportunities due to the changing ambitions of its main players, who can be categorised broadly as follows:

  • ? Large mid market (€20m-50m equity investment per deal): Bridgepoint, Corpfin, Dinamia, Mercapital, 3i
  • ? Small mid market (€10m-20m equity investment): AC Desarollo, Diana, MCH, Qualitas.
  • ? o Small market (under 10m euros equity investment): Catalana d'Iniciativas, Espiga, GED, Talde.
  • As funds get bigger, there has been an increasing tendency for firms to bid for the larger size deals, which in Spain can be considered anything north of €30m or €40m. As a result, a vacuum is forming in the smaller transaction size area and a number of the larger mid-market players are said to be re-examining it.

    On the larger deal front, competition is strong. According to Mercapital's Loizaga, 50 per cent of investment over the last three or four years has been in bigger transactions, which rarely number more than 10 to 15 a year. There are some 35 private equity firms in Spain, composed roughly of 10 independents, 10 captives and 15 foreign players. ?In spite of the foreseeable growth of the Spanish market, it's getting a bit crowded and people are feeling the pressure,? says Loizaga.

    The result is a two-tier market. Many deals in Spain are not sourced competitively through intermediaries but rather through long-term family relationships. Although these usually involve smaller deals, they do provide a strong advantage to firms with an established presence and strong contacts. But for the big deals, which increasingly go to auction, the pickings in Spain may not be as rich as they used to be. According to Loizaga: ?Competition is as intense for these deals as anywhere in Europe, in terms of both bidders and price.?

    So while the potential of the Spanish private equity market is clear, what is less so is who stands to benefit from it. The upper market is as fiercely competitive as elsewhere in Europe. There are at least half a dozen serious private equity houses that have been in Spain for less than five years. For those who have access, the mid-market will continue to provide good returns for quite some time until the economy converges with the rest of Europe. Many new entrants may find, however, that they cannot do as many deals as they would like. Like so many other maturing private equity markets, Spain's growing up is not simply a case of more deals sooner. Rather it is a case of smarter – and maybe larger -deals that go further.