Another new dawn

There was a time when Portugal was, at least in a private equity context, the type of market that commentators refer to as “emerging”. Although the word might be construed as slightly condescending, it was an apt way of describing the country back in 1986 when it joined the European Union. For Portugal this was a momentous occurrence, coming as it did just 11 years after the ending of the Revolution in 1975, in which a pseudo-Fascist dictatorship was overthrown by Communists, who soon after were themselves replaced by a leftleaning liberal democracy.

Finding itself in amongst a host of mainly Spanish investors shortly afterwards and attracted by a new spirit of openness was Swiss private equity firm Argos Soditic, which established a Lisbon office when the benefits of EU membership were becoming apparent in 1992. Founder Eduardo Bugnone explains why his firm joined the influx of foreign bounty hunters: “We aimed to take advantage of the new middle class and the money that was filtered into Portugal when it joined the EU”, he says. “The country had traditionally been an exporter, but we were able to focus on growing domestic demand for local brands in areas like supermarkets and newspapers. We considered ourselves part of the economic renewal of the country”.

Results were mixed, as Bugnone freely admits. “We did deals there that went well, others that went wrong”, he reflects. “Overall, our experience was slightly positive but not great”. Among the success stories was Anodil, a manufacturer and distributor of aluminium frames, which Argos Soditic acquired for €35 million in a management buyin in March 1998. When Swedish industrial group Sapa acquired the business in January 2000, it delivered an internal rate of return of 81 percent.

Argos Soditic closed its Lisbon office two years ago, after a ten-year presence in the city. Bugnone says that once the mid-market firms that were snapped up in the initial rush had been sold on to larger players, there was a shortfall of new assets to invest in. There has never been a large industrial base in the country, and research and development tends to lag behind other European economies. For Argos Soditic, the deal flow had simply run dry: it was time to pack up and leave.

Fast-forward to the present and, in the eyes of optimists at least, green shoots of renewal are once more sprouting. In July 2004 Lead Capital, a 100 percent subsidiary of Portuguese bank Banco Investimento Global (BIG), posted a first closing of its debut private equity fund on 20 million. André Reis, a member of the Lead Capital team, says the fund, which is aiming to close on 50 million, is the first pure buyout fund raised by a Portuguese organisation. The fund – which aims to invest in companies with enterprise values between 10 million and 50 million – has not yet completed an investment, though Reis says it has made several “non-binding proposals”.

Reis's view, in contrast to Bugnone's, is that there is a new generation of companies in need of private equity support at the current time. “We are now at a time when entrepreneurs who set up businesses after the Revolution have reached their 60s or 70s and have succession problems”, he says. In his opinion, the presence of a younger generation with different aspirations from their parents is as much in evidence in Portugal as anywhere else in Europe. For company owners, he believes, bringing in professional management and funding to secure the future of the business is becoming an imperative.

So succession is one potential source of deal flow. Another is what might be termed the “Spanish angle”. Spanish investors, trade or financial, poured over the border in the 1980s and early 1990s, outbidding smaller and less financially powerful local bidders to buy up swathes of Portuguese assets.

Spanish private equity firms were part of this push, but many came to realise it wasn't as easy a game as it had looked – particularly if you did not establish a local presence. “There are significant cultural differences between Spain and Portugal”, says a European placement agent familiar with both territories. “It's hard to be based in Madrid and do deals in Lisbon – aside from perhaps the occasional add-on acquisition”.

But rather than letting these cultural differences put an end to thoughts of deals with both a Spanish and Portuguese element, private equity firms from the two countries have come to appreciate the need for cooperation. Reis says Lead Capital will provide a good example of this: “We will have an upper limit we can invest in any one deal of 20 percent of the fund, which, if we raise €50 million, will be €10 million”, he says. “For larger deals, we will promote an active syndication policy where we will invite Spanish firms in. And we would expect those same firms to reciprocate, so we get to see opportunities in Spain”.

Explorer Investments is another firm seeking deals with a Spanish flavour. In April 2004, the ([A-z]+)-based investor held an initial close of its debut Explorer I fund on €50 million, with the objective of raising €75 million by the end of this year. The fund, which is already the largest raised in Portugal so far, is targeting Portuguese companies aiming to expand into Spain and – to assist it in this process – has formed a joint venture with Madrid-based private equity firm Mercapital.

The Explorer fundraising has gone down particularly well with Spanish institutions, with Spanish savings bank Caja Nova taking a 20 percent stake in the management company and seven other regional Spanish banks making investments. Another significant initiative launched this year was SES Iberian Fund I, a joint venture between Portugal's Espirito Santo Capital and Sigefi Private Equity of France, which will aim to raise €50 million for investment in Spain (50 percent of the total), Portugal (30 percent) and French companies expanding into Iberia (20 percent).

As in many other European countries, the mid-market is the focus of activity in Portugal. The venture capital flame flickered to life around five years ago, only to be rapidly snuffed out. “The last wave was in the software sector but having come to life during the boom, values decreased rapidly after the crash, and people still remember that. They need to forget first before they invest in new companies”, says António Soares, a partner at the Lisbon office of global law firm Linklaters.

At the other end of the spectrum in the leveraged buyout arena, deals are few and far between. Most of the assets up for grabs have stemmed from the government's ongoing privatisation programme, and these have attracted some private equity interest – including from foreign sources. For example, buyout houses The Carlyle Group and CVC Capital Partners were both involved in an auction for Portuguese oil firm Galp Energia earlier this year, which saw the asset eventually acquired by Petrocer, a consortium of Portuguese business groups.

Such rare big ticket LBO opportunities aside, it is the mid-market attracting the lion's share of the attention. Opportunities there may help Portugal shake off its status as one of Europe's least developed private equity markets – funds in the country represent only 0.09 percent of gross domestic product, compared with a European average of 0.25 percent.

So is the “emerging” tag finally justified? Some say yes. But Bugnone at Argos Soditic begs to differ: “Anyone saying Portugal is an emerging market is just trying to justify spending time there”, he asserts. The challenge for live projects such as Lead and Explorer is to prove Bugnone wrong.