Real progress

When looking for signs of maturity in the Spanish private equity market, local professionals caution that you might find yourself looking in the wrong place. In July 2005, the country played host to its first megadeal with the €4.3 billion ($5.6 billion) buyout of travel solutions business Amadeus Global Travel Distribution by BC Partners and Cinven. The following month, private equity firms JP Morgan Partners and Providence Equity Partners teamed with Spanish cable TV business ONO to buy the fixed line arm of telecom operator Auna for €2.25 billion. Surely, you might think, landmark transactions such as these signal Spain's arrival as a private equity market of substance?

Judged on that criterion, 2006 might be viewed as something of a disappointment so far. Yes, there have been some reasonably large deals – the purchase of granite and marble processor Grupo Levantina by Charterhouse Capital Partners and Impala Capital Partners, for example, was reported to be worth in excess of €500 million. But as yet, there has been no outsized transaction of the type that can both grab the public's attention and generate shock waves in corporate boardrooms.

Nonetheless, private equity practitioners operating in the country are in buoyant mood. Many will tell you that by focusing on a handful of large deals – by their nature an unpredictable and ephemeral phenomenon – you are in danger of using the wrong yardstick with which to measure progress. If concentrating on statistics alone, they say, you should consider that, of the €4.2 billion of equity invested in Spanish deals last year, a healthy €2.5 billion went into the mid-market.

More important than trophy deals, suggests Javier Loizaga, CEO and managing partner of Madrid-based GP Mercapital, is the evolution of Spain into an “established and stable second-tier private equity market” that despite ranking behind the UK, France and Germany in stature can nonetheless claim more or less equal prominence with sizeable markets such as Sweden and Italy.

Practitioners will also plead that statistics aren't everything. Look behind the numbers and you might discover more compelling evidence of a maturing market. In its recent hire of experienced industry professionals Carlos Puente and Pere Prat as partners, for instance, Loizaga says Mercapital is the first Spanish private equity firm to have brought in operating partners in an environment where, he maintains, “financial skills alone are not enough”. He adds: “In the past we always sought to bring in operating expertise from the outside as and when we needed it. But we can no longer adopt a case-by-case view. The need for in-house expertise is related to the cycle. There are so many sophisticated vendors in Spain now that it's no longer possible to buy low and sell high.”

By Loizaga's own confession, the model that Mercapital has moved towards is a relatively expensive one for a mid-market firm. Most of the precedents are represented by larger GPs such as Clayton, Dubilier & Rice in the US or Terra Firma in the UK (though London-based upper mid-market firm Candover has also recently appointed two full-time operating specialists). What's interesting in a Spanish context is the perceived market efficiency that is implied by such a move: Loizaga sees it as a way of helping safeguard returns in a tighter deal-doing environment.

A further indication of maturity is to be found in the greater readiness of Spanish firms to expand internationally. In this respect, says Kevin Woods, partner at Madrid-based investment bank GBS Finanzas, large Spanish corporate groups have been in the vanguard. “Spanish companies that were previously only comfortable with making overseas acquisitions in Latin America are now targeting Europe,” he suggests. He says recent manifestations of this have included a couple of notable sorties into the UK: namely, telecom operator Telefonica's £17.7 billion (€26.2 billion) purchase of mobile phone company O2 in January this year and building group Ferrovial's £10.3 billion (€15.3 billion) takeover of airports operator BAA in June.

Observers say transactions such as these have instilled Spanish companies with a greater sense of self-confidence. Against this background, private equity-supported companies have also been demonstrating their willingness to stride boldly into markets where they might once have feared to tread.

When theme park operator Parques Reunidos was acquired by Advent International for €173 million in December 2003, it immediately achieved seminal status as Spain's first public-to-private buyout. Since then, it has undertaken what Advent's Madrid-based managing director Juan-Diaz Laviada describes as the first international buy and build strategy overseen by a Spanish private equity team. Following acquisitions in Italy, France, Belgium, Norway and Argentina, around half the company's EBITDA is now generated outside its home market. Observers may be about to discover how well the strategy will be rewarded: Parques Reunidos is currently rumoured to be exploring sale options.

Willingness to take a gamble in overseas markets was also typified by Madrid-based mid-market investor Corpfin Capital's buyout of Futura, the Spanish charter airline, from Ireland's Aer Lingus in November 2002. The bravery of the deal was underlined by the fact that, during discussions, the September 11 terror attacks from the previous year were still fresh in the memory – which meant that the vendor had to provide debt finance in the absence of any support for the deal from banks.

Since the deal was struck, says Corpfin partner Patrick Gandarias, Futura has overcome tight restrictions on the activities of foreign operators to gain approval for running an eight-strong fleet out of the US. This has enabled the firm to dilute the volatility of its cash flows by flying American tourists to winter holiday destinations such as Mexico and the Caribbean in addition to its core business of transporting European holidaymakers to Mediterranean sunspots during the summer.

Gandarias believes Spanish companies have successfully overcome what he describes as an inferiority complex. “Until ten years ago, Spanish firms were always on the receiving end. Foreign companies knew how to run their operations better and the Spanish had very little experience of exporting. That's changed dramatically.”

What has also changed – though views differ as to how dramatically – is the degree of competition within the Spanish private equity market. In September this year, London-based pan-European investor Doughty Hanson announced a new Madrid office, with private equity activities headed by former JP Morgan Partners executive Francisco Churtichaga (Juan Silvela leads the office's real estate operations). In addition, US private equity firm The Riverside Company is reportedly plotting an Iberian presence, while European Capital, the Paris- and London-based investor, is working on plans to expand its franchise into Madrid.

Spain is also in the midst of a healthy fundraising season, with, for instance, Corpfin Capital having closed its latest vehicle on €223 million in September this year and Ibersuizas having wrapped up €430 million in commitments in May. In addition, Mercapital was, at the time of going to press, close to sealing a new €500 million fund, whilst Impala Capital Partners (formerly Suala Capital Partners) and NMas1 were both understood to be preparing fund launches.

Perhaps most intriguingly, GBS Finanzas, which has sourced many deals for Spanish private equity firms over the years – including USP, the hospital chain acquired by Mercapital for €216 million in 2004 – is lining up a debut fund of its own. Kevin Woods says the firm will aim to raise between €250 million and €300 million, mainly from wealthy family groups prepared to take tickets of at least €20 million each.

He says he expects the capital to be “earmarked by the end of the year”.

While such an influx of GPs and fresh capital might be seen as the inevitable corollary of a maturing market, not everyone subscribes to the view that Spanish private equity is characterised by stifling competition. Says Gonzalo Diaz-Rato, a partner at Impala Capital Partners: “I would define the mid-market as between €100 million and €500 million and I'd say it's not that competitive in Spain compared with other parts of Europe. Just a few Nordic funds have recently raised around €5 billion combined; whereas it's not clear that all Spanish buyout funds put together could raise that much.”

Some resident investors, though it's not necessarily in their best interests to do so, say they are far from surprised to see newcomers sizing up the Spanish market given the scale of opportunity to be found there. The Spanish economy, they point out, has consistently outperformed the Eurozone, with annual economic growth this year forecast to match the 3.5 percent achieved in 2005. Mass immigration, a political hot potato, has nonetheless helped keep the wheels of the economy turning. A flood of cheap labour has filled job vacancies no longer on the whole attractive to the incumbent population, whilst in the process adding to consumer demand for goods and services.

Given this economic dynamism, coupled with a feeling that the momentum is unlikely to be sustained in the long term (from recent discussions, PEI gleaned some concern about the potential repercussions should the country's real estate bubble implode, for example), GBS' Woods says deal flow for private equity firms is being driven in part by the eagerness of family business owners to cash in on the good times. Arguably the first really prominent family sale to private equity was the divestment by the Hinojos and Garcia-Quiros families of retailer Cortefiel to Permira, PAI Partners and CVC Capital Partners for €1.4 billion in September 2005.

There are so many sophisticated vendors in Spain now that it's no longer possible to buy low and sell high

Javier Loizaga

Woods says successful outcomes such as this have paved the way for further family sales, even in some cases from the most unexpected of sources. He describes sanitary products maker Indas as the “archetypal” family business of the type that many observers felt “would never sell”. Formed by Vicente Arochena with a capital injection of €300 in 1950, the business is now in the hands of three Arochena brothers. Giving force to the old maxim that everything is for sale at the right price, Woods says Indas recently appointed advisers to look its options. It is reported that five to six private equity firms have made approaches that value the firm at up to €250 million, representing an EBITDA multiple of approximately 14 times.

As an investor that specialises in sales of family businesses, it was informative that London-based Doughty Hanson took the step of launching a new Madrid office in September this year. Says principal Francisco Churtichaga: “We see Spain as a good match with our family business orientation. The country's economy has grown fast over the last 20 years and we see many situations where succession plans are not obvious.” He says the firm has been tracking 10 to 15 Spanish family companies that “might come up for sale”.

In addition to family sales, there are a number of other significant deal drivers. For example, Advent's Laviada points to a “new generation of foreign-educated, Englishspeaking managers” within the Spanish corporate world keen to explore buyout opportunities alongside private equity backers. Also, there is pressure from regulators on Spanish savings banks to focus on their core financial activities and divest industrial holdings. Among these interests, say observers, are some highly prized assets that would undoubtedly be of interest to private equity firms.

What is more, Corpfin's Gandarias points out that there is no shortage of resident mid-market M&A boutiques “looking to create deals for us”. Newcomers to the space in recent years have included Atlas Capital and 360 Corporate, joining established advisers such as GBS, Nmas1 and Alpha Corporate. In Gandarias' view, such groups do not lack motivation: “They're fee-based. They have to eat.”

All of which adds up to an interesting opportunity for private equity in Spain in the years ahead. Of course, you will always find individuals in any market who will roll their eyes when asked about the level of competition. To an extent, such a reaction will always have some validity because no vacuum will exist for long without investors rushing to fill it. Despite this, in light of Spain's apparent combination of strong economic growth and burgeoning deal flow, it is possible to view the country's private equity market as maturing but not overly competitive. And one thing's for sure: LBOs are not the whole story.