Private equity law in Spain has experienced some sweeping changes in the last two years – to the benefit of the industry, many would say. In a sign of further progress, it is likely a new law will be passed by the end of the year to allow pension funds to invest in the asset class for the first time.
A private equity fundraising law was framed in Spain in 2005, providing insurance companies with the opportunity to invest up to 5 percent of their total capital in the asset class. This ability to invest is being extended to pension funds and is expected to become enshrined in law next month.
The possibility of a new pool of investors with large amounts of capital to deploy has, naturally enough, attracted the interest of fundraisers. Claudio Aguirre, co-founding partner and president of Altamar Private Equity, the largest Spanish fund of funds, which is investing its €420 million second global fund, says: “Insurance companies' and pension funds' ability to invest in private equity should lead to greater investment in the asset class over the next few years. They are starting to invest, but there's a lot more room for them to increase their allocations.”
Alfonso Reina, an associate at Spanish law firm Cuatrecasas, says: “The change in the law for insurance companies and now for pension funds has raised the interest of investors. It has also attracted the attention of managers who are looking at what is happening in Spain.”
Some international managers are looking to set up conduit funds in Spain managed by the GPs, which can be used to feed into larger European and global private equity funds, a partner at Cuatrecasas, Jesús Mardomingo Cozas, says. The funds will provide access to larger buyout funds to parties which may have difficulty investing in funds on an individual basis.
“Buyout firms want to use the new law to find investors in Spain. The only problem is, they want to use this structure to increase their investor base, and it is not clear whether this is legal and the law awaits interpretation,” says Cozas.
Spanish private equity vehicles can benefit from a 99 percent exemption from capital gains. The tax rate in Spain for Spanish PE vehicles is around 0.32 percent. A key legal difficulty is whether these funds feeding into a larger global vehicle should be entitled to this tax relief.
This issue and others are likely to be legally interpreted in Spain in the next year as international managers attempt to launch these structures.
“There are already global fund of funds structures existing that may not be attractive for certain Spanish investors from a tax perspective,” says Reina. The conduit funds would circumvent these tax-related problems. According to Christian Hoedl of Spanish law firm Uría Menéndez, the legal reforms are part of a generally positive transition the private equity industry is going through to enter the country's financial mainstream: “The legal environment is now very similar to the rest of Europe and the political climate is favourable,” he says.
But, by way of caution, he adds: “This neutral mood may change if there were a bankruptcy of a highly leveraged portfolio company or someone were to make public they don't pay taxes.”
Private equity fundraisers across Europe will be keeping a watchful eye on developments in Spain in the next few years. Spanish pension funds and insurance companies can expect many private equity funds to come knocking at their doors.