Viva España

In the current economic climate, the idea of a predominantly US-focused fund choosing to spend more of its money in Europe – with a particular focus on Spain – might sound a bit far-fetched.

But that’s the strategy adopted in the last couple of years by JZ Capital Partners, a UK-listed group that invests primarily in US-based small-cap businesses. In 2010, it took a 75 percent stake in a European Micro Cap Fund, which is managed by its founders Jay Jordan and David Zalaznick, along with City grandee Jock Green-Armytage (who had for the previous decade been investing their own money in European deals).

Since then, the fund has spent $81 million buying five companies, all in Spain – the most recent being a €13.5 million investment in Oro Direct, a precious metals trading business (where it co-invested alongside French private equity group LFPI). And far from being cowed by the experience, JZCP has in fact just persuaded its investors to let it spend 30 percent of its latest fund outside the US, rather than 20 percent as previously. Given that the Spanish economy is in a worse state than most, that’s contrarian, to say the least.

But according to Zalaznick, there’s a lot to like about Spain. “Our thesis was that the crisis in the EU and Spain would eventually sort itself out. In the meantime, it’s possible to buy good assets at steep discounts from prices in Northern Europe or the US. We’ve bought five companies over the past two years; these companies grew through the 2008/2009 recession, so we were confident they were good quality companies. And we were confident that our team had the operational experience to help them.”

Zalaznick says his firm’s approach in Europe is the same as it has always been. “We specialise in buying companies that are not for sale – where an owner/entrepreneur is looking for a partner to take advantage of a specific opportunity, very often outside of their domestic market. And if the opportunity you can develop with them is big enough, they will welcome you becoming the dominant partner.”

What’s unusual is that few firms are brave enough to seek out these opportunities in Spain at the moment.

However, the businesses JZCP is buying are typically not that big – sometimes with EBITDA less than €10 million. And they’re often in relatively defensive sectors: in Spain it has invested in telecoms and digital documents, for example, as well as precious metals. So their performance is not necessarily going to be directly correlated to that of the overall Spanish economy.

Perhaps the most significant factor, though, is that most of these businesses are already making a substantial portion of their revenues outside Spain. Oro, for example, is planning to expand across Europe (it has already opened a new office in Austria, of all places).

But the biggest opportunity undoubtedly lies in Latin America, where some of JZCP’s businesses already operate. “In Latin America, Spanish businesses have a natural edge,” says Zalaznick. “And we’re often following some very big customers, like Santander and Telefonica.” In which case, these deals start looking a lot less risky.