Spain: Back in favour?

Convincing an investment committee to back Spanish private equity funds has been a Herculean task since the country’s financial crisis began in 2008. You could forgive them for being wary: the country is heavily indebted, unemployment is sky-high, and for a long time there was no sign of even the slightest economic growth.

But in the last year or so, Spain’s economy has improved, with its central bank saying in October the country had finally pulled itself out of recession.

Amidst this backdrop, it seems domestic fund managers’ fortunes have improved as well. Groups like Portobello Capital, ProA Capital, Miura Private Equity, Sherpa Gestion and Corpfin Capital have all just closed – or will soon close – funds on their hard-caps. Portobello raised €375 million; ProA Capital raised €350 million; Miura collected €200 million for its Fund II; Sherpa raised €100 million for its distressed-focused fund; and
Corpfin was nearing its €250 million hard-cap at press time.

The buzz in the market around some of these fundraisings suggests that investors are all suddenly piling into Spain. But that’s more perception than reality. “Many people are trying to understand the Spanish opportunity but overall I believe LPs in general – including Pantheon – remain quite cautious,” says Rob Wright, a partner at fund of funds Pantheon.

The cautiousness isn’t always necessarily because of Spain’s financial struggles, however. “If you compare private equity deal volume to GDP as a ratio, Spain is clearly a geography like Germany, where there’s massive scope for private equity to play a bigger role in the economy than it does today,” says Wilf Wilkinson, a partner at placement agent Acanthus Advisers, which has been supporting Corpfin in its latest fundraise. But that ratio remains low due to cultural reasons, he believes. “The corporate landscape is actually quite difficult for private equity deals. Entrepreneurs don’t have the private equity model engrained in their succession plans or wealth creation plan.”

The potential to expand Spanish businesses into Latin America is also something that has yet to really work, he adds. “Not a single private equity firm has made success out of [that] specific strategy. The fact that half the Latin American continent speaks Spanish is not really a massively relevant factor.”

TROUBLED TRACK RECORDS

The issue most likely to make investors’ pause, however, is performance.
“In the early 2000s during the Spanish boom time, a lot of capital was committed to the market and that capital has not performed particularly well,” says Wright. “You either have teams in Spain with track-records that have crisis-related losses or you have new teams that only have track-records going back to 2008 and that don’t have many realisations, but that have a good team and interesting strategy.” It’s hard to get investors comfortable with those GPs, he adds.

Natividad Sierra, head of investor relations at Corpfin, says the market has become bifurcated in terms of its fund managers. “There are funds like us and Portobello that have been in the market for many years, with vintages going back to the pre-crisis years. We have been able to manage those challenging times quite well. But there are also many funds that have disappeared or have not been able to raise capital yet following the economic downturn,” Sierra says.