Investors look for a new bull run in Spain

There is “a fighting spirit” among general partners, limited partners and intermediaries in Spain these days, says Vincent le Hodey, London-based partner at Northern Lights Alternative Advisors, fresh off the plane from a round of meetings in Madrid.

“There is a good feeling about what is going on. There’s plenty for the local guys to do. There’s pent up demand. It’s a perfect mid-market,” he adds.

Thanks to structural reforms and three consecutive years of economic growth, which places the economy among the fastest growing in Europe, investor attention has turned back toward the market.

So far this year, funds have raised $370 million targeted at Spain, compared with $280 million for the whole of last year, according to PEI Research & Analytics.

Firms taking advantage include Madrid and Barcelona-based Abac Capital, launched by three former Apax Partners executives. The firm closed its debut vehicle in June on €320 million.

Long-time player in the Spanish market, Madrid-based N+1 is close to closing its latest private equity vehicle targeting €450 million. Southern European investor Charme Capital Partners, which opened an office in Madrid this year led by partner Francisco Churtichaga, had collected €450 million as of April for its third vehicle that is still in market.

Interest and commitments from international limited partners outweigh those from the local market. Abac Solutions SICAR drew about 60 percent of its commitments from Europe (with a third of that from Spain) and the remainder split 30 percent from US investors and 10 percent from Asia-Pacific.

It was typically the US investors who asked the most questions about Spain. “The Europeans – especially the Swedes, Germans and French – they know it well,” says Abac founding partner Oriol Pinya.

International LPs have replaced domestic banks, pension funds and insurance companies that have withdrawn from the market, leaving Spanish family offices to represent the bulk of local commitments. “Some large LPs want to shift from big pan-European funds to national champions and want us to be their Spanish national champion. Usually the hole [in an LP’s portfolio] is Italy and Spain,” Pinya says.

Charme’s third fund has drawn significant interest from European, Asian and US LPs, as well as several Middle Eastern institutions. There is a lot of inbound LP interest, Churtichaga says. “We did a very large first close and we will go from there, but we wouldn’t want to exceed our original estimates too much. New investors are very much calling in.”

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Government backing has given investors comfort. With the goal of boosting private sector investment, state-owned bank Instituto de Crédito Oficial has made commitments to a number of private equity vehicles through its Fond-ICO Global programme.

N+1 may be the latest to benefit if it receives a €50 million commitment from ICO for its third private equity vehicle. The firm has already collected €100 million from Spanish state-owned cornerstone investor the Centre for the Development of Industrial Technology.

“The Spanish government has been instrumental for the industry and particularly for smaller funds,” says N+1 Private Equity partner and chief executive officer Gonzalo Rivera.

Despite a number of mid-market funds raising capital, dry powder levels are still not back to pre-crisis totals, meaning the market remains uncrowded. According to N+1, there was €2.7 billion of dry powder stored by upper mid-market funds targeting Spain in 2007, compared with about €1.7 billion this year.

“You have a good market situation, a large number of potential assets dominated by SMEs, and an absence of dry powder in the upper mid-market,” says Rivera. “Spain is not being tackled by large pan-European or international GPs because they don’t have the resources to dedicate to those smaller equity investments. These are the reasons for good momentum.”

Big buyout firms such as Cinven, Blackstone and KKR setting up offices in Spain is an opportunity not a threat, placing the market on the map of large LPs. “They look at transactions that we don’t get close too,” notes Rivera, adding that large firms do, however, provide exit opportunities.

Last year, €1.7 billion was invested in Spanish mid-market companies, a 143 percent increase on the €683 million in 2014, according to the Spanish Venture Capital & Private Equity Association. GPs made 57 investments in 2015, compared with 33 in 2014.

Post-crisis, local companies that have weathered the market downturn to emerge leaner and more export-orientated are looking for capital. “The mind-set of Spanish entrepreneurs and management has shifted from survival to expansion,” Rivera says, adding that banks are willing to lend to facilitate transactions.

Madrid-based Corpfin Capital’s investment in Eurogamma in December, through its 2015-vintage, €255 million vehicle is an example of local fund appetite for mid-market companies with ambitions for further international exposure. Eurogamma owns natural food dye company Secna which operates in Spain, Italy and Turkey. The firm’s goal is to grow the company by reinforcing the sales team and boosting the global presence of its products.

Shareholders wishing to exit and who have been waiting for the economy to improve, are now ready to sell. “This hasn’t gone unnoticed by LPs,” says Churtichaga, who flags up the possibility of buying outside of an auction in Spain, where Charme is close to completing two proprietary transactions.

“The dealflow in Spain is quite high at present, and that makes it difficult for us to spend as much time as we would like in other markets such as Portugal, where we think the market might be underserved,” he adds.

Prices in Spain are generally viewed as well below those in the UK and the Nordic markets. Mid-market entry multiples are typically around seven times EBITDA, Abac’s Pinya says.

Abac’s debut vehicle has already made two investments: automotive aftermarket supplier Metalcaucho and global seating systems provider Figueras International Seating, both based in Barcelona. The fund invests between €20 million and €50 million per transaction and is “quite open” in terms of sectors, says Pinya (the market is not big enough for funds to be extremely specialised, notes Corpfin Capital head of investor relations Natividad Sierra).

For exits, trade buyers remain the most common route. “Industry buyers are not scared of Spain today,” says Sierra, adding “traditionally the number of secondary deals has been low but the trend is increasing”.

Both Corpfin and N+1 have exited through secondary sales to other private equity firms. In December, Corpfin sold communications infrastructure provider Acuntia to Spanish lower mid-market firm GPF Capital generating a four times return.

The general election at the end of June might have given some investors pause. But the outcome is not expected to shake the macro-economic agenda or the country’s short term growth prospects, which should be good news for funds looking to deploy capital in the years ahead.