Southern Europe: Heading South?(2)

Southern Europe continues to face huge economic challenges – challenges so great that they may yet bring down the entire Eurozone. But although investing within the region is more difficult than ever before, local managers say there are still good deals to be found

Southern Europe dominated the financial headlines for all the wrong reasons last year: credit downgrades, rescue packages, draconian spending cuts, increased regulation and taxation, political instability … Not exactly an ideal climate for private equity investment.

The figures tell the story: M&A was flat in Italy and decreased in Spain in 2012, according to statistics from data provider Mergermarket. The latter saw 130 deals in the first half of 2012, with a total value of €12.2 billion. That was a substantial drop from the same period a year earlier, when 160 deals were completed with a total value of €36.7 billion. The second half of 2012 saw an even more dramatic fall: 90 Spanish deals were completed with a total value of €5.9 billion, down from 153 deals worth €23.6 billion in the second half of 2011. 

This dearth of deals is easily explained, according to Vittorio Pignatti, founding partner of Trilantic Capital Partners and chairman of Trilantic Capital Partners Europe. “Funds are currently concerned more by their many existing investments that are struggling than the few new investments they are going to make in 2013,” he says.

It can be challenging to keep the portfolio performing well through the downturn, agrees Eusebio Martin, a partner at Mercapital. “All of them are more or less maintaining their position in the market, but not growing or creating much value in Spain,” he says.

For local Spanish companies, the way to maintain revenue growth is to snap up smaller players, he suggests. For example, Mercapital owns a chain of perfumery shops that has been more affected by the crisis than expected, he says. So it’s buying up shops from failing competitors, he says. “We take the shop, the employees and increase our revenue base,” he says. Unfortunately, this approach doesn’t always work, because slow legal procedures in Spain make it difficult to buy a failing business, he complains. “When buyers arrive it’s often too late to save the company”.

And although some of these companies are clearly struggling, they’re not necessarily available to buy at a big discount, Martin adds. “You hear in the press that prices are really low and you can pick up bargains quite easily. But that is not our experience.”

Hazem Ben-Gacem, head of corporate investments in Europe at Investcorp, takes the same view. “Maybe there continues to be shock in the seller’s mind [about] accepting the valuations today, which have to take into account the depressed business prospects,” he says. This is why a fair few auction processes are being pulled in Southern Europe, he believes – because the seller wants to wait another two or three years.

In addition, the few deals that are available take longer to complete, according to Ben-Gacem. Last summer, Investcorp acquired Esmalglass, a Spanish ceramics and tiling business, from UK listed group 3i. “In the case of Esmalglass, it was a very prolonged process. After shopping around for a while, the owner’s price expectations came down significantly over the course of a six-month period and [it] decided to move on,” he says.


Spotting the right opportunities is about being in the right place at the right time, says Pignatti (“private companies don’t put an advertisement on eBay,” as he puts it).

However, a lack of credit availability has opened up the market for private equity, he says. “There is a severe dislocation of capital in Southern Europe. The banking system is unable and unwilling to renew loans to many good medium size companies.”

Mikel Bilbao, a partner at private Spanish investment bank GBS Finanzas, agrees. “Companies that would normally not turn to private equity are starting to [do so] because that’s one of the few ways for them to get access to capital,” he says.

Futurimpresa, an Italian private equity firm, also benefits from this, says Giuseppe Donvito, its head of investments. “As a growth capital investment fund, we are bridging the gap between the companies and the banks,” he says.

But while the credit gap creates opportunities for GPs, it’s also a hindrance. “Bank debt has been extremely difficult to obtain,” Bilbao says. “The number of syndicated loans in Europe for 2012 has decreased by 35 percent – [and] 92 percent of syndicated loans in Spain have been refinancings. This shows that there’s quite a small amount of debt for new deals, [which is] why the environment has been so tough.”

To get around this lack of credit, some firms – including Investcorp and HIG Europe – have turned to unitrache structures. “With banks more reluctant to provide debt and sometimes prohibition of mezzanine debt on top of senior loans by Southern European banks, we are often forced to turn to unitranche structures,” says Jaime Bergel, a managing director at HIG Europe. “It is normally more expensive than a mezzanine-topped senior loan. But right now, it is sometimes the only way to get a deal done”. And when (/if?) the economy improves, these unitranches can be refinanced, he adds.

Investcorp’s Ben-Gacem agrees. “I think tapping into that [unitrache] market is going to be key to getting deals done in Southern Europe for the medium term,” he says. “It’s probably fair to say that today none of the senior lenders in Spain are open for business.”

He’s more optimistic about Italy, however. “I think we can assume the Italian banks are a bit challenged, but they are different from Spanish banks. They have a much better leverage ratio,” he says.


Given these financial and macroeconomic challenges, how – if at all – can firms make money in Southern Europe? Many industry players believe internationalisation is vital.

For instance, Trilantic’s portfolio company Talgo, a Spanish high-speed train manufacturer, is 80 percent export-driven. Investcorp’s Esmalglass also exports three-quarters of its products, with only 13 percent of its sales coming from Spain. The firm usually stays away from businesses that are heavily dependent on Southern Europe, says Ben-Gacem. “They probably rely for a large part on local demand, which with the economic uncertainty could be anyone’s guess.”

Investindustrial has also proven that Spanish deals can work – if there’s an international link. It acquired PortAventura, a Spanish theme park, three years ago; since then it has doubled EBITDA by attracting more foreign visitors, says Carl Nauckhoff, principal and head of investor relations at Investindustrial. “You might think it’s a domestic asset, but in reality the numbers come from international tourism.”

Internationalisation has certainly become the main strategy of Mercapital, which is in the process of merging with competitor N+1. At the moment, 25 percent of the pair’s portfolio revenues come from Latin America; they hope to increase this to over 50 percent.

The two firms, which have decided to join force to “adapt to a difficult environment”, plan to come to market with a new joint fund later this year. Attracting investors will not be easy, Martin acknowledges. “Fundraising will be tough, there’s no doubt about this,” he says. But the firms hope this Latin American focus will convince LPs.


Clearly internationalisation is an important element for any LPs considering Southern Europe (if they haven’t already decided to steer clear altogether).

“We would look at past investments and see whether these were in businesses that were solely operating in Italy or Spain, or whether these were businesses based in Southern Europe but with a global reach,” says John Gripton, a managing director at Capital Dynamics. “We would always look where the growth is coming from. A company could be based in Italy but the majority of its revenue may come from Asia, for instance. But if past investments were in businesses that were only operating in Southern Europe, we would probably not back that manager.”

Other investors are even trying to negotiate special terms to cap their exposure to Southern Europe. “Bespoke fund structures, which investors are seeking to use to control the geographic investment parameters, are increasing,” says Jason Glover, a partner at Simpson Thacher. “For instance, you might encounter an investor with a significant amount of money who is prepared to support a manager raising a pan-European fund – but wishes to give that support through a separate managed account arrangement.” This would enable the investor to exclude geographic areas with which it is uncomfortable, like Mediterranean Europe.

Such structures wouldn’t have been possible before, certainly pre-Lehman. But managers have to be more flexible now, says Glover. “The successful fund houses are generally looking at a traditional blind pool fundraising with the investment criteria they specifically want. For those houses that are finding their fundraising more difficult, a number are prepared to be flexible in attracting a managed account investor – who might represent 10 to 20 percent of their total commitments,” he says. 


Bilbao of GBS Finanzas suspects all Spanish firms will have trouble raising funds this year. “Investors are worried [about being] exposed to Spain,” he says. “They perceive a high risk in Southern Europe, specifically in Spain, and they are looking for high rewards.”

That’s particularly true of managers targeting a largely domestic LP base, he believes. “The Spanish arena for fundraising is completely dry. If you only look to Spanish investors, you will not be able to raise a fund. You will need to go to foreign investors to demonstrate your capability to generate high returns in the Spanish markets.”

The fundraising picture in Italy looks more promising, however. Investindustrial declined to comment on the specifics of its current fundraising, but it is on the verge of reaching the €1.25 billion hard-cap for its fifth fund, according to a source familiar with the matter. 90 percent of its LPs have re-invested in the fund, with roughly half of the investors coming from Europe and half from North America, the source added.

North American investors remain particularly negative on the macroeconomic risks in the European Union, admits Nauckhoff. “We had spent a lot of time sitting down with them. But in the end, most people are coming to the conclusion that for the right GP they are backing, that tail-end risk is not worth giving up relationships that you are otherwise particularly pleased with.”

Futurimpresa also managed to attract LPs when it raised its €70 million debut fund, the Finanza e Sviluppo Impresa, in 2010. It typically invests in companies that can grow internationally, which “was one of our main selling points to LPs”, says Donvito. All of its LPs are Italian, so it’s probably easier for them to understand the country, he adds.


While most GPs admit that operating in Southern Europe is more challenging than before, they don’t feel the region should be avoided all together.

“It’s clear that neither a ‘run away from it all’ nor a ‘business as usual’ approach to investing in Europe is appropriate today,” says Investindustrial’s Nauckhoff.

“Italy is under pressure because of the macroeconomic conditions, but when it comes to small and medium sized businesses, there are excellent companies in Italy,” says Donvito.

The same is true for Spain, according to HIG’s Bergel. “Certainly, there will be companies on the brink of going bust. However, [that] does not mean the whole country is radioactive for private equity. The Spanish economy is doing well structurally, with productivity and export levels higher than ever,” he says.

“There may be companies you may not want to buy, but we have certainly found no shortage of interesting things to look at”, agrees Jock Green-Armytage, an adviser to JZ Capital Partners.

In addition, Italy and Spain have been home to some of the best and most sophisticated international businesses, says Ben-Gacem – and that won’t change because of the economic issues in the eurozone. “We take a very solid look at how those markets evolve and [don’t] necessarily panic at the first sight of some weak economic data.”

Ben-Gacem doesn’t think policy changes are necessarily vital. But what’s needed is a “more of the American positive attitude to life,” he suggests. “If politicians, consumers, and managers approach the euro in a cup-half-full kind of mindset, I think that would be a good catalyst to unlock many other good things,” he says. n