A Spanish conquest

Private equity in Spain was originally regarded as a tool for allocating capital to regional development, but the private equity culture has evolved. The change of terminology from “capital riesgo” (literally risk capital) to “capital inversion” (investment capital) illustrates the new mindset.

Mercapital’s euro600 million fundraising, the second largest country-specific fund in Europe, and the arrival of multinational private equity giant Carlyle, which set up offices in Barcelona and Madrid and is on the look out for the rare Spanish mega-deal, were two events this year that marked a turning point in Spanish private equity.

Despite these events, it looks like figures for 2001 will remain static, perhaps even recording a slight decrease on the boom of 2000. Mark Heappey of 3i Spain says: “Growth last year was huge. This year it will break even or there will be a small decrease.” He adds: “Venture capital is cyclical, the economy does start dipping, but I would be very surprised if it dropped by more than 10 or 15 per cent.”

Spanish fund raising boomed in 2000, over three times the amount raised in 1999, according to figures from Spanish venture capital association, ASCRI. Total Spanish funds raised in 2000 reached euro1.8 billion. Taking into account pan-European funds that dedicate part of their fund to the Spanish market, this figure reached euro2.5 billion in 2000.

The surge in the Spanish market is largely due to a flourishing economy, new regulations regarding private equity funds with more attractive tax incentives, and in particular the launch of new funds with banks as sponsors such as Banco Sabadell and Banco Pastor for Aurica XXI’s e180 million fund and Banco Guipuzcoano for the Diana Capital I fund, which held a first close at e60 million in July and anticipates a final close of between euro100 million and euro150 million by year-end.

Figures from ASCRI reveal total managed funds in Spain in 2000 increased to e4.75 billion, up over 90 per cent compared to 1999. Boosting this figure was Spanish veteran Mercapital’s euro600 million SPEFII fund, the largest private equity fund in Spain to date. Mercapital accounted for 40 per cent of the generalist funds raised for investment in development capital and buyouts in Spain in 2000. A fifth of this fund has already been committed to two deals and it is hoped that 50 per cent will be fully committed by year-end. Both transactions are build-up projects. The fund’s first commitment was a euro82 million investment for a 35 per cent stake in Guascor, a renewable energy company. This was followed by a e40 million investment for a 45 per cent stake in Jofel, a leading manufacturer of hygienic accessories. Mercapital has ambitious plans for the future and expects to invest the current fund in two to three years then go out fundraising again for a fund of maybe euro1 billion, says Javier Loizaga, executive partner.

Fellow Spanish domestic, Excel Partners is in the process of fundraising for its fourth vehicle that it hopes to close next year at around euro350 million, which would coincide with the firm’s tenth anniversary. Excel’s first two funds ECP1 and ECP2 are both now fully liquidated with an average IRR on investments of around 42 per cent. Its third fund, ECP3 is now 65 per cent invested in six companies and should be fully committed by year-end.

Spanish VC’s anticipate the first Spanish fund-of-funds to appear in the market by year-end, although nothing is confirmed. The Italian market witnessed the launch of its first fund-of-funds earlier this year – see evcj May, page 47. Mediolanum State Street’s Fondamenta raised euro160 million at its first close and, if the fund structure proves a success in Italy, the idea is to duplicate Fondamenta in the Iberian market.

A factor holding back the Spanish market in this respect is the lack of involvement from institutional investors. Says Juan Daz-Laviada, managing director of Dresdner Kleinwort Capital Spain: “What is still not happening is that Spanish pension funds and savings are not as involved in private equity as they could be.”

The players

“The Spanish market has historically been characterised mostly by local players, small funds and small deals that are in general very liquid,” says Joaquin Pereira of CVC Capital Partners. “Private equity professionals in Spain are still young and are still in the process of learning the business, going through both good and bad experiences, shaping seasoned professionals for the market,” he continues.

At the end of 2000 there were 64 private equity investors operating in Spain, according to the European Venture Capital Association, with more in the process of setting up first funds.

The Spanish private equity market can be divided into three main groups. Firstly come the indigenous players such as Mercapital, Corpfin Capital, Excel Partners, Dinamia, a quoted private equity vehicle jointly-owned by Electra Partners and AB Asesores (now part of Morgan Stanley Dean Witter), and Talde, all of which have built reputations in this market, and make for a close community when it comes to co-investment. There are the international funds that have set up offices such as Apax and more recently Carlyle, which are looking for deals at the larger end of the spectrum. And there are the more well-established pan-European players that include 3i, Bridgepoint and CVC, all with a solid grounding in Spain, having built strong management teams with a good network of contacts.

Venture capital firm, Talde has been on the scene in Spain for over two decades and has invested in around 120 companies, contributing over euro60 million to the development of these business projects. The firm is in the process of fundraising for a new e60 million fund that will invest across the board in seed capital, start-ups, development capital, MBOs and MBIs. The fund will complement Talde Capital FCR, which launched last November with e40 million for investment. The firm has had an active year so far with five deals to its name including an 18 per cent stake in Internet consultant NHT Norwick; 22 per cent in Lancell Systems, manufacturer of payment GSM terminals; 70 per cent in Universal de Modelos, a thermoforming and injection mould producer for the automotive and white-line component industry; 10 per cent in telecommunications specialist AMR Systems and a 16 per cent stake in Andago, developer of Internet technology.

Among new entrants to the market is the 21 Invest Industry fund, a euro323 million investment vehicle, controlled by the Benetton and Bonomi families – see evcj July/August, page 28. 21 Invest will commit between euro15 million to euro50 million in Spanish and Italian companies. It is difficult to tell how newcomers to Spain will fare in the current climate. The acid test will be if next generation funds are successfully launched.

Early stage stands still

Deal sizes, rather than numbers, are on the increase. The expansion and buyout deals show the most potential for growth this year, rather than the early stage transactions that are few and far between.

Last year, high tech funds accounted for 20 per cent to 25 per cent of new funds raised. Funds launched last year dedicated to this sector included Innova Capital with euro120 million, Marco Polo with euro97 million, and TecPlus, Granville Baird’s Spanish fund with euro30 million. While the high tech sector did bear some fruit such as the euro63.8 million investment in Netjuice by 3i, GE Equity, Fibanc and FCC; 3i’s e40 million commitment to Sistemas Informaticos Abiertos and a euro36 million investment by Vista Capital in Grupo SP, this year activity seems to have ground to a halt. One such example is Marco Polo, which was making the headlines last year with its fundraising and has now gone quiet. Even the life sciences sector, which is witnessing a boom in Northern European countries, is not that big, according to David Baker of Baring Private Equity Partners.

Spain was a late starter as far as technology investments are concerned. Mark Heappey of 3i says: “The benefit of technology making a late appearance in Spain is not a great loss, but nor was there any gain. As a result, there are only seven companies listed on the Spanish Nuevo Mercado, that have dropped by around 80 per cent and no new issues.”

But the technology sector is beginning to bounce back. There is a raised interest in this field despite the doom and gloom of the past months. Heappey says: “There are some good technology businesses out there, which will mean that between 10 and 15 per cent of investment in Spain will remain in early stage.” Investment opportunities are even sparking interest from foreign funds without a Spanish presence such as Z Capital Partners, GE Equity, Palamon, Atlas Ventures, Pino Ventures and NetPartners.

Seeking out potential in the Internet sector, Spanish online bank, Bankinter launched Ebankinter Internet factory in July. This is a venture that hopes to commit up to euro12 million over the next five years, with a view to taking minority stakes of between 10 per cent and 30 per cent in Internet-related investments. Incubators are still experiencing a rough ride in the Spanish market. They are few and far between, but a recent newcomer, Spark Inversiones, a venture born out of the NewMedia SPARK model, decided to brave the storm with its launch earlier this year – see evcj March, page 12. Spark Inversiones is a Madrid-based joint venture established by Kiriako Vergos and NewMedia SPARK to invest in early stage technology companies in Spain, Portugal and Latin America.

However, SPARK is in difficulty and recently announced cost reduction plans to bring down central organisational costs from over GBP7 million per annum to GBP4 million. The firm has also implemented tight control of costs in Madrid and its other European offices. Venture Park, the Berlin-based vehicle, which had also set up offices in Madrid, has been hit by deteriorating market conditions. In June, the firm decided to return its remaining funds of around euro20 million to investors and cease operations.

Growth capital

“Today, the name of private equity in Spain is growth capital,” says Javier Loizaga of Mercapital. Mark Heappey of 3i agrees: “Growth capital is where most of the opportunity in Spain lies.” This is due to the fact that the Spanish market is still in a phase of development. It is in the process of converging with Europe and this convergence, according to Loizaga, is a factor contributing to growth. Potential derives from a large proportion of companies that, in order to compete globally, have no chance other than to grow aggressively with the aid of funding or to sell out to a larger conglomerate.

The majority of Spanish companies are family-owned and therein arise opportunities where venture capital is a good option to provide liquidity for shareholders and to finance growth plans, says Felipe Oriol, president of Corpfin Capital, another veteran of the Spanish market where it has been active for over a decade. The firm is currently investing its euro135 million fund, Corpfin Capital II.

Oriol adds that there is rising competence in the Spanish business environment, with more sophisticated management teams and an internationalisation of Spanish businesses evidenced by the increase of Spanish companies listed in London and New York. One such example is fashion retailer Zara, which successfully floated this year following high demand for its shares.

While Heappey is bullish with regards to the potential of this market, he adds it is still difficult to do deals in Spain at the moment. “Pricing is still fairly high. It is hard to close deals. Pricing will come down however it will have to.” He is also of the opinion that there is no room for new entrants in this market, particularly in the mega deal segment. “Big deals are few and far between, but medium-sized deals will grow,” he says. Loizaga of Mercapital sees the positive side of the growing number of players, saying: “We would rather have a one per cent share of a very big market, than 50 per cent of a small market.”

One thing is certain however and that is to be successful in Spain, you need a base. The flow of deals automatically favours those with an established Spanish presence. Hence the wave of pan-European and international funds that have set up in the region. Says Oriol of Corpfin: “Spain has been a second division private equity market for a while and it is only natural as part of its development that some of the more established global players would move in.”

Size matters

Deals are getting bigger in line with the rest of Europe. But deal size in Spain has a long way to go. “A big deal in Spain is a medium-sized deal everywhere else,” says Mark Heappey of 3i. An established player remarks that there is a lot of money chasing deals and many of the larger players are making a lot of noise but have yet to do a deal.

David Bendel of Excel Partners says: “It all seems very familiar. The last time the American VC’s invaded Spain was in the late eighties and most went away having taken a hit. We shall see…” On the one hand, he sees how there is scope in Spain for Carlyle. The firm intends to concentrate on sectors that many Spanish VC’s avoid such as privatisations, regulated business and cyclicals. On the downside, he adds that the large buyout sector is already crowded in Spain with both local funds and pan-European buyout funds who are all struggling to find deals. Bendel says: “There is considerable price inflation at the bigger buyout end and I am not sure at this stage of the economic cycle that excessive gearing, needed to justify the higher prices, is necessarily wise.”

However, Alex Wagenberg, a director in Carlyle’s Barcelona office speaks with confidence of the firm’s plans: “The timing is right for this kind of product in Spain.” He adds that the Carlyle Group sees itself filling a void in the Spanish market. This is debateable with houses such as Apax, which entered the market last year, and CVC fighting for deals in the same space.

Carlyle has set up offices in Barcelona and Madrid, headed by Pedro de Esteban, managing director for buyouts in Spain. The team currently stands at four, with two more professionals to join the division by year-end. Carlyle will have a particular focus on Spanish family businesses, which represent a significant proportion of GDP in Spain but are reluctant to become listed companies in order to raise further capital for growth.

Wagenberg says the firm, which has set a minimum transaction size of euro150 million, has entered the market with modest expectations. “In Spain, we won’t be seeing the mega deals that Carlyle is used to. But we already have some deal flow something we didn’t expect so early on. If we do one deal a year, we will be very happy.”

Joaquin Pereira, director at CVC, also competing for deals at the larger end of the spectrum, says: “In general in Europe larger deals are being done, but let’s be realistic, the Spanish economy is not as large as the UK or Germany. Today, prices are high, but transactions aren’t happening at high prices they’re just not happening.” A landmark deal for the Spanish market was CVC’s investment in Torrespapel. CVC, with a euro400 million commitment, put in as much equity as Mercapital had raised in its previous fund alone.

Deals at the forefront of Spain’s buyout market last year included another CVC investment – the GBP203 million Revlon Professional Products/Colomer Group deal and 3i’s GBP119.45 million acquisition of Grup TCB from Grupo Perez y Cia and Guell Martos Family.

Earlier this year, Corpfin completed the MBO of the waste management company, Grupo TMA for a total value of euro72 million. The firm’s three-strong senior management team, all sons of TMA’s founder, have reinvested to take a 45 per cent stake in the equity. Societe Generale has structured and fully underwritten the bank debt in the form of a seven-year loan. Patrick Gandarias of Corpfin describes the TMA deal as an ideal private equity transaction, a classic LBO with the aim of growing both internally and by acquiring other companies.

Exit opportunities

According to ASCRI, in 2000, total value of divestments was up 11.6 per cent, reaching a total of e217 million, while the number of exits at 107 fell for the fourth year running. Most of the exits were from commitments made during the first half of the 1990s.

Until the mid 1990s the most common exit route in Spain was the management buy-back, primarily due to the importance of government-backed private equity houses that invested in small companies in lesser developed areas. The decreasing importance of these institutions has led to an increased use of trade sales as an exit route.

The pattern of divestment changed somewhat in the second half of the 1990s. Write-offs fell sharply and trade sales replaced management buy-backs as the main exit mechanism. The Nuevo Mercado in Spain hasn’t taken off and so IPOs of venture-backed companies are uncommon.

David Baker of Baring Private Equity Partners Espaa sees the Latin American market as a significant exit route for Spanish private equity houses. Companies in this region are keen to benefit from Spanish management capabilities by acquiring Spanish companies. There is a great cultural link and if the deal is managed properly, it can lead to a wealth of opportunities, says Baker who is nevertheless very careful when it comes to Latin American exposure. “There are not so many great investment opportunities out there, but on the exit side, it is a good angle to take,” he says, adding that BPEP may have two or three examples supporting this by the end of the year.

A sign of the relative immaturity of this market is the fact that secondary buyouts have yet to come to the fore something that it is predicted will change as the Spanish private equity market develops. “The Spanish are still very suspicious when it comes to the secondary buyout route,” says Mark Heappey of 3i. “They ask themselves why the other private equity firm has decided to sell the portfolio company on. Also, until recently, there has not been the volume of operators in the region making the secondary buyout a likely exit route.”

As for the future, Joaqun Pereira of CVC says: “The climate in which we operate calls for being cautious. Nobody has a clear read of what the future economic outlook will be certainly, it looks dubious.”