Spanish private equity reform on the cards

In the past six months the Spanish private equity market has been thrust into the limelight for unearthing some of the largest transactions in Europe’s deal history. With private equity deals such as the mega E12bn bid for Spanish telecommunications group, Auna and BC Partners and Cinven’s E4bn-plus buyout of IT travel business Amadeus, Spain’s legal practitioners have been hard at work putting newly established reforms into practice. Katherine Steiner-Dicks reports.

Legal changes in Spain in the past year have been positive for private equity. The regulatory and fiscal environment has become more flexible, especially for sophisticated investors. These changes include an increase in the amount Spanish pension and mutual funds are able to invest in Spanish and non-domestic private equity funds, which increased from 10% of their total assets to 30%. Private equity funds were also allowed to retain a shareholding in an IPO, whereas before they were required to fully to divest. And those foreign investors not based in tax havens have been granted a 100% Spanish tax break on dividends distributed by Spanish private equity funds. With these changes, and others on the way, Spain should be a more attractive place to raise capital, to invest and divest, both in the public and private markets.

Until now, most private equity funds in Spain have not been structured as Spanish vehicles, but as UK or offshore, because many funds have been targeted at non-Spanish investors. However, when there is a majority of potential Spanish investors, Spanish vehicles are more frequently used. The new draft bill should enhance the use of Spanish vehicles, since the new regime is considered an improvement over the present one. This is especially good news for local high net worth investors, since about 99% of Spanish regulated private equity vehicles are tailor-made for Spanish families, according to Alejandro Ortiz, a corporate partner and head of the private equity practice at Linklaters in Madrid. Such examples include Spain’s domestic funds, which have only been open to banks and family offices in the past, such as Diana and Qualitas, the latter of which was set up four years ago by the Polanco family, which owns national newspaper El Pais.

Time for a change

In Spain, the basic legal framework for private equity is the Private Equity Act (la ley de entidades de capital-riesgo), which applies to domestic vehicles. And those that cohere to the Act, especially Spanish corporate investors, can enjoy a favourable tax regime, according to Javier Morera, a tax partner and member of the private equity team at SJ Berwin in Madrid.

“In fact, the tax regime provided by the Spanish Private Equity Act to these Spanish corporate investors is proving a very important tool in their investment decision-making process,” says Morera. “This, together with the possibilities that the Spanish private equity vehicle may offer to (according to the Spanish Pension Funds Regulations and under certain conditions), investments from Spanish pension funds is are boosting the Spanish private equity vehicle to a very strong and competitive position in our market,” he says.

Morera and his peers are increasingly seeing large private equity houses aiming to raise significant amounts from the Spanish investor market. Fund managers are increasingly setting up structures that include one Spanish private equity vehicle alongside the usual UK/offshore/Delaware limited partnerships.

“The legislation plays a key role in the development of the private equity market and is an important criterion when choosing the country from which an investment is channelled. In this respect, jurisdictions like the UK have a clear competitive advantage, as they have a more flexible legal regime, which is particularly suitable for attracting domestic and international investors,” says Morera. Up until now, many Spanish private equity funds have had UK or offshore fund structures, which are conducive to the demands of many investors. Morera says these structures have provided a strong competitive advantage and this has been the main reason for their success in the private equity market.

Recent changes in Spanish law include the new draft bill of the Private Equity Act, which includes the acceptance of formally regulated Spanish fund-of-funds, and a fast-track approval process for private equity funds managed by sophisticated investors (for example, institutions and banks.) The draft bill is also expected to make amendments to the tax regime for private equity products.

Overall, the new draft bill on private equity entities introduces a greater degree of flexibility in terms of the establishment and operation of private equity products. “The bill creates new forms of simplified private equity entities, which operate under a more flexible administrative regime than that of the general regime,” says Alejandro Hurtado, a regulatory specialist in the private equity team at SJ Berwin in Madrid. In order to qualify as a simplified private equity entity it is necessary to have minimum commitments of €500,000 per investor, a maximum of 20 investors and the placement of the interests in the fund must be strictly private.

Previously decisions, such as fund approvals, were made by the Ministry of Economy, which slowed things down, but once the bill is approved such decisions will be passed to the Spanish Securities Market Commission (the Spanish Comisión Nacional del Mercado de Valores, or the ‘CNMV’.) According to Morera, this means the time limits for granting authorisation will be reduced. In some cases, authorisation is granted based on a non-objection system, which will replace a system whereby if no response was obtained from the Administration, authorisation was refused.

Fund-of-funds: the turning point

While there’s talk of more positive changes likely in the area of remuneration for investment managers in the form of carried interest, the biggest news is the acceptance of formally regulated fund-of-funds vehicles, which will spark new investment opportunities for Spanish LPs. In principle, Spanish investors may invest in foreign private equity funds-of-funds. However, the absence of a formally regulated legal framework for Spanish fund-of-funds vehicles in the past might have limited the investment opportunities for Spanish LPs and also curbed to some extent the growth of the Spanish private equity sector. This should be resolved by the new Act, provided Spanish LPs do invest.

Spain’s first fund-of-funds product is managed by Altamar Private Equity, headed by Claudio Aguirre, an ex-Merrill Lynch senior banking and private wealth executive. Aguirre says he is looking to make a final close on the €200m fund in December of this year. The fund is being pitched to Spanish limited partners, which in itself will act as a significant education exercise. Aguirre says he is confident, given the interest so far, that the fund will be significantly oversubscribed. Advisers on the ground in Madrid expect to hear of other fund-of-funds launches in the next year from large financial institutions.

Such landmark decisions from the regulators have brought to light just how behind some of the Act’s founding principles were compared to other legal frameworks in Europe, especially when it comes to setting up a fund in Spain. “This legislation has fulfilled an important role, but was in need of amendment due to various flaws noted over the years, relating to its relative lack of flexibility, and the new trends of the European private equity sector,” Morera says.

“Although some of these amendments will be purely technical, others may be controversial,” he says. “For example, it is intended to penalise those transfers of stake holdings, which the Spanish private equity entity carries out in favour of acquiring entities related to the transferring entity or its investors.” By this he means a direct or indirect capital or equity stake of at least 25%. This also includes transfers to entities in tax havens. In both cases, the penalty will take the form of a withdrawal of the tax exemption for 99% of the profits made by the Spanish private equity vehicle on such transfers, although the bill envisages exceptions to this penalty for cases in which the transfer is made to the stake holding entity itself, to another member of the stake holding (certain conditions would apply here), or to another private equity entity, says Morera.

“This will also include securities acquisitions from an entity related to the Spanish private equity entity or to its stakeholders, which may also entail, for the Spanish private equity entity, the loss of the 99% tax exemption. This may be another controversial tax point of the new Act,” explains Morera.

Hurtado says: “The new legislation is clearly an improvement on the previous situation and the parliamentary process is proving to be a proper route for improvements in the text of the bill, which hopefully should reach a balance between the concerns of the sector and those of the rule-maker.”

Those at the crux of the current deal whirlwind say the legal framework would still be inflexible and antiquated had the pan- European and US buyout houses not come into the market looking for deals. But by the end of 2005, the Spanish private equity market will look vastly more attractive to LPs as local regulators now set legislative reform in motion to serve both the private equity firms and minority shareholders alike.

For those private equity firms looking to list or sell shares on the Spanish public markets, there is also some good news in the form of the Royal Decree Law 5/2005, which has initiated more flexibility in terms of registering prospectuses for public offers and listings in Spain. Institutional offerings by non-listed issuers no longer require the registration of a prospectus in Spain, according to Spain’s Spanish Official Gazette (Boletín Oficial de Estado.). The law partly implements the Prospectus Directive (2003/71/EC.)

Current Spanish securities regulation does not include what other markets consider an offer of securities to the public. This can be construed as vague in terms of when rules on public offerings are applied, yet can also be considered flexible as some transactions might fall outside the constraints of a public offerings regime. This flexibility, according to a Freshfields Bruckhaus Deringer report, has enabled the regulator and advisers to conclude in the past that small institutional placements of shares in Spain, by issuers not listed in Spain, were not subject to the full prospectus regime or the limited filing requirements of the current exemption regime.

SJ Berwin regulatory lawyer, Alejandro Hurtado, says new exemptions in the Prospectus Directive are now much more flexible, which will be beneficial to private equity houses looking to list or make a public offering (whether it be the private equity firm itself or one of the target companies.) He says the simplified process will enable companies already listed in markets such as London, to also to list or raise capital from the Spanish public markets without having to produce another prospectus or, in some cases, produce a full translation or introduce substantial amendments in the existing prospectus. It also highlights a different calibre of sophisticated investor in Spain. For example, prior to the changes, the minimum denomination exemption was E150,000, but this has now changed to E50,000.


? Offerings can be made to a maximum of 100 investors rather than the previous rule, which stated a maximum of 50 investors.The term ‘qualified investor’ (institutions, banks, sophisticated investors) is now much wider than the equivalent Spanish concept (institutional investor), which does not include corporates, SMEs or individual investors. However, the current institutional exemption is subject to a resale restriction, which is studied on a case-by-case basis.

? The minimum denomination or consideration exemption in the prospectus directive reduces the €150,000 threshold to €50,000.

? Also, exemption will be granted if the offer targets less than 100 individuals or legal entities per EU state, excluding qualified investors.