A larger buyout market has shown signs of gathering momentum in Spain over the last few years. To what extent has it been derailed by the credit crunch? Toby Lewis explores.


Announcement date Deal value ($m) No.
by year
2005 15,321 79
2006 5,677 87
2007 11,158 71
Total 32,157 237

However, despite the notable amount of LBO activity in Spain in recent years, which culminated in the Altadis and Iberia bids, this part of the market has been largely the domain of foreign firms. Domestic GPs operating within the mid-market have taken a different approach to market conditions. One of these, Mercapital, had yet to make its first investment from a €550 million fund it raised last year at the time of going to press.

Javier Loizaga, of Mercapital, says: “We did bid for a number of companies in the first semester but the pricing environment was very demanding. We are now going to close a couple of deals but only at more reasonable prices.” There will be some slowdown in deal flow while sellers decide whether this correction is permanent, he says.

Mercapital exited three companies in the first half, and Loizaga says he is pleased to have seemingly called the market correctly. Notably, Mercapital sold private hospital group USP Hospitales for €675 million to Cinven and its stake in media group Recoletos to trade buyer RCS for €857 million.

“I would love it if the correction went even further as long as liquidity is there. I hope its going to last because the buying environment of six months ago was crazy,” says Loizaga.

The opinion is frequently expressed that the majority of domestic Spanish firms are well suited to investments of a relatively smaller scale.

Mounir Guen, chief executive of London-based placement agent MVision, says: “Unlike other parts of Europe, it is an extremely fragmented country. If you look at a market leader in many countries it will have at least 90 percent of the market, but in Spain it often has 9 percent of the market. By default, this tilts the market towards growth and expansion. It takes longer to build these companies and it means it can take a long time to create European leaders out of Spain.”

Crucially, the mid-market focus of the country's domestic funds is likely to mean they can continue investing in the wake of the debt market problems. Natividad Sierra, a partner at Corpfin Capital, says: “Banks were stricter and gave less options in financing smaller deals and so the mid-market will also be less affected by the problems.”

An advantage on the buyside is that companies will begin to trade at lower multiples, and there may be opportunities for bargain hunters. “As companies which have expanded are forced to focus on their core activities and family businesses consider selling up, there will be good buying opportunities,” Hoedl says.

However, Sierra points out that there may well be a period of time until sellers adjust their price expectations down.

Given the constraints caused by the credit squeeze, it is probable in the short term that investors in the asset class begin to look even more carefully than before at the capabilities of those investing their money. This is likely to have unhappy consequences for those funds which cannot adequately demonstrate their competence to investors.

Javier Arana, a partner at listed mid-market firm Nmas1, which is investing a €330 million fund, half of which was raised from the public markets, says: “Some new managers are going to face problems as investors become more selective, but proven senior partners shouldn't have a problem. This shouldn't affect fundraising. The market has evolved and there's a maturity in the industry here now.”

There is a widespread feeling that it would be premature to predict armageddon. Fernando Torrente, partner at law firm Cuatrecasas, says: “Time will show the effect of the crisis but the general panic has led to numerous rumours without foundation. What will be important is the amount of defaults that happen in the near future. But banks here don't give away money and so most of the companies which have received backing should not default.”

While mid-market Spanish private equity firms are unlikely to be overly prejudiced by the changed borrowing landscape, it remains to be seen whether the problems in the debt markets will have a negative effect on the overall global and domestic economy.

One thing is certain: LBOs appear to be on hold in Spain, as is also the case globally. If large debt syndications go better than expected, there may be an LBO revival. For the next six months at least, it seems Iberian larger buyout firms will be looking expectantly to the banks in Europe and the US for signs that their loan backlog is clearing.