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Relishing youth

Having spent the last few years positioning itself as a rapidly maturing market, Spain may yet be thankful for its youth, writes Toby Mitchenall.

Until the credit markets crunched, the Spanish private equity market was enjoying a growth spurt. International firms were being drawn to the adolescent market, and as a result the larger end of the deal spectrum was starting to blossom.

What Spain’s private equity industry body, the Asociación Española de Entidades de Capital Inversión, describe as “mega-deals” – those worth more than €100 million – increased in number from six in 2006 to 11 in 2007. The total value of these deals grew from €816 million to €2.2 billion.

Toby Mitchenall

In Spain, the asset class is largely seen as a valid new part of the financial establishment and the country has a regulatory regime that has started to encourage Spanish institutions to allocate money to private equity. Spanish GPs go about their business in what, according to the European Private Equity and Venture Capital Association, is now the sixth best tax and legal environment in Europe.

Part of this advantageous environment can be attributed to the fact that Spanish private equity deals have not yet been thrust into the media spotlight nor incurred the wrath of labour unions, as in some other countries.

“[Spain] has had fewer large deals with syndicates and potential conflicts,” Javier Loizaga, chairman of Spanish firm Mercapital, recently told sister publication Private Equity International.

But having had what one might call a privileged upbringing – growing through a sustained period of benign economic conditions – Spanish private equity could be in for some tough times. Spain’s economy, with its heavy exposure to the property market, is certainly set to suffer more than most developed countries from the current downturn, as highlighted by the International Monetary Fund in October.

“We have not had any major private equity write-offs in the market; I’m not sure whether we will or not,” says Francisco Churtichaga, head of Doughty Hanson’s operations in Spain.

In this environment, the default of a high-profile private equity-backed company, or a portfolio company forced to scale back staff, could bring unprecedented and unwelcome attention.

One prominent industry figure pointed to two buyouts in particular which are likely candidates to suffer from the economic downturn: fashion retailer Cortefiel, which was bought for €1.44 billion in 2005 by Permira, CVC Capital Partners and PAI Partners; and Panrico, a donut-maker bought by Apax Partners also in 2005. Cortefiel has 1100 outlets and more than 8000 employees, while Panrico employs almost 6000. Bad news from either group would certainly make the headlines.

Should this happen, Spanish private equity professionals will face the same battle of perception that their neighbours in the UK, Germany and Denmark have already been through.

However, as a relatively young market, Spanish private equity is still focused to a great extent on buyouts of family-owned businesses: a segment of the market, which according to Loizaga is throwing up an unprecedented number of opportunities.

As recession looms, family business owners may increasingly want, if not need, a viable exit route. With plenty of cash awaiting deployment (fundraising in the first half of 2008 was up 5 percent over 2007) and an industry still focused smaller deals (98.7 percent of deals in 2007 were under €100 million), private equity is in a position to ride to the rescue of these smaller businesses.

It is at this smaller end of the market, therefore, that private equity will be able to enhance its reputation. Having spent the last few years trying to look older and bigger, Spanish private equity may yet be thankful for its youth.