Private equity in Spain

The Private Equity, or as it is Known in Spain “Capital Riesgo”, can be defined as the investment in value titles through a negotiated process. Equity investment in Spain begins to emerge; the last year has left a volume of 3,465 million euros in 580 operations, which is back to the levels recorded before the crisis. The fourth quarter of 2014 accounts for 40% of total investments. International funds capitalized 79% by volume, with 66 transactions. The foreign equity was also responsible for the closure of 11 major operations throughout the year, although in general, the average amount did not exceed one million euros, 76% of cases.

The private equity can be defined as the investment in value titles through a negotiated process. Most of the investments in private equity are in shares of unlisted companies. Investing in private equity is usually an active investment strategy in which changes in the company, trying to add value are included.

In Spain, Institutions and Companies dedicated to Private Equity are regulated by 22/2014 Act, of 12 November.

For its part, the National Securities Market Commission (CNMV) keeps tracks of Private Equity Companies in Spain which is available on its website.

Unlike hedge funds, investment in private equity usually has a high degree of liquidity, coupled with valuations less transparency, since most of the companies they invest in the private equity funds are not listed. The private equity makes the purchase and sale of shares of companies through a process of negotiation, which gives a significant difference from traditional equity funds, which buy and sell listed shares without a negotiating process (buy and sell through stock markets).

In negotiating to buy a stake in a company, not just the purchase price being discussed, but there are many other aspects such as the form of payment, type of (ordinary, convertible, preferred…) action options purchase order to have a majority stake (51%), and in general, many clauses that require the buyer stipulated so that the management team of the company directs it in a certain way. When a private equity fund taking a stake in an unlisted company, your goal is to sell such participation with strong gains in this regard it is key to plan the exit of the company.

The output of the company can be basically in three ways:

  • The first is to take the company public, at which the private equity tends to get rid of their participation.
  • The second is to sell the stake to another fund capital risk.
  • Finally, it is possible to organize a sale; groups interested in buying the stake in the company can be very varied: management, an investment group, either in a trade or a supplier.

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Despite the liquidity of private equity growth over the last five years it has been very high, driven in large part because it has been one of the most profitable types of investment. The reasons why investing in private equity are several.

First, private equity has obtained excellent results in terms in the past. The return on equity funds has been higher than the stock indices.

Second, private equity funds are oriented to obtain absolute returns, regardless of the overall performance of the stock markets. This is especially relevant since many of the traditional management in equities have a very closely related to what the equity indices behavior.

Third, private equity can help diversify portfolios traditional assets (equities and fixed income). Although private equity has some correlation with the performance of equities.

Fourth is noteworthy that most of Europe’s GDP is generated by unlisted companies, and then the investment horizon of risk capital is much higher than the funds to buy shares of listed companies.

Fifth private equity can give exposure to smaller than they are normally bought on the stock markets companies.

Sixth private equity gives access to internal company information. When investing in private equity, managers give great information about the company. This information, in an organized market as stock markets could be considered as inside information.

Seventh, private equity has an ethical dimension because it encourages entrepreneurship and innovation. The Private Equity supports entrepreneurs through capital contributions.

Eighth, private equity has a high influence on the direction of the company and the implementation of strategies. The managers of private equity funds usually seek active participation in the strategic direction of the company. For example, you can help establish a business plan, selecting top executives of the company, present or potential customers set a strategy involving a merger or acquisition.

Finally, private equity can help make efficient use of leverage, especially in the case of buy-outs. Often, private equity debt makes the company better organized, both types (senior debt, mezzanine debt…), and terms, which helps to improve the profitability of the equity of the company.

On the other hand, there are three aspects which the private equity cannot be a good investment at certain times or for some investors. First, the private equity investment necessarily has to have an investment horizon longer term. Investments in private equity enjoy low liquidity. Second, invest in private equity resource intensive, especially when compared with the investment in listed shares, which follow a benchmark is quite simple. Finally, the managers of private equity funds enjoy great freedom to choose where to invest. The manager therefore has a greater degree of discretion than in traditional bond funds or equity.

In 2013 the total volume of Private Equity investment fell by 8% compared to 2012, to €2,149 million, which represent the lowest figure recorded since 2009. These figures are way below the maximum achieved in 2005, when €4,005 million was invested. In 2013, nearly three quarters of the investment came from international funds which headed the year’s biggest deals (Befesa, Dorna, Santander Asset Management and Teknon). There was a 5% drop in the number of deals, to 166 operations, of which 155 (93%) were carried out by Spanish Private Equity Firms. Between 2011 and 2013, the most active national investors were N+1 Mercapital, Nazca and Cofides.

The Private Equity reactivation which began in the second half of 2013 is continuing through 2014 and 2015. Fundraising will also rally thanks partly to the resources which the public sector fund of funds FOND-ICO Global has begun to share out.

We are at a moment full of optimism for the sector in Spain. The improvement expectations show a significant recovery of the investment activity, the divestment activity and also the fundraising, as the latest figures estimated by the Association Spanish Risk Capital Entities (ASCRI). We’ll see how end this 2015 and 2016 begins, but it seems that everything points to a clear recovery of the sector.

Firmado: Julio Bermúdez Madrigal
Co-Director en Derecho & Perspectiva


Fuentes:

– Ley 22/2014, de 12 de noviembre, por la que se regulan las entidades de capital-riesgo, otras entidades de inversión colectiva de tipo cerrado y las sociedades gestoras de entidades de inversión colectiva de tipo cerrado, y por la que se modifica la Ley 35/2003, de 4 de noviembre, de Instituciones de Inversión Colectiva.

Web de la Asociación Española de Entidades de Capital Riesgo 

Página web de la CNMV 

Imagen:

Distribución Actualidad

Julio Bermúdez Madrigal

Licenciado en Derecho y Gobierno de Instituciones y Organismos Internacionales por el Centro Universitario Villanueva. En el ámbito académico ha realizado también el Curso Superior de Asesoría Jurídica de Empresas en la Escuela de Práctica Jurídica.
Tras trabajar en el Departamento de Derecho Audiovisual y de las Telecomunicaciones de Diez & Romeo, comenzó a trabajar en el Departamento de Derecho Privado y Mercantil de Puerta abogados. En la actualidad es abogado en el Departamento de Derecho Mercantil del despacho de abogados Garrigues en la Oficina de Madrid.
Compagina su trabajo con su labor como co-fundador y editor de la presente web así como con la colaboración de otras web y revistas de contenido jurídico como Hay Derecho o Lex Mercatoria.

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