Spanish fundraising: has the market already overheated?

By Maarten de Jongh

There's more money than there are deals in Spain, although that could soon begin to change.

The outlook for the Spanish economy is getting better, as you may have seen in the press. The economy is growing again, be it at a moderate rate, but growing nonetheless. The number of employed people is also up, although the number of unemployed is still very large.

This all has had its effects on the private equity market. Since 2009 until last year, it was barely possible to raise funds, but now we see investors returning to Spain. In the first six months of this year € 1.1bn was raised by Spanish private equity and venture capital fund managers. In addition, € 0.9bn was invested directly by foreign investors.

Part of these funds was supplied by the Spanish government, through its Fond ICO Global, a fund of funds which co-invests together with private investors and was established with € 1.2bn. It is currently in its third round, after distributing €473m to 14 funds in the previous two rounds.

So, now you are surely thinking that this € 2.1bn of fresh money must have brought the market back to life. And looking at volume of investments in the same period that assumption might be correct, as more than € 1.1bn was spent.

But if we take a closer look at the numbers, we must adapt our conclusion, at least when looking at mainstream mid-market private equity, with a deal size between €10m and €100m. In this segment, only 13 deals were registered in the first half of this year. This is a significant increase over the five deals in the same period last year, but very much at the same level of the years between 2009 and 2012. Yes it is true: mid-market private equity in Spain generates just a few transactions. And the segment below the mid-market, those deals between €5m to €10m isn’t much bigger (only five deals in 2014). Most deals are done in the micro segment by small VC players: close to 200 deals of less that €5m. This breakdown of deals by size has actually been fairly stable in the last five years.

However, prospects for the next two years are reasonably good. It is my feeling that mid-market deals will grow significantly in numbers, for two reasons: first, elderly business owners have been postponing decisions concerning the sale of their companies in the last five years. The lack of confidence in Spain by investors and the reduced level of profits made exits unattractive to many of them. Now we see that investors are returning, at all levels, and profit expectations are better. So the number of buyouts will increase.

Secondly, now that the economy is picking up a little, companies again see that they can grow and growth means investment, either capex or working capital. Many companies have seen their profits drop and, therefore, their debt/Ebitda ratios are too high to have access to substantial bank finance. So here I see multiple opportunities for development capital, either in the form of equity or debt.

So even if the amount of funds raised this year seems large in comparison to the investments in the mid-market, I am convinced that these funds will be put to work over the next 18 months.

Author: Maarten de Jongh is managing partner at Spanish advisory firm Norgestion.