Turning tides in Spanish private equity

Once the sick man of Europe, the Spanish market is attracting private equity giants from across the globe. That looks set to continue, with international GPs accounting for 11 of the 24 applicants for the second tender of Fondo ICO global, the €1.2bn state-supported fund-of-funds.

And international LPs are following suit. According to one lower mid-market fund manager speaking at the Ascri conference in late May, 35 international investors expressed an interest in committing to the firm's latest vehicle – that figure stood at just eight this time last year. The LP base of local managers appears to be expanding, then – but regulatory constraints remain.

Age-old concerns
Traditionally, pension funds' allocations to private equity have languished around the 2% mark, primarily due to regulatory restrictions which state the maximum fees a pension fund can pay must not exceed 2% of the asset base.

Spain is attracting a growing number of international LPs thanks to state initiative

"When you add together the fees that the pension fund manager charges and the fees that the fund pays to other managers such as GPs there is, of course, a conflict of interest because pension fund managers have an incentive not to allocate that money to other managers as it reduces the fees they can charge. At Ascri, we are trying to encourage the government to change that limit, but it is challenging," says Carlos Lavilla, Ascri president and managing partner at Corpfin Capital.

Although regulation continues to restrict the LP base, things are looking up for GPs looking to diversify into direct lending funds, with positive repercussions for cash-strapped SMEs. "There is a mismatch between what many family companies want and what GPs are able to provide. The problem is there are not many growth funds that focus just on cash in (with a minority percentage) and not many direct lending firms in Spain," says Enrique Tombas, founding partner at Suma Capital.

Regulatory support
Indeed, mezzanine player Oquendo cuts a lonely figure in the local debt space. But that may be set to change. Speaking at the conference, Elena Aparici, senior adviser at Spain's Ministry of Economy and Competitiveness, announced that the government is currently preparing new legislation that will enable Spanish GPs to manage hybrid instruments combining debt and equity via a tax regime. With 85% of financing currently provided to SMEs by banks, the impact could be great.

"The capital structure of companies is not binary; they do not want just debt or just common equity," says Lavilla. "That is a very simple approach that existed in every market 25 years ago. It is also an approach that continues in markets not as developed as the UK, the US and so on. The reality is the capital structure of a company is a continuum from pure debt to common equity with full equity and full risk."

But despite inroads being made to create a supportive regulatory framework for hybrid instruments, focus should remain on equity, according to José Gefaell, chief investment officer at ICO. In early 2008, €30bn's worth of credit was pumped into local SMEs per month. When the credit crunch hit, that figure fell to €10bn per month in 2010. The figure rose again to €12bn in 2014, €2bn of which is provided by ICO on a monthly average. Relatively speaking, the drop is large, though credit lines remain open to local businesses.

"Equity is a more pressing issue, as the GDP multiplier is higher than it is with credit. Furthermore, equity gives SMEs the ability to obtain credit," says Gefaell. With ICO's second tender results just announced, hopes are high that GPs' coffers will soon hold enough capital to boost local businesses and sustain the country's economic recovery.

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• Topics
• Southern Europe
• Funds
• Fundraising
• Mezzanine
• ASCRI
• Spain
• Corpfin Capital
• Suma Capital
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