Spain’s first hybrid fund holds final close

After a long siesta, the Spanish private equity market has awoken with renewed vigour. And a number of GPs are in fundraising mode, boosted by the arrival of state-supported fund-of-funds Fondo ICO Global. Mezzanine investor Oquendo is one such player and has just hit the €150m hard-cap on its latest hybrid fund, Oquendo Mezzanine II, exceeding its original target of €100m.

But with regulatory constraints on pension funds and the collapse of the savings banks, Spain's LP base is limited. "Savings banks accounted for 80% of our previous vehicle, which closed on €50m," explains Daniel Herrero, co-founder of Oquendo. "So when the savings banks disappeared, €40m of our previous fund died." However, that did not stop the firm's existing backers from re-upping into the latest fund, which launched in January 2013. "The remaining €10m from our previous vehicle converted to a little more than €30m for our latest fund," says Herrero. 

Fondo ICO Global represented the local LP base, alongside privately owned Spanish bank Banca March, the European Investment Fund, a range of pension funds and insurance companies. Local LPs account for two thirds of all commitments. With the help of placement agent Acanthus, international LPs provided the rest of the funds. 

"Today the outlook of the market looks sunny, but we did most of our fundraising around 15 months ago when the mood wasn't so good," says Herrero. "The improvement of the market has allowed us to reach the hard-cap, but we had already raised €120m six months ago, so most of our fundraising was done in a more challenging environment than now."

Oquendo has reached the €150m hard-cap of its latest vehicle

Que Sicar Sicar
Structured as a Luxembourg-domiciled Sicar, Oquendo Mezzanine II sidesteps the regulatory constraints that have prevented the advent of hybrid instruments in Spain. From mezzanine to growth capital, the vehicle can structure investments spanning senior debt to equity. The fund commits around €5-20m per transaction to companies with EBITDA of €3-25m.

"We are basically in the lower mid-market on a European scale, but the mid-market by Spanish standards," explains Herrero. The fund has so far committed around €30m of raised capital across three transactions; the €20m mezzanine commitment to bus operator Monbus and the investment in Servicio Movil; both as sponsorless deals, with the remaining transaction involving a private equity backer.

"The market has changed a lot in the last six months," Herrero says. "A year ago we would have said that the banks were on standby mode. But that's changed and now they're being fairly active."

The lay of the land is changing, with old players returning to the field. "The local banks are becoming more aggressive on terms and leverage and we are not very interested in becoming mere providers of additional leverage. We focus on more complex situations and add value through our flexibility in transaction structuring, and our ability to use junior debt and preferred capital instruments. The return of bank appetite will make life complicated for unitranche and other alternative lenders focused on senior debt as banks are defending their position in the market. The banking crisis wasn't very spread out; most of the larger banks still exist, it was just the savings banks that disappeared," says Herrero. 

"And there is a lot of liquidity from the bond market, so banks are saying that they are losing business and since consumer lending is lagging, they have focused their balance sheet to mid-market corporate lending." 

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