Spain sails with fundraising tailwind

Since emerging from recession at the end of 2013, Spain has enjoyed significant growth in GDP, despite a high public deficit and stubbornly high rates of unemployment.

Against this backdrop, private equity fund managers in the country have experienced strong fundraising momentum over the past three years and are currently sitting on €4.5bn in deployable capital, according to Juan Luiz Ramirez, chairperson at Spanish private equity association Ascri.

Spain-based institutional fund managers raised €2.27bn in 2016, a 48.5% increase compared to 2015 and higher than the €2.1bn raised in 2014. Overall, private equity fund managers raised €1.7bn, while venture capital firms amassed €568m. The figures represent the highest level since 2007, when local players reaped commitments of around €3.5bn. The level of commitments is also in excess of those in both the Italian and German markets, where €1.31bn and €2.33bn were raised respectively, according to figures from each of the countries' private equity associations.

According to Ramirez, fundraising conditions remain favourable in 2017 due to high liquidity in the market, the activity of public-backed funds-of-funds Innvierte and Fond ICO Global, and international investors' interest in the country. As a result, he expects the country to return to its pre-crisis levels in two to three years.

Spain-based institutional fund managers raised €2.27bn in 2016, a 48.5% increase compared to 2015 and higher than the €2.1bn raised in 2014

The mid-cap market has led the Spanish fundraising boom between 2016 and 2017: MCH Iberian Capital Fund IV held a final close on its €350m hard-cap in May 2017, Alantra Private Equity Fund III and Black Toro Capital's BTC Fund II closed on €450m and €235m respectively in February 2017, and Fondo Nazca IV hit its €275m hard-cap in October 2016. Furthermore, the market has recently witnessed the first closings of Artá Capital Fund II on €300m, Realza Capital II on €125m and Aurica III on €100m.

Spain has also seen 30 new venture capital funds raised since 2013, according to Ascri's Ramirez, several of which reached a close between 2016-2017. These include the €126.4m final close for Ysios BioFund II Innvierte and the €71m first close for Kibo Ventures II in October 2016. Moreover, several new venture funds have launched since the start of 2016: K Fund, Bullnet Capital III, BeAble Innvierte KETs Fund, Samaipata I and Swanlaab Giza Innvierte I all have targets of between €20-50m.

As Ramirez points out, the €4.5bn of dry powder currently waiting to be deployed remains below the €6bn pile seen in 2008. However, the significant increase compared to the €1.6bn seen in 2013 is a sign of the growing confidence in the Spanish market on the part of institutional investors. According to Ascri, domestic LPs are driving fundraising in the country, accounting for 62% of the total capital raised in 2016. Their allocations were also up by 158% compared to the previous year. International LPs, meanwhile, have maintained a consistent level of commitments over the past two years.

Furthermore, despite the build-up in dry powder, domestic GPs appear confident about the coming year and have been showing signs of putting capital to work. The industry performed strongly in H1 2017, with Spanish private-equity-backed transactions reaching their highest level ever recorded in value terms.

Clouds on the horizon
However, there are signs that the macro environment that has supported the reinvigoration of the industry might change in the coming years. According to delegates at an Ascri and EY event on Spanish private equity, held in London in October 2017, an economic downturn is expected in the short- to medium-term. The most recent data from the Bank of Spain shows that the country's GDP growth is expected to reach 2.8% in 2017, while the following two years could see a slight dip to 2.3% in 2018 and 2.1% in 2019.

Although the recovery is expected to continue, the Spanish economy appears to be reaching the mature stages of a cycle. As a result, fund managers are beginning to argue there is a need for increased caution and accuracy in investing. They also point to reforms and the need to reduce the public deficit. Nonetheless, the industry as a whole remains positive due to opportunities for both domestic and international investors.

Despite the relatively low impact of the recent Catalonian independence referendum to date, delegates at the aforementioned event expressed some apprehension as to whether this will continue to be the case into 2018. Some commentators are suggesting Spain's minority government is more fragile now and the country could be heading towards a snap election next year. With the ensuing political uncertainty that would entail, it is possible investor appetite may become more suppressed in the months and years ahead.

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