First-time challenges in southern Europe

Despite the significant increase in fundraising in southern Europe over the last few years, raising capital for first-time funds represents one of the greatest challenges faced by the private equity industry in the region. Lacking the buoyant LP base and investor confidence of more established markets, southern Europe is still hampered by a stigma originating from the financial crisis.

According to Unquote Data, out of 32 vehicles that have held a final close over the last three years in the region, only three were first-time funds. "Attracting LPs' interest and gaining their trust can be more challenging in countries like Italy, Spain and Portugal," says Etienne Deshormes, CEO of Elm Capital. "First-time fund managers can only be successful in these markets if they are able to demonstrate a proven track record from previous investment experience."

Indeed, in most cases, first-time vehicles are raised in southern Europe either by firms that were already well-known in the investment arena through activities in different asset classes or by managers that span out from established private equity houses.
One such example is Abac Capital, a Spanish GP established by former Apax Partners executives. The firm raised Abac Solution I, a €320m first-time fund that collected most of its capital from investors based outside Spain and achieved the largest final closing for a maiden fund in Iberia since the 2008 crisis.

Oriol Pinya, founder and managing partner at Abac Capital, says: "Our past performance and track record enabled us to kickstart the fundraising process and attract interest not only from local LPs but primarily from international investors, which accounted for 80% of the fund's total commitments."

Investment approach
Despite a longer fundraising process and additional risks, first-time funds can deliver high returns and even outperform follow-on vehicles. "Several investors now have investment programmes specifically dedicated to emerging managers," says Giacomo Biondi Morra di Belforte, managing partner at Capstone Partners. "They can deliver better performance than established GPs because they have to prove themselves, are entirely dedicated to one single vehicle, and very cautious when executing the investment strategy. In addition, they are usually strongly focused, given the lack of distractions that can come from managing legacy investments in previous portfolios."

Furthermore, first-time funds in southern Europe tend to adopt a sector-specific or geographically focused strategy able to draw attention to the new vehicle, speed up fundraising and guarantee a competitive advantage over more established generalist funds.

A new generation of managers are now entering the market with a more lightweight and effective deal-by-deal structure" – Mounir Guen, MVision Private Equity Advisers

Some newcomers have found different strategies for overcoming the challenges of a first-time fund in a small market dominated by more established local private equity firms and international players. "In addition to an outstanding track record, first-time managers need to put in place a complex infrastructure, which includes numerous policies to check on a yearly basis and requires the deployment of a large amount of capital," says Mounir Guen, CEO of MVision Private Equity Advisers. "Instead, a new generation of managers are now entering the market with a more lightweight and effective deal-by-deal structure. Spain has so far been the most receptive in accommodating this type of entrepreneurialism."

One such example is Moira Capital, a Spanish GP that has put in place an innovative strategy. Instead of raising a large fund and collecting capital from a wide pool of investors, Moira establishes one regulated vehicle – SICC (closed-ended collective investment firm) – for each single deal. In its two years of activity, Moira has invested around €110m across six companies operating in various sectors, with a special focus on innovation and business transformation.

Javier Loizaga, Moira Capital's chair, says: "Adopting this approach, we are able to raise, deal-by-deal, a pool of funds from a selected group of investors that are interested in supporting a specific company rather than a portfolio. Our LPs prefer this strategy to the black box of a traditional private equity fund."

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