Portuguese fundraisers feel the strain

Due to the looming threat of an international financial bail-out, Portugal's macroeconomic issues are extremely well documented. But despite the concerns over the country's ability to access debt markets and the sharp rise in yields on government bonds last Thursday, sophisticated LPs know that due to the long-term nature of private equity, times of challenge can sometimes provide the best investment opportunities.

Nevertheless, many LPs are currently finding it difficult to argue in favour of deploying capital into a region that has more economic problems than others, as Rhonda Ryan, Managing Director of PineBridge Investments, points out.

Just three private equity firms - Magnum, Explorer and ECS Capital - manage funds focusing largely on Portugal, meaning that competition for LPs is minimal. It would, however, be naïve to think that the continuing uncertainty about the country's economic conditions will not have an effect on these GPs' ability to raise their next vehicle.

Less experienced players keen to enter the market are likely to be deterred from raising until the government proves that it will be able to finance its debt without help from the European Union and bond yields decrease to more sustainable levels. Ryan explains: "We believe younger GPs will find it hard to raise capital while many of the region's leading GPs may postpone fundraising waiting for a better environment."

LP confidence will have no doubt been eroded further by the paltry number of deals realised in 2010. ECS Capital's purchase of Artenius Sines for more than €100m in September represented Portugal's only buyout transaction, while the remaining two deals, that of LeYa and Crioestaminal, involved funding from overseas investors Trilantic Capital and the Riverside Company, causing LPs to question the value of local GPs in the current climate. Meanwhile, the lack of disposable income in consumers' pockets is having an increasingly negative effect on portfolio companies, particularly in the retail sector - thus jeopardising the returns of already-invested LPs and decreasing the probability of them launching new vehicles in which to invest in the near future.

The outlook is bleak for the coming year, as Ryan predicts: "Many factors are important to a fund's success; in 2011 Southern Europe is likely to have relatively low fundraising activity. Fundraising is cyclical, after all."

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