Nazca Capital: Interview with Carlos CarbÃ³ & Ãlvaro MariÃ¡tegui

20 November 2003

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NAZCA CAPITAL: Carlos CarbÃ³ and Ãlvaro MariÃ¡tegui comment on the evolution and future shape of the Spanish private equity marketâ€¦

What are the particular features and trends which characterise the Spanish markets?

It is fair to say that the Spanish private equity market is less mature and less developed than some of its European counterparts, with a comparatively low percentage of the countryâ€™s GDP invested in the asset class. However, the industry is constantly growing and evolving. Over the last two-and-a-half years, there has been growing interest in private equity from large corporations, although the actual level of activity is still relatively low. The average size of transactions has increased and there is now a higher level of specialisation in certain areas. Previously, Spanish teams lacked expertise and knowledge â€“ a change is now underway, with firms becoming more professional. It is now far easier to obtain information in the market, which has the added benefit of facilitating transparency. Hence, private equity now has a better image than it did five years ago. Amongst the institutional investor community, national insurance companies and pension funds are still slightly reticent about investing in private equity, with the banks taking a more active role. In terms of recent market trends, it goes without saying that with the quoted markets effectively closed for business, exits are currently complicated and the IPO route remains problematic for the medium-sized company in the present economic climate. However, as the economy continues to develop, exits look set to become easier. Secondary buyouts are becoming more common, as many people who invested in the 1990s are ready to make an exit. In actual fact, auctions are frequently used in Spain, and are the norm in many large transactions, but are much less widely seen in mid-market operations.

How has the arrival of foreign teams changed the private equity landscape in Spain?

To date, only a few large foreign firms have enjoyed any significant degree of success in Spain. Those who have succeeded have a good local team on the ground, with direct insider knowledge of Spanish business practices, and who are close to the dealflow. For instance, it can be difficult having a foreigner on the board of a company, as they may not be totally up to speed in terms of language and local awareness. Some of the big foreign players have focused on large deals but found very few. As a result, they have missed out on the many smaller deals which are around because they have failed to realise that it is not just about access to capital, but access on a local level which counts. However, the influx of large foreign banks into Spain over the past few years is a development which we welcome as positive. The newcomers, which include Bank of Scotland (now the biggest leveraged finance team in Spain), Rabobank, Fortis, Royal Bank of Scotland and BNP Paribas, have brought more experience to Spain, as well as a broader, more comprehensive vision of what is possible when structuring an operation, for example in public-to-private deals.

What kind of competition does Nazca Capital have in the mid-market?

Nazca has between eight and ten competitors in the mid-market bracket, including Suala Capital Partners and Mercapital. The key factor is how we differentiate ourselves from them. Our real differences lie in the investment process itself, as well as in the real hands-on and value-added approach to investments. Nazca operates a very streamlined and efficient investment process, compared to some of our competitors who have a tendency to drag the process out for longer than is strictly necessary. The firm has particular expertise in the total structuring of transactions, which is especially important when dealing with the high concentration of family-run firms operating within Spain. Such firms often have a large number of shareholders, and it is essential to know how best to deal with issues which arise out of these situations. In addition, we have a complete hands-on approach to our companies with substantial involvement in specific strategic and operational areas. The Nazca team all have direct experience of running businesses, and so is well placed to add value to our portfolio companies.

How do you see the future of the industry in Spain?

We are optimistic about the future of the Spanish private equity industry in Spain, and believe that the indications show that it will continue to grow and develop. The long-awaited improvement in the stock markets should also benefit private equity by attracting more foreign capital in the future. We also expect to see more consolidation within the industry, with the good players being weeded out from the average over the next few years. Of course, there are no â€˜badâ€™ teams in this business, they simply would not survive. In terms of Nazcaâ€™s own future, the number of investments we have made over the past two years are a testament to the strong track record of our first fund. The success of Nazca I has created a solid basis for our future growth, and we will be raising the Nazca II fund towards the end of next year. Nazca Capital is one of Spainâ€™s newest private equity firms, although it has closed a total of four investments this year, making it the most active Spanish fund. Between 2002 and 2003, Nazca led five transactions with a total value of â‚¬200m. Nazcaâ€™s first deal came In April 2002, when the firm led the â‚¬22m MBO of the hair treatment company Svenson, and subsequently invested â‚¬2.5m in the market-leading Galician cosmetic surgery company Hedonay via Svenson. This year has seen four further investments by the firm, beginning in January with the acquisition of a 47% stake in the fast food sandwich chain Rodilla. A capital injection into the leading fish and pet food producer Dibaq Diproteg was then followed by an investment in Unipost, the national private postal services company. Nazca Capitalâ€™s largest transaction to date took place in June when the firm took a 53% interest in Spainâ€™s sixth wine producer Cosecheros Abastecedores, later increasing their holding to 96% for a total of â‚¬118m. BBVA, BNP Paribas and Royal Bank of Scotland backed the transaction with â‚¬78m of debt financing. Nazca will begin fundraising for its second fund Nazca II by the end of 2004.