LP enthusiasm for Spain cools down in election run-up

José Rojo
25 November 2015

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With Spain preparing for a potentially disruptive election in December, José Rojo explores the unease of foreign LPs and the strategies for fund managers to survive the selection process ahead

After hitting rock bottom during an anaemic 2013, 2014 will be remembered as the year when Spanish private equity bounced back and stole the show. As dealflow climbed by an unimpressive 11% on average in Europe, unquote" recorded a whopping 127.3% jump in Spain.

Meanwhile, the Spanish fundraising scene went from producing no closes in 2013 to several vehicles breaking €200-400m last year. According to figures from Spanish industry body ASCRI, the surge was driven by foreign LPs, who provided 60% of all raised capital last year and overtook their national peers for the first time ever.

Almost one year down the line, has the fundraising bonanza survived? Local practitioners report investor enthusiasm for Spanish vehicles is on the wane. "For a while, investors had been aggressive in their allocations to Spain but things have cooled down somewhat, especially after the summer," says Luis Seguí, co-founder and managing partner at Barcelona-headquartered Miura Private Equity.

Figures strongly support the sentiment: according to ASCRI, in spite of conditions for healthy fundraising still being in place, Spanish firms raised €541m in H1 2015, 44% down from the €982m raised in H1 2014; the industry body attributes the slump to a "wait-and-see" stance among institutional investors. "LPs look at Spain now and find a space overcrowded with new international entrants," says Seguí. "There are also concerns about the implications the slowdown of the Chinese economy over the summer may have had on emerging markets such as Latin America, so closely linked with Spain."

Paradigm shift
According to Miura's co-founder, another driver behind LPs' tactical retreat is Spain's upcoming general elections, scheduled on 20 December 2015. After decades of switching between the mainstream PP and PSOE parties, latest polls suggest the country's two-party political system could evolve into a four-way match with upstart formations Ciudadanos and Podemos, led by its founder Pablo Iglesias (pictured above), brought to the fore.

As they wait for the outcome, investors are keeping their cards close but GPs need not worry, says Seguí: "There is a possibility that Spain will head towards an 'Italianisation' of sorts, experience the same instability. But Italian businesses have learned to live without a stable government and we might have to do so too; China or oil prices affect us as much as whoever becomes Spain's next president."

Outside the political sphere, one key question is fuelling LP unease around Spanish private equity: having been handed a blank check, will local funds be able to find assets worthy of those commitments and meet return expectations? "A great deal of capital has been committed to Spain over the last year," says Rhonda Ryan, partner and head of EMEA at Altius Associates. "As with any market that has a large amount of capital raised for it, there is concern over whether it will all be absorbed sensibly and lead to good returns, which we will only know many years from now."

Balking the bandwagon
According to Ryan, quality companies up for sale may be becoming scarcer in Spain; the circumstance could partially account for the drop observed by unquote" in the country's combined deal value, down from €6.1bn between January and October 2014 to €2.4bn during the same period this year. "Today the global market feels quite frothy so caution and discipline should be exercised," says Ryan. "You don't want to back too many managers in the same space or invest in the market everyone else thinks is the flavour of the month."

As deal sourcing becomes demanding continent-wide, Miura's Seguí advises those combing Spain in search of quality assets to set their sights on the Mediterranean region as that is where 40% of the country's SMEs operate. An eye should be kept on healthcare or consumer-reliant sectors such as retail and services, he adds; the likelier hotspots after private equity firms retreated to the relatively safer, exports-friendlier industrials segment in the post-crisis years.

According to Seguí, a number of those GPs running the asset-seeking race today in Spain might struggle to make it to the final line: "Fresh capital, LP support... the ingredients are there and it is now up to us to prove whether our investment models work or not, whether we can be disciplined at sourcing and deploying. Spanish private equity might see a bit of a selection process between overperformers and underperformers in the coming years."