Q&A: views on the Spanish mid-market

Francinia Protti-Alvarez
09 February 2010

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Spanish mid-market player Nazca recently saw it’s cornerstone, Fortis, sell its stake to AlpInvest. The new investor simultaneously backed the buyout of Nazca from Fortis. Fracinia Protti-Alvarez speaks to Álvaro Mariátegui and Carlos Carbó from Nazca about recent fundraising efforts and prospects for the Spanish market.

Nazca recently began raising its third fund, how receptive have LPs been to it?

Alvaro Mariátegui (AM): Our fund Nazca III launched in October 2009, has a €150m target and succeeded in reaching a first closing on €115m in late December. We are extremely pleased with the way the fundraising is evolving, which to an extent has been aided by the presence of AlpInvest among our investor base. We have had a relationship with AlpInvest for four years and the due diligence they carried out was exhaustive and rigorous. Their decision to support us has opened the door other investors.

Carlos Carbó (CC): One thing investors have focused on greatly while they carry out their due diligence is the portfolio companies: how they are performing, what measures were needed to weather the storm vs which were taken. Portfolio management has weighted considerably in the fundraising process, great emphasis has been placed on active management. This also means investors are also focusing on the quality of the management and the GP's/ portfolio company relationship with lenders has also become fundamental.

How then have you gone about actively managing your portfolio?
CC: Our portfolio has an aggregated debt of below 2x EBITDA and none of our portfolio companies have faced covenant breaches or defaulted. You may think that at the lower end of the mid-market –companies with an enterprise value of €25-100m – there was not much gearing taking place, but during the 2005-2007 period high debt was available at all market levels. The market saw 7-8x debt multiples and mezzanine tranches in deals valued at €150m.

In late 2007 and early 2008 we reviewed our entire portfolio. For companies operating in the consumer goods sector we reduced costs and adjusted product prices to reflect the reality of the consumers. For companies operating in the IT sector we focused on increasing growth. One example is Acens, which over the last couple of years has seen its sales and EBITDA triple to €32m and €12m respectively. For our portfolio, the 2007-2009 period saw the aggregate EBITDA margin increase from 18% to 22.5%.

The Spanish market has seen its deal activity dwindle in recent months. Where will opportunities come from over the next six to 12 months and what challenges must these overcome?
AM: The bulk of existing opportunities reside in the lower mid-market, where there are over 5,000 family businesses operating across all sectors. Most sectors are undergoing consolidation, which are accentuated by the difficult macro-economic environment. Similarly, price expectations have started to come down. Valuations are closer to 5x EBITDA on average – below the 7-8x EBITDA that were being asked in recent years. However, one of the most important challenges remains financing. Local banks are open for business but on a very selective basis. We are seen clubs of two to four banks provide €10-20m in debt. Advisers are also being selective and focusing on the quality of private equity firms; this is particularly crucial as there are some investors that are blacklisted by lenders.