August 2014 Issue
For a number of years Spain has been an economic pariah in Europe. Its economy has fluctuated terribly, falling in and out of a damaging recession twice since 2008. In 2012, at the height of the country’s economic woes, Spain was also forced to apply for a €42bn bailout from the EU in order to recapitalise its struggling bank system. Furthermore, for a number of years the country has continued to suffer from one of the worst unemployment rates in the West. According to the latest government data released in February 2014, 25.6 percent of Spaniards are unemployed, with the country’s young among the worst affected; 53.50 percent of the country’s youth was recorded as unemployed in April 2014.
Along with Italy, Greece and Portugal, Spain has been part of a group of Southern European states that has, on the whole, been shunned by investors for a number of years. As a result of the country’s economic travails, private equity (PE) activity in Spain has been minimal since the onset of the financial crisis. Although many PE groups previously identified Spain as a key target area for growth, often deals for assets across the country have failed to materialise. Leveraged buyout activity in the country totalled just €2.8bn in 2013, half of the €5.6bn figure recorded in 2007, prior to the global economic downturn.
But despite the country’s poor economic performance over the last six or seven years, and previous PE failures in the region, buyout groups are now hoping to capitalise on the latest rebound of Spain’s economy. Optimism is running high.
“Since summer 2013, firms including Blackstone, HIG Capital and Goldman Sachs Private Equity have all acquired portfolios of properties or loans in Spain.”
Although Spain’s economic recovery is still in an embryonic stage, its financial outlook has improved since emerging from its latest recession in 2013. Last year the Spanish government introduced a program of labour reform which, despite being politically divisive, has had a positive impact on the wider economy. The EU bailout also provided an injection of capital which has shored up the country’s faltering banking system, and the credit initiatives of state-owned Instituto de Crédito Oficial have also gone a long way to improving the country’s fortunes. According to data released at the end of April, Spain’s GDP rose at its fastest quarterly pace in six years in Q1 2014. Inflation also accelerated in the first three months of the year. Yet more signs that the Spanish recovery is gathering speed.
Against this backdrop, PE firms have made investments in the country. Since summer 2013, firms including Blackstone, HIG Capital and Goldman Sachs Private Equity have all acquired portfolios of properties or loans in Spain. In February 2014, the co-founder of CVC Capital Partners Steve Koltes told a PE managers conference in Berlin that “Spain is now the next private equity paradise”. It can be no coincidence that a number of the industry’s biggest firms, including KKR & Co, have also opened offices in Madrid. Furthermore, Blackstone recently raised a $2.2bn fund aimed specifically at targets in Southern Europe.
With the PE industry sitting on record levels of dry power – over $1 trillion globally – firms are more than prepared to snap up the many treasures available across the country. The newfound popularity of Spanish businesses was demonstrated in early June when European PE firm Cinven announced that it had acquired the fibre network arm of Spanish utility Gas Natural in a deal worth $694.4m. This has been the country’s biggest PE buyout of the year to date and reinforced Spain’s burgeoning reputation as an investment destination.
Although a number of equity, real estate and credit assets have become available for savvy PE investors, many PE firms believe there could be also be opportunities away from distressed assets.
The country’s continued economic renaissance is also reflected in PE fundraising activities. State-supported fund-of-funds Fondo ICO Global has also had a positive effect on fundraising in 2014; recently mezzanine investor Oquendo achieved the €150m hard-cap on its latest hybrid fund. The fund, Oquendo Mezzanine II, easily exceeded its original target of €100m.
Whether PE’s forays into Spain prove to be successful this time remain to be seen. However, the nascent recovery of the Spanish economy will ensure the country remains popular with investors in the near future at least.
© Financier Worldwide
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Richard Summerfield