Private equity investment slumped 67% in Spain in the first half of this year, seemingly putting an abrupt end to the nascent boom in the sector.
It proved difficult, if not impossible, to get big deals over the line and investors retreated to more liquid assets in the face of considerable economic uncertainty.
From here, the question is whether it can revive as some (limited) normality returns.
Private equity had seen a global surge as investors have sought higher returns and exciting new opportunities.
Many of the world’s fastest-growing companies were staying in private hands for longer.
In this climate, Spain’s private equity sector flourished. Usually seen as a decade behind more established markets, such as the US or US, there was a sense it was coming of age.
Aquilino Peña, president of ASCRI (the Spanish Venture Capital & Private Equity Association) said that annual investment relative to GDP was hitting the European average as international private equity managers saw “the great growth potential of Spanish companies”.
He also highlighted the maturity of the middle market sector, where the lead positions were being taken by local managers “and a dynamic venture capital ecosystem that is among the most important in Europe”.
At the time, this optimism looked well-placed.
The family-owned companies that form the lion’s share of the Spanish economy had become more receptive to private equity investment in the wake of the 2008 financial crisis, viewing them as an important source of growth capital.
At the same time, Spanish institutional investors showed more interest in the asset class.
In a climate of lower interest rates and mixed performance from European equities, the higher rates of return available from private equity had real appeal.
This growth phase culminated in a record €8,513m of investment volumes, spread across 680 deals in 2019.
Four-fifths of the total was international funds taking a keen interest in Spanish companies.
This encouraged a number of ‘megadeals’ (over €100m). Although growing, national private entities still contributed a relatively small amount – €1,813.4m – around 21% of the total.
The slide seen since the start of the year is not quite as dire as it first appears. The fall is in volumes rather than transaction numbers.
The key problem was that none of the mega deals that had supported the Spanish private equity sector up to the start of the year came to fruition.
Partly this can be attributed to the global slump in private equity dealmaking, rather than conditions specific to the Spanish market.
Equally, domestic private equity investors appear to have held their nerve a little better and are now a greater share of the market.
Of the €1,434m invested by private equity in the first half of the year, international investors were responsible for €993.4m across 79 deals – around 70% by volume, rather than 80% in 2019.
Private national investors closed 208 investments and public national investors made 57 investments.
The development of this domestic private equity interest is important for local entrepreneurs and restarting the Spanish economy.
Desperately seeking diversity
Although it is still early days, at the margins demand appears to be continuing: in June, insurance groups Mapfre, Abante and Altamar came together to launch a €250m fund of funds targeting the private equity market.
This is part of Mapfre’s wider move to diversify into alternative investments.
Group chief investment officer José Luis Jiménez explained his rationale: “These alternative investments allow us to diversify our balance sheet in a climate of low interest rates, and also tend to be less sensitive to market developments, which provides protection against sharp declines such as those we have seen recently.”
In this, he highlights a major reason why private equity might not lose its lustre in Spain: with fixed income yields at record lows, equity markets looking fully valued, investors need to diversify into alternative assets.
In its latest its latest annual Global Private Equity Performance Series, eFront found that Western European was the most attractive region globally for private equity on a risk-return basis.
While it will take time to assess the fallout from the pandemic, this historic performance record is still likely to draw people in.
Equally, there are new and emerging sectors that need capital.
It is notable that the most recent statistics show investment concentrated in those sectors on the right side of the pandemic: for example, industrial products and services attracted 34% of overall capital, biotechnology another 21% and electronics 11%.
By number of investments, the most important sectors were information technology (180 investments), medicine/health and biotechnology/genetic engineering (29) and industrial products and services (20).
The conditions are in place for the private equity boom to revive in Spain.
It may even bring some much-needed realism to pricing, which had become ambitious towards the end of last year.
The need for alternative and diversifying assets has not gone away.