2016 has been a tough year for Spain. After two elections and 10 months without a government, the center-right People’s Party, led by Mariano Rajoy, was finally able to grab the reins of power, albeit without a majority of seats in parliament. Another election could be in the offing as early as May. Beneath the political tumult, however, the economy is quietly humming along. The IMF has lifted its estimate of Spain’s economic growth to 3.1 percent for 2016, making it the envy of the developed world.
The recovering economy, which is playing catch-up after a deep recession brought on by the 2008 financial crisis, has given a strong boost to Spain’s private equity market. The country saw a record 72 private equity deals in 2015, totaling $2 billion, according to research service Preqin.
But while the number of deals hit an all-time high, the dollar volume was the lowest in five years, reflecting a shift in private equity investment to small and medium-size enterprises. It’s those companies that now provide the most inviting growth opportunities.
Investors are starting to pay attention. A record 1.27 billion euros was raised in nine private equity fund closings in 2015, according to Preqin. Spain now has 25 private equity funds with a combined 3.6 billion euros of targeted capital.
Still, the market is small compared to its potential, with those 3.6 billion euros accounting for just 0.3 percent of Spain’s gross domestic product (GDP). That compares to $1.34 trillion in the US, or roughly 7 percent of GDP.
So where are the most promising private equity investments? The list starts with disruptive companies that are bringing new products and new ways of doing things, of which Spain has its fair share.
The companies that are most likely to be disruptive are the smaller and more agile firms. In addition to their growth prospects, smaller firms often offer more attractive valuations than their larger brethren and there is often less competition among investment funds to garner a stake in these companies.
The sectors of the Spanish economy with this kind of appeal include telecommunications, transportation, medical technology, biotechnology, education and real estate.
When it comes to telecommunications, I see opportunities in young companies providing services that complement traditional offerings from telecom, cable and satellite incumbents.
On the medical technology front, two overriding factors are driving innovation in the provision of healthcare services. First is the issue of rising costs for medical care. Second is a concern for patient safety. Technology plays a key role in both areas.
Recent examples of private equity investments in disruptive small- and medium-size Spanish enterprises include the following
· GPF Capital acquired a majority share of telecommunications company Acuntia, which engages in the design, integration and maintenance of communication networks, including network architecture, video collaboration, security and mobility, and data centers;
· Magnum Capital took an equity stake in Orliman, a manufacturer and distributor of non-invasive orthopedic devices for the limbs and torso, with its products being used in the prevention of injury, treatment of chronic conditions and for recovery after surgery or injury; and
· Eneas Alternatives Investments, of which I am a partner, acquired control of Lug Healthcare Technology, a medical technology company that has developed a unique error-free process to manage the prescription, administration and inventory of single-dose drugs in hospitals.
Spain is full of similar disruptive companies in growing industries. Many of these companies are starved for capital after a prolonged recession. And there is far less competition among private equity firms in Spain than in the US.
Combine that with the fact that its population of nearly 50 million is well-educated and larger than California’s, that its $1.4 trillion GDP is the fourth largest in Europe, that it’s home to some of the world’s top-ranked business schools, and you have an attractive playing field for private equity.
As my partners and I have discovered, Spain is most definitely open for business.
Opinion column by Ed Morata, partner and co-founder of Eneas Alternative Investments.
