Private equity investing by Portuguese pension funds is still almost non-existent. Yet the level of private equity activity generally in Portugal is on the rise, even compared with other western European countries.
In 2003, private equity investment in Portugal amounted to 0.089% of gross domestic product (GDP), placing Portugal 13th.
Last year, however, the figure rose to 0.119% of GDP, with Portugal moving up to tenth place, ahead of Switzerland and Belgium, which are generally perceived to be more sophisticated environments for alternative investing.
Despite this backdrop, however, Portuguese pension funds are still reluctant to take the first step into private equity.
“Interest in this asset class from Portuguese pension funds is very much in its infancy,” says Bernie Thomas, senior consultant at Watson Wyatt’s Portuguese office. “The pension fund industry invests less than 0.5% of its assets in private equity. Portuguese investors are cautious in their asset allocation strategy, even in the way they approach equities. Hedge funds have been slow to take off as well.”
As a whole, the indigenous private equity industry has been dominated by two types of provider.
“Until two years ago, most of the private equity investing in Portugal was done by independent limited partnerships – banks, and government-owned institutions,” says Afonso Barros, investment manager with BPI Private Equity, which is owned by BPI, one of the four biggest banks in Portugal. “Those private equity firms that were owned by the banks were basically responsible for managing the banks’ balance sheets. Recently, however, we have seen two independent private equity firms raising new funds, but I’m not aware of much interest from pension funds.”
Barros says he and his team have looked into the reasons for the almost complete absence of Portuguese pension funds from private equity investing.
There are no legal restrictions barring Portuguese pension funds from the asset class.
“One main reason seems to be the lack of knowledge of the alternative investments which are available,” says Barros. “Another is that the tax environment for pension funds is not terribly efficient, for example, there is withholding tax, and tax on capital gains.”
He says that foreign pension funds have also avoided Portugal, because the tax environment is unfavourable for international investors.
They have also been put off by the fact the market is relatively undeveloped.
“Many investments focus on early-stage expansions, with very few buyouts taking place,” says Barros. “So the amount of risk is quite high.”
This, of course, is another reason for Portuguese pension funds themselves to be wary.

Investing outside Portugal is also perceived to have its drawbacks. “Providers have not been successful in marketing multi-manager products, because Portuguese investors prefer to put their money into local private equity firms which are closer to them, and give them greater control,” says the Portuguese head of another investment management company.
“The appetite for private equity from pension funds is minute,” says Rodrigo Guimaraes, managing partner of Explorer Investments, the biggest independent private equity company in Portugal. Guimaraes says that only one Portuguese pension fund has invested in the company’s €62m Explorer I Fund.
This fund backs Portuguese companies which need capital to expand in Portugal or Spain, although Guimaraes says that most of the money in the fund comes from Spanish investors.
Guimaraes echoes Barros’s belief that one of the obstacles to investment is the type of product available.
“Pension funds have an aversion to investing in start-ups and technology companies, and the government is making a big effort to incentivise this type of investment, but they are not very popular,” he says.
But he does see change on the horizon. “I think the situation will change dramatically over the next five to six years, because private equity is an asset class like any other,” he says. “And the potential returns are much higher than from other asset classes.”
Barros agrees. “We are now seeing some international houses coming into Portugal, executing deals and participating in others,” he says.
For example, last November, the Portuguese food group Nutrinveste sold its fruit juice business Compal to the drinks company Sumolis and state-owned bank Caixa Geral de Depositos, in a deal reported to be worth around €450m.
“It was the biggest deal in Portugal,” says Barros. “Before the deal was closed, 3i was reportedly involved – they were supposed to be trying to back a management buyout, but it didn’t happen. Even so, the fact that 3i was associated with the deal was very favourable.”
3i itself says it is interested in the Portuguese market, and will be actively sourcing investment opportunities there.
On a smaller scale, however, local firms are now beginning to emerge. The past three or four years have seen a flurry of new Portuguese private equity firms being set up, making the asset class more visible to investors.
And there is also interest from Spain, according to Barros.
“We are seeing some Spanish private equity firms moving into Portugal, with some even establishing partnerships with Portuguese players,” he says. “At BPI Private Equity, it is one of our objectives to establish a relationship with pension funds in Portugal and Spain. As part of this, we are planning to raise money for a new fund in the New Year.”
Furthermore, the government is now making plans to reform the tax laws, with input from the Portuguese Venture Capital Association.