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Spain catches PE fever

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Compared with the rest of Europe, Spain’s involvement with private equity has soared over the past year or two. Last year, according to the European Venture Capital Association. private equity investment equalled 0.246% of the country’s gross domestic product, placing it fifth in the European rankings, ahead of countries such as Denmark and Finland where the market is more developed.
In 2003, Spain had come in ninth, with private equity investment equalling 0.180% of its GDP.
There has been a similar jump in pension fund involvement in private equity. In 2003, pension funds contributed €30m, or 3.4%, of private equity raised, while a year later this had become €194m, or 12.3% of the total.
For the first time, a large proportion of this figure came from domestic pension funds.
However, this cannot disguise the fact that the private equity market in Spain is still relatively small.
“There are pension funds in Spain which invest in private equity, but it’s a very limited component of their portfolios,” says Sanjay Mistry, head of European Private Equity at Mercer Investment Consulting.
“Part of the reason why Spain is behind the rest of Europe is that it doesn’t have a mature public market. And having a mature public market helps the private market, as it provides an exit route.”
He says: “We see allocations to alternatives between 2% and 3%, and those that do have private equity would have a smaller component within the alternative umbrella.”
But Mistry says that even this is often done by default. He says: “The investment is often made via a mutual fund or segregated management, where third party fund managers make an investment for the client, rather than the client making a specific allocation. This is comparable to the situation with the UK in the early 1990s, when pension funds used to work with balanced managers.”
Factors contributing to the lack of interest in private equity include the conservatism endemic in Spanish culture, and the relative lack of financial knowledge of pension fund trustees. A further brake on investment is the fact that the vast majority of Spanish pension funds are defined contribution schemes, so the risk is borne by the members. And private equity is, of course, a highly risky asset class.
The government took a step forward in encouraging Spanish pension funds to invest in private equity vehicles when the detail of the law regulating pension funds was approved in February 2004. Pension funds are allowed to commit up to 30% of their assets to securities issued by unquoted entities. Private equity had not been previously banned, but the new law clarifies the ability to invest in the asset.
As a whole, alternative investments are becoming more popular with Spanish pension funds, but they are still approaching this asset class step by step.
Those which do invest in private equity tend to be the biggest funds. Néstle, for instance, has had some exposure since 2001.
However, there is also localised interest in, for example, the Basque Country (see panel).
“Spanish pension funds need to have daily pricing of their assets, and that is impossible with private equity,” says Jose Olabarrieta, director for institutional clients in Spain and Portugal with US-owned private equity firm WestAM. The company specialises in fund of funds, but has no Spanish pension funds as clients.
“The new regulations will allow pension funds to have prices over different time periods, such as three or six months,” says Olabarrieta. “But you will still need to receive regular information about how the investment is doing, and I don’t think many private equity houses in the US will be ready to send that information, or tell clients what decisions have been made.”
“We prefer to use hedge funds because private equity gives a return in five or six years, whereas hedge funds start making returns in a matter of months,” says Rafael Hurtado, fund manager at Banco Popular. “Furthermore, private equity is illiquid. And hedge funds publish their net asset values, which makes it easier to mark to market. Another factor is that that there is a big personal pensions market in Spain, and it is very common for investors to switch between pension funds. Using private equity makes it difficult to give investors a transfer value.”
One interesting thing about those company pension funds which do invest in private equity is that they generally go for funds investing domestically.
“It is easier to gather the information that the law requires from Spanish companies,” says Olabarrieta. “In Spain, you can go and visit a company – you don’t have to wait for its quarterly report. The pension fund regulator says that as long as you receive regular information from a private equity fund, you can invest in it. But the problem with investing abroad is the lack of available information.”
This view is backed up by some pension consultants, who say their pension fund clients have experienced difficulty from the regulators in investing with overseas private equity vehicles.
However, Mistry believes that things are moving in the right direction.
“The Spanish market is relatively small, and private equity players in Spain are few and far between,” he says. “But it is gaining momentum and people think there are a lot of opportunities.
What helps is having local private equity groups doing deals, such as the Abbey takeover by Grupo Santander, which give the sector a higher profile.”
Mistry says: “However, people realise that it is a long term game, and Spain is a country which will gather more interest.”

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