Pressure to put dry powder to work will likely lead to bigger and bolder PE transactions in the year to come.
By Manuel Deó
Spanish private equity (PE) houses are sitting on large piles of dry powder as they scour the Spanish market for investment opportunities, as is the case in much of Europe. According to Pitchbook, total deal value has decreased by 15.3% compared to the same period in 2017.
This dry powder will not simply disappear. The pressure to put that money to work will likely lead to bigger and bolder PE transactions in the year to come, as PE firms take on more ambitious targets across the country. PE firms will need to source more off-market deals and corporate carve-outs in 2019. These transactions will likely be more common in the next few months as PE firms continue to operate in a competitive sellers’ market.
Limited partners will put more pressure on PE firms to generate returns, inevitably leading to more headline-grabbing buyout attempts. The greater capital needs of larger deal sizes likely will fuel a revival of consortium deals, in which two or more sponsors pool their resources as co-investors. An uptick in consortium-led deals can be positive for corporate boards and senior management, because such deals widen the range of possible investor structures, and deepen the pool of accessible capital and expertise to enhance shareholder value.
Consortium leveraged buyouts have historically attracted scrutiny by regulators concerned about anti-competitive issues. Consequently, PE houses seeking to participate in consortium deals need to carry out a thorough pre-deal structuring and antitrust analysis well before the deal process begins.
PE firms will also turn to buy-and-build strategies, using a platform investment to consolidate a fragmented industry. Buy-and-build platforms allow PE firms to use a portfolio company to their strategic advantage. PE firms can build economies of scale with this strategy, which has been used successfully across Europe in recent years. In Spain’s mid-cap deal market, there are plenty of investment options.
Corporates should also be alert to the changing dynamics of participation by other investors, such as sovereign wealth funds and pension funds, which typically pursue minority equity positions in transactions well before a formal process has begun. These funds typically have longer holding periods and target lower rates of returns, making them potentially suitable investors in large buyouts across different industries.
Spain’s infrastructure market will also experience a surge in growth, which likely will turn into a longer-term trend. Political disruption has delayed greenfield projects over the past few years, including the National Infrastructure Plan and the sale of certain distressed toll roads. The prospect of another general election in 2019 could further delay investment in greenfield projects.
Brownfield assets will continue to fuel infrastructure deals. The continued availability of cheap financing and the current period of political instability will also drive infrastructure transactions. Furthermore, pressure on the Spanish government to reduce the national debt could lead it to offload highly leveraged assets over the coming years. These factors should ensure a healthy level of infrastructure activity in the year ahead.