The market for turnaround funds - Spain

1.2 Restructuring in Europe concerns millions of workers

There are many private equity funds in Europe. These funds have substantial resources at their disposal, enabling them to invest in LBOs (***) in companies that are doing more or less well. Turnaround is generally not their core business, and is therefore relatively neglected. Acquisitions tend to be made in companies with growth potential, but which are not in dire straits.

Eurofound, a European foundation for the improvement of living and working conditions, lists the main cases of restructuring in Europe over the last two decades.

This data is also available by sector, providing an overview of those particularly exposed to downturns. Generally speaking, industry alone accounts for almost **% of job losses during turnaround operations, and just over **% of job creations. Financial services, transport, warehousing and retailing are then equally affected by job losses (***).

Number of cases of job losses or creations (***) during corporate restructuring Europe, **** - **** Source: ****

Looking at Europe in ****, we see that industry remains the sector most affected by turnaround operations, accounting for over a quarter of the total.

Number of turnarounds in Europe Europe, **** Source: ****

1.3 The market for turnaround funds: a niche within private equity

The private equity sector appears to be growing and developing in Spain. If we exclude the years **** and ****, years impacted by the covid ** crisis, we obtain a ***.**% growth in investments made by the sector between **** and ****. The sector expanded strongly between **** and ****, with an increase in investment value of just **.**% between these two years. The covid crisis may have slowed the sector's expansion (***) estimated that ***,*** jobs in the Spanish economy were covered by private equity or venture capital through their companies financed by these same methods.

Evolution of Private Equity in Spain Spain, ****-**** € billion Source: ****

By ****, capital invested in private equity in Spain will amount to €*.*** billion. With *.*% of this value dedicated to turnaround capital, this segment corresponds to a niche of €**,***,*** through * deals completed during the same year.

Breakdown of the private equity market in Spain in **** Spain, ****, % of total

2.1 Business failures in Spain

Between **** and ****, several trends can be observed in the number of business failures in Spain. Firstly, it is remarkable that over this period, the number of business failures oscillates from a low of ***.* thousand in ****, to a high of ***.* thousand in ****. The average number of business failures over the period is therefore *** thousand. Between **** and ****, we can observe a period of constant increase in the number of business bankruptcies in Spain, with an average annual growth rate of *.**% over the same period - isolating the data for ****, an anomaly over the period. In ****,the number of bankruptcies in Spain fell by *.**% compared with ****, thanks in particular to the economic measures introduced by the Spanish government to safeguard its economic fabric in the midst of the Covid-** pandemic.

Corporate bankruptcies in Spain Spain, ****-****, in thousands of companies Source: ****

Between **** and ****, there is an upward trend in the proportion of companies without employees that have gone bankrupt. While they represented only **.**% in ****, in **** their share increases by just over * points to **.**%. This movement is accompanied by a downward trend in the other shares represented by other companies - those with employees. Companies with * to * employees saw their share fall from **.**% to **.**%, those ...

2.2 The preferred targets of turnaround funds

By virtue of the way they operate, turnaround funds focus mainly on SMEs -PYMES in Spain. These companies are favored by these funds because their characteristics make them particularly profitable to invest in: limited size, making access to capital possible; unlisted shares, enabling private financing. ASCRI (***) estimates that, by ****, **% of private equity and venture capital transactions will be in PYMES.The table below concentrates all the turnaround funds available in Spain in **** according to the"Anuario ASCRI"- Asociación Española De Capital Crecimiento E Inversión / Spanish Association of Growth and Investment Capital. It presents the main characteristics of these funds:

Source: ****

3.1 Turnaround activities in private equity

Private equity activities can be divided into * main types of fund. The aim of these funds is to support the development and sustainability of a company. In the case of turnaround capital funds, the aim is to make a massive investment in a company to help it emerge from the crisis, notably through managerial and financial restructuring.

In Spain, turnaround capital activities are fairly new and concentrated in ** companies offering this type of fund. Nevertheless, the new "Concursal" law promulgated on January *, **** now provides a new framework conducive to turnaround fund activities. Of these ** companies, the graph below shows the funds of foreign and Spanish origin. The * Spanish funds are Sherpa Capital, Noso Capital and Norgestion.

Origins of turnaround funds present in Spain Spain, ****, nationality of company origin Source: ****

Competition is not necessarily fierce between the sector's players, since each fund chooses its targets according to human criteria (***), the company's sector and its confidence in a possible restructuring. Because of the risk inherent in the turnaround capital business, the private equity sector prefers to turn to other types of investment, such as buyouts and expansion capital, which are inherently less risky. This market therefore corresponds to a niche market, where the ...

3.2 Turnaround players in Spain

Business turnaround remains a particularly complex sector, requiring a thorough understanding of the law and relevant technical skills, among other things. The chart below shows the echosystem of professions within Spanish turnaround funds.

Each player has a role to play at different stages of the turnaround process. Court-appointed receivers, for example, are responsible for administering or overseeing a company's assets when it is in receivership or safeguard proceedings.

Banks provide the funds required for investment in the target company, to complement the capital provided by the turnaround fund. More often than not, they are responsible for raising debt from institutional investors.

4.1 Turnaround funds in Spain

Turnaround funds always make a capital contribution that enables them to take control of the company, or at least to have decision-making power. This contribution also enables the company to steer its strategy and initiate the restructuring process. Sometimes, debt is added to the investment to enable the turnaround fund to invest in larger companies (***). [***]

How an LBO works: the fund repays the borrowed debt out of the company's cash flow Source: ****

Leverage (***) is generally low in turnaround capital. Companies are often in financial difficulty, and unable to repay large loans immediately.

The graphs below show all LBO / MBO / MBI / LBU transactions carried out in Spain since ****. While these deals do not relate solely to the activities specifically associated with turnaround funds, they can nevertheless be an indicator of the growth of private equity in Spain.

Evolution of LBO/MBO/MBI/LBU in Spain Spain, ****-****, billions of euros Source: ****

Thus, of the *.*** billion euros invested by the sector in ****, LBO / MBO / MBI / LBU accounted for **.**% of total sector investments . However, the Covid ** pandemic slowed investment growth. Investments in **** thus represent **.**% of **** investments.

Trend in the number of LBO/MBO/MBI/LBU transactions in Spain. Spain, ****-****, number Source: ****

The average ...

4.2 Exit procedures

When an investment fund (***) wishes to recover the profits from its investment after several years, there are several possible ways to divest:

Initial public offering Sale to a manufacturer Sale to another investor Selling the company to the management team Etc...

In **** in Spain, of the *.*** billion euros divested (***).

Means of divestment used in Spain in **** (***) Spain, ****, % of total Source: ****

The graphs below show the value and number of divestments made in Spain through LBO/MBO/MBI/LBU. Even if these operations encompass more global actions, they are an indicator of the sector's growth in Spain. In fact, this indicator marks the end of a private equity transaction, and divestment of capital is necessary to enable these companies to invest again. In ****, private equity and venture capital divestments in Spain will have an average profitability of **%.

Divestment trends in Spain Spain, ****-****, billions of euros. Source: ****

There was a boom in divestment operations between **** and ****, with ***.**% growth. While the covid pandemic slowed down divestment transactions, ****, with *.*** billion euros of capital divested, marks a comeback for the private equity sector in Spain.

Number of divestments in Spain Spain, ****-****, number Source: ****

all the more so as the ratio of divested capital to ...

5.1 Changes brought about by the reform of the Ley Concursal

The new Ley Concursal, which came into force on **/**/****, governs insolvency procedures for all types of debtor, whether natural or legal persons. Its aim is to ensure the efficient and rapid reallocation of productive resources in the event of a company's insolvency. The law speeds up the process of restructuring or liquidation in the event of bankruptcy. This new legal framework is particularly welcomed by investment funds. Indeed, this new legal framework will enable them to develop their activities in Spain.

The law is in line with EU Directive ****/**** of the European Parliament and Council. The main principles of this law are as follows:

Introduction of restructuring plans. These are a pre-bankruptcy tool designed to avoid or overcome insolvency by enabling earlier action to be taken in the face of an individual's or company's financial difficulties, unlike previous pre-bankruptcy instruments. They enable liabilities to be restructured more quickly, while relieving congestion in the courts. Abolition of previous pre-bankruptcy instruments, which the debtor can only use in a situation of imminent insolvency. Reform of the insolvency procedure to make it more efficient, notably with the introduction of procedural changes designed to make it more rational, facilitating approval of an agreement when the ...

6.1 Segmentation

• H.I.G. Europe
• BDO
• Norgestion
• Noso Capital
• ASHURST
• KOHLBERG KRAVIS
• BEAMONTE INVESTMENTS
• ALVAREZ & MARSAL
• BlackPearl Capital
• PHI Industrial
• Sherpa Capital