According to the Spanish Association of Capital, Growth and Investment (ASCRI) (https://www.ascri.org/) the investment of Private Equity funds is mainly aimed at growing companies or already consolidated companies (unlike funds of Venture Capital that invest in earlier stages of development).
Private Equity funds are distinguished from each other by the characteristics of the projects in which they are interested. Each fund has its own requirements when choosing a possible investment objective. The most common specialization criteria might include the following:
- Maximum and minimum size of the company or of the target transaction: invoicing, EBITDA, valuation,
- Acquisition of control or possible minority stake
- Economic activity: more or less general or specialized funds
- Territory of implementation: Generally the funds that operate in Spain invest directly only in Spanish companies; some funds limit their geographic scope to invest exclusively in certain regions.
- According to the type of investment: some of the most common specialties are described below:
Operations of “Capital expansion or development” (Growth Capital)
They are investments to finance growth. The companies receiving the investment usually have a good historical track record, a good management team and a solid Business Plan for which it is necessary to finance large investments. The destination of the funds (generally contributed by means of a capital increase) can be directed to the acquisition of fixed assets, an increase in the working capital for the development of new products or access to new markets.
“Replacement Capital” operations
In this case, the capital contributed is mainly destined to the acquisition of shares or participations of a part of the partners. Typical case of family businesses when some of the shareholders or groups of shareholders have discrepancies about the business objectives of the group that controls the management and prefer to divest.
Leveraged Trading (LBO):
It is applied in the purchase of companies by an Investor in operations in which the payment of the price is structured through a combination of own funds and long-term debt with the guarantee generally of the assets of the acquired company and with the guarantee also of the cash flows that it expects to generate. This operation can be applied in companies with little previous leverage and with stable and sufficient cash flow generation.
Restructuring operations (Turnaround):
This is the specialty of some funds (sometimes referred to as “vulture funds”) that invest in companies that are struggling for an extended period of time and that need financial resources to implement major transformations and management capacity for operational restructuring that encompasses all aspects of the company (facilities, personnel, products, …). In these cases, the investor, apart from contributing capital, is directly involved in the management.
According to ASCRI, there are more than 200 investment entities in Spain (including venture capital companies) that manage more than 25,000 million euros to invest and have some 3,000 companies owned (or acquired) by these types of investors. Below is a graph showing the evolution of the capital invested in Spain and the number of operations in the last 10 years: