The private equity landscape in Portugal is less saturated than in other markets

LEADERS LEAGUE: Private equity investment in Portugal increased in 2022. Do you see the same trend continuing through to the end of 2023?

Luis Quaresma: The Portuguese market is characterized by a large number of one-to-one transactions which require direct personal contact. Covid lockdowns in the first semester of 2020 and again in 2021 significantly disrupted this, causing a dip in private equity activity. In 2022, with the winding down of Covid restrictions, private equity activity increased significantly.

At Iberis, investment in 2022 rose to €58 million, an increase of 61% compared to 2021. As we moved into 2023 interest rate increases froze some potential deals, especially those that were primarily price driven such as full buyouts, leading to a temporary slowdown in deal activity. In our experience this effect is more related to the upward movement of interest rates than to the absolute level of the rate itself, so as we move through the rate cycle and switch to a downward tendency, we expect investment activity to normalize and resume its growth momentum.

On a more long-term note, I would highlight the establishment over the last number of years of a mature ecosystem of market actors, namely solid local general partners and transaction advisors. This has greatly increased companies’ and entrepreneurs’ familiarity with private equity.

Compared to when I started working in the Portuguese mid-market, nowadays most companies that we visit are familiar with the possibilities private equity presents as a tool to solve challenges such as succession and shareholder relations and others. This combination of factors drives structural growth in private equity activity in Portugal.

What makes Portugal an attractive destination for investors?

The private equity landscape in Portugal is less saturated than in other markets. To illustrate the difference, it is worth noting that the ratio of dry power to EBITDA of potential target companies in Portugal is smaller by one order of magnitude when compared to major European markets. This allows for a significantly higher number of off-market deals transacted at attractive multiples.

The Portuguese private equity legal framework has been improved, which will allow simplification and expansion of private equity offerings.

In discussion with LPs with a pan-European investment scope, we hear the feedback that quality private equity managers in Portugal can and do differentiate positively in their performance due to the less saturated conditions of the market.

The set of potential targets is also positively evolving, with exports accounting for almost 50% of Portuguese GDP at present compared to 31% in 2010. A good bet would be to invest in Portugal-based industrial and technology companies that can benefit from the good infrastructure and competitive cost-base available locally and have the growth potential to address global markets.

Recently, the Portuguese private equity legal framework has been improved with the introduction of the new Regulamento de Gestão de Ativos (Asset Management Regulation). This will allow, among other things, significant simplification and expansion of private equity offerings, which presents a great opportunity. Participants in the market, including investment managers, the regulator, and others, have the opportunity and responsibility to take advantage of its possibilities to deliver greater quality and innovation.

What sectors are seeing the most investment growth?

Private equity investment in Portugal has traditionally focused on mid-market industrial companies with strong positions in their respective niches, aligning with the investment philosophy of investing in local companies, expanding their presence in export markets, and positioning them attractively for exit opportunities with international investors. Consequently, sectors such as retail or services have experienced relatively lower investment activity.

However, Portugal’s entrepreneurial landscape has undergone a significant transformation in recent years, with cities like Lisbon, Porto and Coimbra witnessing the emergence of a vibrant ecosystem of startup companies. Initially targeted by venture capital firms, several of these startups have been growing and developing into large technology companies. As a result, private equity transactions in this space are becoming increasingly prevalent, reflecting the maturation of the ecosystem.

Moreover, Portugal is increasingly recognized as a leading global destination for high-quality services in various sectors, including event organization and education. Several attractive companies catering to global markets have emerged in these areas. In this space our firm has recently completed a first investment of over was €5,000,000 in Student Finance (a student private loan company) and is currently actively pursuing a second investment opportunity.

The “Golden Visa” has proven to be a crucial source of capital for the Portuguese ecosystem, particularly for venture capital funds, startups and, also, for private equity.

By leveraging the expanding ecosystem of startups and technology firms and the country’s reputation as a hub for premium services, private equity investors in Portugal are diversifying their portfolios and tapping into new avenues of growth. This dynamic landscape presents an opportunity for further exploration and investment in sectors that were previously overlooked, such as technology and exports of services, creating a more robust and diverse investment ecosystem in the country.

How will the changes to the Portuguese “Golden Visa” program affect foreign investment?

The Residency by Investment program, commonly referred to as the “Golden Visa”, has proven to be a crucial source of capital for the Portuguese ecosystem, particularly for venture capital funds, startups and, also, for private equity.

This program has not only facilitated financial support but has also served as a valuable opportunity for sophisticated investors to familiarize themselves with the Portuguese market. In the case of Iberis, we have witnessed a significant number of participants who initially approached us for a “Golden Visa” investment.

These individuals are professionals and investors with a strong financial background, and their engagement with Iberis and understanding of our investment philosophy has resulted in substantial expansions of their investments in our funds beyond the scope of the program itself.

It is important to acknowledge the relevance of the approval of the revision to the law governing the Residency by Investment program. Stability in legislation is paramount for attracting and retaining investors. Providing a clear and consistent regulatory framework instills confidence among investors, promoting a sense of security and trust in the system.

How does Iberis differentiate itself from other funds in the market?

We are one of the most relevant private equity firms in Portugal, with more than €400 million in assets under management. The four co-founders have different backgrounds and offer a set of complementary skills that help set up unique value propositions for our investors.

We believe that Iberis is recognized as a trusted and reputable player in the Portuguese private equity market. The company’s core principles of focus and exclusive dedication, best-practice governance and alignment of incentives have been instrumental in establishing this reputation. With a team of more than 20 professionals, Iberis has one of the largest investment teams in the market.

The team’s constant presence on the ground and regular meetings with potential targets, combined with an investment approach with the flexibility to execute both majority and minority investment, provides Iberis with preferential access to a deep deal flow of high-quality investment opportunities. 

Marília Gradin