Gonzalo de Rivera: “ESG has become a core issue for private equity in recent years.”

Alantra PE's CEO discusses the evolution of Spain’s mid-market private equity environment, the sector's incredible growth, and reasons to be optimistic for the future.

Posted vendredi, février 4 2022
Gonzalo de Rivera: “ESG has become a core issue for private equity in recent years.”

Leaders League: What have been the most important developments in the private equity sector in Spain over the last several years?

De Rivera: The sector has done very well in recent years. On the one hand, this is being driven by private equity managers with a local focus and a solid track record, as in the case of Alantra.

On the other hand, medium-sized family-owned companies (our investment focus), which represent more than 75% of Spanish GDP, are increasingly open to private equity. As the Spanish economy and companies mature, second, third or later generations of business owners are increasingly recognizing private equity as the best alternative. In addition to liquidity, PE firms can provide medium- to long-term value-added benefits such as internationalization, inorganic growth, professionalization and attracting talent.

Another example of the evolution of the market is the presence of international players, which have increasingly focused on Spain’s alternative market, thanks to solid economic growth (above the European average since 2013), structural reforms following the 2009 crisis, and the presence of leading companies with ambitious projects.

This has resulted in private equity growing very well in Spain, reaching penetration levels above the European average. Private equity has gone from representing 0.28% of Spain’s GDP in 2010 to 0.49% in 2019.

How do you see the Spanish private equity market evolving in the future?

We are optimistic. From the supply side, the sector will continue to benefit from enormous liquidity and growing interest in alternative assets from large institutional investors, as well as the increasing number of national investors. From the demand side, we are seeing a growing number of companies that fit the private equity investment strategy, combining market leadership, international potential, excellent financial performance and outstanding and motivated management teams. Finally, the growing number of successful business ventures driven by private equity funds is incentivizing other founders and shareholders to partner with PE firms to drive growth.

Another important trend is PE firms providing operational improvements that create real value in their portfolio companies. To do this, PE managers must incorporate senior operational talent into their teams. This may be a more common practice at larger international funds, but in the mid-market I think firms still need to improve. We are so convinced of this strategy that two years ago we added two operating partners to our team: one focused on maximizing sales and the commercial structures of our portfolio firms and another focused on digital transformation.

How has ESG and responsible investing impacted private equity in the last several years?

ESG has become a core issue in recent years. We have been signatories of the United Nations Responsible Investment Principles (UN PRI) since 2011 and have increasingly integrated ESG management into our business. We have a comprehensive responsible investment policy that covers all phases of the investment cycle, ESG clauses in the legal documentation of our most recent funds, annual operating objectives, and an annual ESG report for all our funds that we share with our investors. This report includes the main ESG measures and milestones of our portfolio companies, as well as their compliance with an extensive number of SDGs.

In many sectors there are strategic trends related to environmental and social issues that represent growth opportunities. In the food sector, the development of healthy products represents an attractive growth opportunity (e.g. our subsidiaries Frías, UM, and Betapack). In the automotive sector, this includes companies specializing in zero-emission vehicles or components (e.g. MD Moldes). In other sectors, there are products/solutions that allow efficient use of resources and promote the circular economy (e.g. Salto, Hiperbaric, and ROQ).

Ultimately, ESG has a positive impact on the communities in which our portfolio companies operate while reinforcing their strategic positioning.

“ESG has become a core issue in recent years.”

How has the pandemic affected deal flow and PE investments in the last year? How has it affected LPs and/or fundraising?

Private equity has clearly been affected by the pandemic. Throughout 2020 there was a decline in the number of mid-market transactions. Many national managers changed their investment criteria from cyclical companies/sectors (e.g. restaurants, retail, hotels, etc.) to more defensive sectors (e.g. food). In our case, we are the only Spanish manager with a sector focus. For years (particularly in our latest fund, PEF III), we have only invested in four sectors: food, healthcare, TMT and the tech industry. These sectors meet the characteristics of scalability and anti-cyclicality, two core aspects of our investment thesis. We are very happy with how our portfolio has evolved, even during the pandemic.

Our disciplined approach led to three new investments in 2020: HealthinCode (a company specializing in non-reproductive genetic diagnostics), Salto (a leading global manufacturer of electronic access control) and Surexport (specializing in high-quality berries). HealthinCode and Surexport are investments that we had been working on for more than 12 months and proved resistant to the pandemic. Salto, on the other hand, has been an Alantra portfolio company since 2013. We decided to continue investing in it from our current fund (PEF III).

As for 2021, we continue to see a high level of deal flow and we expect to close one or two new investments shortly, as well as a series of add-ons.

In general, the pandemic has affected fundraising and several fund managers have decided to postpone their processes. However, we found ourselves with capital available to invest. Fundraising has recovered in 2021 and we think that in the medium term, volumes will return to above pre-Covid levels.