The venture capital entities in Spain are those institutions specialized in investing the funds of the joint venturers in the capital of the companies. Do you know about the Spanish venture capital? If so, read on! You will learn about what the subject is about, and reinforce more for those who have little knowledge of it. In general, companies that are acquired are characterized by problems in accessing alternative sources of financing.

This usually occurs either because of the stage of development or because of the nature of the business. However, there is currently an increasing prominence of transactions focused on mature companies which, by this method, are generally restructured. In general terms, these types of operations favor greater dynamism in the business fabric of the economy and, above all, favor the emergence of technological innovations and the advance of productivity.

What is venture capital in Spain?

When we talk about venture capital in Spain, we refer to those financial activities developed by specialized entities. These are completely consistent in the contributions of capital or own funds, on a temporary basis of 3 to 5 years. Generally, they are minority to non-financial companies, of non-real estate nature and that cannot be listed in the first stock markets. In addition, it aims to contribute to the development and expansion of the companies, in order to capitalize them, process them and advise them.

In order to increase their value, risk investors tend to seek participation in companies that belong to dynamic sectors of the economy. Where they are expected to have above-average growth; the more diversified the portfolios of VC companies are, the more likely investors are to recover the initial amount that was invested.

Investors will then seek to exit the companies in order to realize the returns obtained and try to reverse the flow of funds to the suppliers. The main exit strategies that they consider, and which are included under the terms of divestments, are the sale to strategic investors. In other words, the initial public offering of company shares or the repurchase of new shares by the company itself.

Duration of investments

These types of investments usually have a long duration in Anglo-Saxon countries. Where they are completely linked to public initiatives, for the provision of financing to small and medium-sized enterprises. It was not until the end of the 1990s that they began to expand in a generalized manner, due to a series of fiscal and legal reforms in several countries. In Spain, however, the development of this industry model has been more delayed. However, in the last three years its activities have grown notably.

Therefore, in this context, this article will analyze the situation and development of the venture capital industries in Spain. After this brief explanation in the previous sections, we will describe the characteristics of these types of instruments. In addition, we will discuss the evolution in Spain and the relationship with the rest of Europe and the United States.

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What are the main characteristics of venture capital in Spain?

All venture capital operations are responsible for encompassing all those transactions whereby investors provide financing in the form of capital to certain companies. This usually occurs through private negotiation processes, that is to say, outside the stock markets. These transactions are carried out through unlisted funds or companies, whereby they are managed by specialized institutions. In addition, they have the power to decide which companies may receive the resources and participate directly or indirectly in their management.

All acquisitions carried out by private equity firms in Spain are of a temporary nature. This is due to the fact that after a certain period of time has elapsed, the shares purchased are sold. In fact, the average terms of the investments are usually quite long. For a long time, Spanish venture capital has focused on financing companies that are in the process of launching or expanding and have limited internal funds. In addition, they are characterized by a high degree of uncertainty about the future evolution of the business, making it difficult to access alternative sources of funds.

In addition, there has been a significant increase in the number of transactions targeting mature companies. These transactions are generally associated with the restructuring process, and sometimes involve the exclusion of the acquired companies from the stock market.  These investment modalities have also been used in companies where divergences have arisen among shareholders on how to manage them.

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How can venture capital activity be classified?

There are different types of classifications of private equity activity in Spain, taking into account the characteristics of the acquisitions. The most common are those that distinguish between investments in companies in the expansion phase. Where high growth potentials and more mature companies are taken into account. First the group of such operations is known as the name of Venture capital, while the purchased companies are characterized by some difficulties in obtaining financing.

This is due to the uncertainty about their capabilities to generate resources, the lack of susceptible assets so that they can be used as collateral. In addition, the importance of the different problems of asymmetric information between lenders and borrowers. The Spanish venture capital is in charge of mitigating in a certain way these limitations, by participating directly or indirectly in the management.

The second group, called buyout, refers to mature companies, sometimes listed. Where it can be observed that they generate significant cash flows and obtain higher profitability through reductions in operating costs. Including the restructuring of balance sheets or management changes, within this type of modality there has been an increasing importance of leveraged operations. This is the combination of funds provided by venture capital with a high recourse to debt on the part of Spanish venture capital firms. It should be emphasized that this type of transaction is used in other acquisition processes not related to this industry.

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Evolution of venture capital in Spain

In Spain, the origin of the venture capital industries dates back to the mid-seventies, although a significant volume had not been reached until the 2000s. The beginnings were linked to the Public Administrations, but currently the greatest dynamism of these operations corresponds to the private sectors. As a result, the participation of the public sector has been progressively reduced, so that by 2005 only 18% of the operators were registered in Spain of this type.

However, during the last few years, these types of industries have experienced a remarkable development. As a result, the number of operators registered in Spain increased from 96 to 140 between 2003 and 2006. Different factors, both global and specific, have contributed to the development of the venture capital industry in Spain in recent years. The first to be mentioned is the growing demand for these types of products from institutional investors. In addition, including corporate restructuring processes, which have been driven by globalization and, in the case of Europe, by the single market.

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Investments made by venture capital

In recent years the Venture Capital type of operation has been gaining importance in different areas, especially in European countries, where this modality is currently wholesale. This is in contrast to the situation in the United States, where funds have mainly gone to companies in the development stages. Another differentiating element at the geographic level is the different weights of leveraged buy-out transactions. Thus, in the U.S. economy these are approximately half of the volume of investments, while mature companies in Spain represent practically all of them.

Some risks

However, the growth of private equity in Spain may also have some risks. Therefore, several organizations have expressed their concerns with certain features of recent developments, such as, for example, the increases in debt that leveraged operations usually entail. This increases the exposure of the sectors to adverse shocks, or even potential conflicts of interest. In addition, it can generate price manipulation and insider information, which are linked to the limited transparency of these transactions, as discussed above.

Have you had any experience with private equity in Spain? But, if that is not the case and you are interested in investing in Spain, or to learn about business models and project finance. In Tas Consultancy, we have the best experts who are willing to work hand in hand with you, in order to achieve your goals. Contact our experts through our website and they will answer all your questions!