Portugal’s economic recovery is making it a hot destination for the rich and famous like Madonna as well as tech entrepreneurs and now private equity is looking to participate in the upswing.
Private equity investments in Portugal have more than tripled to 7 billion euros (£6.14 billion) in the past three years, according to data by industry consultant TTR, as investors flock to a rebounding economy hungry for capital.
The 2017 data includes some big deals, such as a 1 billion euros investment by U.S. firm Lone Star, but shows a rise in smaller ones as private equity shifts from distressed assets to healthy companies riding the country’s economic growth wave.
Portugal’s economy is set to grow 2.2 percent this year, four years after it exited a bailout and seven years since it faced sovereign default, one of several euro-zone countries whose indebtedness had threatened the single currency.
“The sector is now pretty dynamic,” said Joao Rodrigo Santos, a partner at Lisbon-based Atena Equity Partners. Atena is raising money for a new 40 million euro fund which will take its total assets under management in Portugal to 100 million euros.
“Four or five years ago fundraising was mostly looking to distressed (assets), with many companies struck by the crisis and unbalanced financial structures. Now we see interest in traditional buyouts,” he said.
The industry is also showing signs of maturity, with a growing number of private equity firms taking profits on earlier deals done several years ago.
Last month, Portuguese private equity firm Explorer sold ROQ, a manufacturer of shirt-printing machines, to two foreign private equity investors — Spain’s Magnum Industrial Partners and Alantra Private Equity — for 150 million euros.
Explorer declined to disclose its return on the investment but it was sold for several times the original investment. It is raising 125 million euros for another fund.
Luis Quaresma, partner at Iberis Investment, which targets both Portugal and Spain, said his firm was also raising money for a fund that would make investments of 5-25 million euros.
HCapital, which manages 75 million euros, is looking to buy four companies this year and raise a new fund in 2019.
“We are happy with our investments so far … and recently launched a 20 million euro fund for early stage companies,” said Joao Oliveira, a partner at HCapital.Mexico’s Nexxus Capital said last month Portugal was one of three investment destinations for its plan to invest 350 million euros in small and medium-sized enterprises (SMEs).
The government, wary of the resurgent economy embarking on another debt binge, has thrown out the welcome mat for private equity firms, offering to partner with private investors to lower financing costs as well as extending tax concessions.
Lisbon has also created a scheme, Capitalizar, which funnels private equity to smaller firms that struggle to obtain competitive finance from banks still burdened by bad loans.
“We developed a programme called Capitalizar with the idea that firms should invest more with an equity base,” said Portuguese Economy Minister Manuel Caldeira Cabral.
“This programme has capital-based financing lines with incentives for funds to invest with equity.”
The government uses part of its 2.4 billion euros Capitalizar scheme to co-invest with private equity firms.
“We have measures to help deal with the restructuring of firms, which is important to reduce bad loans. A lot of them look to guarantee a strong equity base in investments, which is very important,” Caldeira Cabral said.
The government has promised to maintain a stable tax regime for private equity, but some investors worry it may come under pressure to raise taxes. The ruling socialist party governs in minority with support from communists and the radical party Left Bloc.
“The Portuguese tax framework is ultra-competitive in European and global terms,” said Nuno Gaioso, head of the Portuguese Risk Capital Association.
But he added: “While other countries may tax more, some offer a stable tax framework in a 10, 15-year period.”
For now, there are few signs that private equity’s interest in Portugal is cooling.
Total assets under management by Portuguese private equity firms stand at around 6 billion euros, up from barely 1 billion euros a decade ago, according to Gaioso.
About 75 percent of those assets are held by restructuring funds that bought up bad bank loans accumulated during the sovereign debt crisis.
But private equity and venture capitalists are shifting their focus to mainstream business, particularly SMEs.
The European Investment Bank (EIB), whose charter includes support for smaller businesses, said Portugal’s economic recovery was helping to draw private equity and venture capitalists into the SME funding gap.
The EIB is working with private equity in this regard.
“There are several proposals under scrutiny and we anticipate positive news during 2018,” said Kim Kreilgaard, head of the EIB in Portugal.