Over the 30 years of my professional life in the EMEA region, the EU’s Southern Mediterranean markets have played an important role. I have led and managed projects executed on a pan-EU basis, yet each market has its own distinct culture. Every time I work on these projects, I am struck by how unique and unrelated the business cultures are in Spain, in Italy, in France and in Greece. Aside from certain areas where the EU has imposed general guidelines, each market has its own regulatory, economic and cultural approaches. Implementing an investment decision or entering a new product market thus requires distinct market-specific benchmarks of success. The stereotypical perception is that most businesses in these countries are predominantly family-owned, SMEs or start-ups and that they are symmetric in business culture, meaning business is done in similar ways. In fact, this is not the case; there is actually much diversity, and to be successful requires cultural nuance. Equally striking is the very little cross-border activity between these countries.
To shed light on their diversity and interactions, the next three country profiles will examine Spain, France and Italy in terms of their inter-regional and cross-border potential.
Private Capital in Southern Europe: Spain
Spain, the Eurozone’s fourth largest economy, was for years viewed as one of its weaker members. Along with Portugal, Ireland and Greece, it was one of the ‘PIGS’ – vulnerable, debt-addled economies. Since real estate was a driver of growth, it was hit hard by the financial crisis. Only last year did it return to its pre-2008 GDP levels.
Look closer and you’ll see signs of a resurgent Spain. Since 2013 it has been one of Europe’s best-performing and fastest-recovering economies thanks to reforms of its labour markets and banking and its deficit reduction. In finance, its big players are at the forefront of FinTech innovation.Madrid-headquartered BBVA, for instance, runs more like a start-up than a big bank, empowering its teams to prototype new ideas quickly, acquiring firms in areas such as big data and design, and with a stake in Atom, the UK’s sole app-only bank. Santander is a globally recognised brand also experimenting with the latest technologies – it was the first to use blockchain for investor voting, and its groundbreaking digital intranet is ranked in the top 10 worldwide. Spain’s consumer markets are also a draw – Chinese smartphone-maker Xiaomi started its Europe expansion in Spain – and it’s one of the world’s leading tourist economies.
One area less discussed but worth watching is private equity (PE). Spain’s PE sector has been growing – in the first quarter of 2017, it registered its highest acquisition and exit rates since 2005. There is a strong international flavour to its participants. Last year, international funds accounted for 75 per cent of the €4.9bn deployed by private capital firms, with targets ranging from healthcare to cruise ships. Riverside, a US firm with $7bn under management, completed its first Spain deal when it acquired Celvitae, a blood bank, as part of a strategy to create a global leader in stem cell research, and Germany’s Aquila Capital invested €500m in logistics and residential assets, with plans to allocate another €800m.
Private equity deal-making benefits from on-the-ground presence, which would indicate that nearby countries would have greater engagement in each other's investment community. Spain's nearest neighbours are France and Italy and France is the more active of the two. One league listing Spain’s top-ranked PE funds included PAI Partners, a French firm. Paris-based Tikehau Capital, which has offices in Madrid, has invested in several Spanish businesses both directly and indirectly, including OmniAccess, a Mallorca-based satellite firm, and has been active in other sectors including tourism and motor rentals. Lendix, a France-based SME crowdfunding network that has been raising capital to drive its goal to be a P2P SME financing platform across continental Europe, received approval to enter Spain in 2016.
But Italian private equity and venture capital (VC) activity is scanter. The data indicates that Italian PE is very domestic-focused, with just a tiny fraction going to other European countries. Its PE sector lagged behind Spain’s last year and some funds were spooked by the Catalonia secession crisis – with one reportedly pulling out of buying a Barcelona-based company at the time.
Southern Europe – defined as Greece, Italy, Portugal and Spain – is a small PE market in relative terms according to one data set, raising only €3.7bn in 2016 compared to €41.3bn in the UK and Ireland, and €18.9bn in France and Benelux. The sector should be encouraged to grow more both within and between these countries. Private equity can be a force for good, acquiring mature and often underperforming businesses and turning them around. Although sometimes criticised as asset-strippers, PE funds are often medium-term players working to 3 to 5-year time frames, a far more patient form of capital than you’ll find in stock markets. Venture capital is different in nature – still private, but it backs early-stage firms. It too can do much good for economies. European innovators, from Spotify to Skyscanner, both received VC backing.
To encourage both types of flow across borders, a pan-European regulatory framework exists to harmonise investment rules. The EU Capital Markets Union (CMA) aims to streamline the rules and promote regulatory convergence, which in turn could help European businesses lessen their reliance on bank loans and make more use of instruments such as PE, VC, business angels and crowdfunding. This, combined with greater efforts to explore opportunities in each other’s markets, could do much to encourage Southern Europe to build its own PE industry to rival its Northern and Western counterparts. And this, in turn, could also make it a destination for more US and North European funds seeking growth, both helping them ride the economic recovery of Southern Europe and diversifying the capital inflows in this promising, resurgent region.
Cleopatra Kitti was in conversation with Adam Green