SECONDARY BUYOUTS REACH NEW HEIGHTS IN SPAIN
Secondary buyouts by private equity firms have increased very significantly in Spain in the last year, as more and more venture capital firms are relying on other international funds to sell their best assets.
A secondary buyout (SBO) is an M&A transaction where a private equity firm sells its shares in a portfolio company to another private equity firm. Also known as sponsor-to-sponsor deals, these mega-acquisitions between PE firms amounted to over EUR7 billion in Spain in the last year. Highlight deals include Carlyle´s purchase of Altadia from Lone Star for more than EUR1.9 billion, Ardian´s acquisition of telecoms company Adamo from EQT, exceeding 1 billion, and Brookfield´s EUR900 million acquisition of slate roofing and cladding company Cupa from Carlyle.
REASONS BEHIND THE INCREASE OF SECONDARY BUYOUTS IN SPAIN
Several factors explain the increase of large M&A deals involving Spanish companies among national and international funds. These include:
● High levels of liquidity at private equity firms thanks to capital raising processes undertaken in recent years.
● Strong interest in Spain by international investors. Numerous foreign venture capital funds are entering the Spanish market, with many opening offices in the country.
● Increased competition for high-quality assets, which has generated great appetite in the market, creating generous gains for their owners. There are more buyers and sellers, and the gap between the conditions required by both parties has shrunk.
● Global uncertainty encourages investment in consolidated companies. This is because, in theory, companies which have been invested by a private equity partner have higher quality standards and have undergone two or more growth and internationalisation phases.
FEATURES OF SECONDARY BUYOUTS
Expediency
Secondary buyouts are M&A deals which tend to be closed particularly fast. These transactions usually attract several venture capital firms as well as other companies, which leads to increased pressure on buyers both in terms of pricing and timing.
Use of warranty and indemnity insurance
For venture capital firms selling in an SBO, not having any future liabilities arising from the sale is a priority. In order to achieve this clean exit, the buyer is usually required to take on warranty and indemnity insurance (W&I). This ensures that the buyer is protected against any unknown contingencies, with the insurer covering the risk of breach of representations and warranties by the seller.
Locked boxed mechanism for fixing the purchase price
In secondary buyouts, a locked box mechanism is usually preferred for fixing the purchase price. In other words, the final purchase price is fixed using the target’s closed accounts prior to the signing of the SPA. From that date, the economic risk/benefit of the business is passed on to the buyer. The seller, on the other hand, takes on certain obligations during the interim period.
FUTURE OUTLOOK
In other markets, such as France or the UK, secondary buyouts account for 30% of M&A transactions. In Spain, we´re still a long way away from these figures, and there is therefore great scope for growth of secondary buyouts in this market.