PORTUGAL: An Introduction to Private Equity

PRIVATE EQUITY: PORTUGAL 

BRIEF OVERVIEW 

From a macroeconomic perspective, Portugal is still showing signs of recovery, essentially driven by exports. This has contributed to a significant decrease in unemployment, falling from 17.1% in 2013 to 8.5% in the third quarter of 2017. GDP is expected to grow by 2.3% in 2018 and around 2% annually until 2020, which is slightly below EU growth level. Exports now represent around 40% of the GDP, and effective market share gains suggest an increase in competitiveness in most product/country markets in the EU (1).

The Portuguese private equity market sector accounts for 2.4% of GDP, which is a slight increase from the previous year (2).

In the current economic climate, private equity activity assumes an important role as an alternative source of financing for and capitalization of Portuguese companies, other than recourse to bank debt.

Investment in 2016 was essentially made through “other investments” (supplementary contributions, accessory contributions and shareholder loans, bonds, and other debt securities) rather than the acquisition of shares (2).

TRENDS AND DEVELOPMENTS 

According to the Portuguese Securities Market Commission (“CMVM”) (3), there are currently 98 registered private equity funds and 45 registered private equity management companies in Portugal, with specific investment policies, types (e.g. industry, trade and tourism) and dimensions. This represents a significant increase when compared to the previous year.

There is still a significant concentration in the Portuguese market, with nine private equity funds representing around 68.4% of total assets under management.

The assets under management of the Portuguese private equity players were around EUR4.6 billion, representing an increase of 10.2% when compared to the previous year (2).

This growth was driven by redirecting investment to certain economic sectors, including activities in real estate, tourism and technology.

Indeed, the economic crisis has led to a new trend in the private equity sector in Portugal, through restructuring and recovery vehicles (distressed debt funds) that essentially invest in companies related to real estate, construction and tourism – industries that were severely affected by the financial and economical crisis in Portugal.

The majority of the transactions in Portugal are carried out in the late stage of the development of the target companies (“private equity”) rather than in the early stage (“venture capital”).

Although showing a slight increase, investments in venture capital (seed capital, startup and early stage) continue to represent a small share of the total amount invested, representing 19.5% vs. 80.5% for later-stage private equity (buyouts and growth).

It is likely that venture capital will increasingly represent a higher percentage of total investment in Portugal. On the one hand, the local entrepreneurial ecosystem has steadily developed – fostered in part by a significant increase in unemployment up until 2013. On the other hand, purely on the supply side, the government has helped with promoting events in Portugal such as the Web Summit, and has developed incentives for venture capital fundraising and investment. In particular, in 2016 the IFD (Instituição Financeira de Desenvolvimento) set aside EUR110 million for the creation of several venture capital funds where it would co-invest up to EUR10 million with private investors on a 50/50 basis.

By the third quarter of 2017, the IFD had already promoted several financing agreements in partnership with 13 private equity companies for a total of EUR175 million to invest in the fintech, biotechnology and robotics areas. A co-investment fund called 200M was also created and will have similar investment objectives, but on a deal-by-deal basis (up to EUR5 million per deal, on a 50/50 basis), targeting international and institutional investors.

In early 2018, Portugal will launch a “Startup Visa” project, with the aim of encouraging foreign entrepreneurs to set up new business models (incubators) in the technology and innovation fields. Also, the biggest European crowdfunding platform Seedrs entered into a partnership with Portugal Ventures, a public Portuguese venture capital company for investment in Portuguese startups registered with the Seedrs platform.

We have also witnessed the appetite from large corporations, some listed, to form corporate venture capital funds to pursue investment opportunities that could bring strategic advantages in terms of new products and technologies.

LEGAL ENVIRONMENT 

Private equity activity in Portugal is subject to Law No. 18/2015 of 4 March (“Law”), which implemented Directive 2011/61/EU of the European Parliament and the Council on Alternative Investment Fund Managers (“AIFMD”).

The private equity activity consists of investment (either through equity or debt capital instruments), for a limited period of time, in target companies with a high potential for development and growth, allowing them to benefit from the future sale of those companies.

It is important to mention that the Law does not distinguish between the concepts of private equity and venture capital, comprising private equity activity in all its forms, including venture capital.

The Law sets forth two different legal frameworks:

     a) a legal framework applicable to management entities whose value of assets under management falls within the AIFMD thresholds: greater than EUR100 million (leveraged) or EUR500 million (unleveraged) assets which do not grant investors redemption rights for an initial five-year period; and

    b) a legal framework applicable to management entities whose assets under management do not fall within the AIFMD thresholds, reproducing the legal framework previously in force as set forth in the former Decree Law, although with some amendments.

The legal framework referred to in (b) is lighter than the new one referred in (a) above, as the latter set forth tighter requirements, namely regarding: (i) authorisation and registration; (ii) internal organisation; (iii) conflict of interests; (iv) risk management policies; (v) valuation rules; (vi) remuneration policies and (vii) delegation and sub-delegation of functions in third parties.

It should be noted that the legal framework referred to above introduced a set of innovative changes aiming to bring greater flexibility, to simplify and, consequently, promote the increase of private equity activity.

We believe that this new legal framework will improve Portugal's competitiveness in this sector, bringing it in line with similar EU legislation.

Private equity players are subject to CMVM’s supervision of their prudential and market conduct. Specifically, these players must comply with Regulation No. 3/2015, which develops the Law further, emphasizing the introduction of several asset valuation rules and report duties.

CONCLUSION  

We believe that the economic and legal reforms initiated in 2011, and the government’s incentives for venture capital, have increased Portugal’s attractiveness from a foreign investor’s perspective, notably in the banking, insurance, infrastructure, energy, tourism, IT and technology sectors.

(1) Bank of Portugal, Economic Bulletin, October 2017.

(2) CMVM Annual Report of Private Equity Activity 2016 (latest report available)

(3) http://web3.cmvm.pt/sdi/capitalrisco/pesquisa_nome_fcr.cfm