PORTUGAL: An Introduction to Private Equity

CHAMBERS AND PARTNERS
EUROPE GUIDE
PRIVATE EQUITY OVERVIEW, ED. 2019
https://chambers.com/content/item/3274

PRIVATE EQUITY: PORTUGAL 

BRIEF OVERVIEW 

From a macroeconomic perspective, Portugal is benefiting from a very positive environment, essentially driven by a growth of exports and foreign investment. This has contributed to a significant decrease in unemployment, falling from 17.1% in 2013 to 6.7% in the fourth quarter of 2018. GDP is expected to grow by 1.9% in 2019 and 1.7% in 2020, which is generally in line with the estimation for the EU growth level. Exports now represent around 44% of the GDP, and effective market share gains suggest a marginal increase at a stable rate at least until 2021.

The Portuguese private equity market sector (total net value of PE funds) accounted for 2.3% of GDP at the end of 2017, which is a slight downturn in comparison with the previous year, despite an increase of 1.2% of the value under management, reaching EUR4.5 million (value of assets under management net of financing and other liabilities).  In the current economic climate, private equity activity assumes an important role as an alternative source of financing for and capitalisation of Portuguese companies, other than recourse to bank debt. The majority of the investment in 2017 was made through “other investments” (supplementary contributions, accessory contributions and shareholder loans, bonds, and other debt securities) rather than the acquisition of equity.

TRENDS AND DEVELOPMENTS 

According to the Portuguese Securities Market Commission (“CMVM”), there are currently (in 2019) 114 registered private equity funds and 46 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 64.5% of total assets under management.

As per the available information, in 2017, the assets under management of the Portuguese private equity players were around EUR4.8 billion, representing an increase of 3.5% when compared to the previous year.

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

Indeed, in recent years we have registered a new trend in the private equity sector in Portugal, as the restructuring and recovery vehicles (distressed debt funds) that invested in companies related to real estate, tourism and hospitality – industries that were severely affected by the financial and economical crisis in Portugal – have restructured such companies and assets and are placing some of them in the market, benefiting from the existing liquidity and strong interest of international funds and investors in such assets/sectors.

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 an increase, investments in venture capital (seed capital, startup and early stage) continued to represent a small share of the total amount invested in 2017, representing 19.7% vs. 80.3% for later-stage private equity (buyouts and growth). Although we do not have official numbers from 2018, it is likely that venture capital will increasingly represent a higher percentage of total investment in Portugal, since, according to the TTR - Transactional Track Record recorded transactions, venture capital deals had a relevant growth in 2018 both in volume and value. 

On the venture capital market, the Web Summit initiative together with the government incentives for venture capital fundraising and investment through the IFD (Instituição Financeira de Desenvolvimento) are probably the most relevant ones.

By the third quarter of 2018, the IFD had already promoted several financing agreements in partnership with 15 private equity companies for a total of EUR205 million to invest in the fintech, energy, biotechnology and robotics areas. A co-investment fund called 200M was also created with 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 launched 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 as recently amended by Decree-Law No. 56/2018 of 9 July (“Law”), which implemented Directive 2011/61/EU and Directive 2014/65/EU of the European Parliament and the Council on Alternative Investment Fund Managers (respectively “AIFMD” and “AIFMD II”).

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 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.

Several relevant changes to this legal framework have been recently introduced by the abovementioned Decree-Law No. 56 /2018, of July 9, including the end of the 10 years’ time limit for private equity investments and the addition of further clarifications to the calculation methodology used to assess if the AIFMD thresholds are reached or not. These measures aim to achieve more flexibility for the management of assets by Private Equity funds and companies, which can now be more market oriented in their decisions to divest or to maintain their investments for longer periods.

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, emphasising the introduction of several asset valuation rules and report duties.

CONCLUSION  

In recent years, there has been a steady growth of inbound cross-border investment and Portugal has been attracting private equity investment, notably in the real estate, technology, financial and insurance, energy and infrastructures, tourism and and healthcare, hygiene, medical and cosmetics sectors.

INE Press Release on Employment Statistics, 4th Quarter of 2018.

Bank of Portugal, Economic Bulletin, December 2018.

CMVM Annual Report of Private Equity Activity 2017 (latest report available).

http://web3.cmvm.pt/sdi/capitalrisco/pesquisa_nome_fcr.cfm.