PORTUGAL: An Introduction to Private Equity

General Overview of the Market and Trends 

The private equity market in Portugal comprises a variety of different realities and players.

There are several very active private equity funds run by Portuguese-based sponsors, but a significant part of Portuguese M&A activity is conducted by foreign-based PEs, in particularly in Spain, UK, France and the US.

M&A/PE databases have evidenced an increase, in the last four years, of cross-border transactions completed by foreign-based PEs.

It is also worth mentioning that national PEs funds’ main focus will be mid-market transactions, while the fewer high-value deals are be mostly undertaken by high-profile foreign PEs with and enhanced investment capacity.

The most attractive/dynamic sectors for investment are the renewable energy, real estate/tourism, infrastructure, TMT and family-owned industrial players.

Publicly available M&A/PE databases reveal a shift in PE activity in 2023. Despite the increase in the number of transactions (of about 27%), M&A deals involving private equity parties in terms of deal size have dropped by about 50% (year-on-year).

The uncertain environment that characterised the industry in 2023 – international landscape affected by conflicts and geopolitical tensions, as well as high interest rates, with slower fundraising and deal process – will most likely persist in 2024.

As the market has had the time to adapt to these challenging circumstances, and as there are still high liquidity levels waiting to be invested, we expect some rebound of private equity deals this year.

Equity Financing 

In addition to the typical M&A transaction structure used by PEs – acquisition of the target company’s control – other investment structure alternatives (more similar to those adopted in VC transactions) have been implemented in the past few years, and are becoming more common.

In this option, the founders or current owners maintain control of the target company, while the investor invests through preferred shares. Of course, there are some specific features that companies need to comply with in order to capture this type of investment (solid business plan, with an international focus, know-how and management capabilities), but to the extent those are met they might be a very attractive option for companies with funding needs and limited debt capacity.

Increasing Competition for Deals 

As private equity becomes more popular in Portugal, competition for attractive investment opportunities is likely to heat up. This could lead to higher valuations and more pressure to find innovative ways to create value in portfolio companies.

Technology-Enabled M&A Processes 

The use of technology in the M&A process, from virtual data rooms to AI-powered due diligence tools, is likely to continue to grow. This can streamline the process, improve accuracy in valuations, and enable better integration planning.

(Re)allocation of Risk: W&I Insurance 

In the last few years, access to W&I insurance on M&A transactions in Portugal has increased significantly due to the simplification and acceleration of the contracting process and the availability of policies with good terms for competitive premiums. We have witnessed a progressive growth in the use of W&I insurance, particularly when a private equity fund is on the sell-side. In fact, taking into consideration the limited duration of private equity funds (usually between five to ten years), in an exit process through a trade sale, either in an auction process or in a bilateral negotiation, the W&I insurance will be the he ideal solution to ensure that the buyer enjoys protections against possible breaches of representations and warranties after the time the private fund has ceased to exist.

Decoding Cross-Border M&A: Navigating the Multi-layered Regulatory Landscape

Effective from 12 October 2023, the EU Foreign Subsidies Regulation (FSR), outlined in Regulation (EU) 2022/2560, has become a crucial element in the landscape of cross-border M&A. This new Regulation introduces a mandatory concentration control framework aimed at addressing the impact of subsidies from non-EU countries. Dealmakers must now incorporate the FSR regime into their considerations for cross-border M&A, alongside existing merger control and foreign direct investment (FDI) regimes, adding a significant layer to the regulatory landscape.

Under this new regime, notification is mandatory whenever: (i) there is a concentration (same criteria as for the EU Merger Regulation); (ii) where at least one of the merging undertakings, the acquired undertaking or the joint venture, is established in the Union and generates an aggregate turnover in the Union of at least EUR500 million; and (iii) the transaction involves aggregated foreign financial contributions of more than EUR50 million to any of the concerned undertakings in the last three years.

Under the FSR, there is a “foreign financial contribution” (which seems a much broader concept than that of “foreign subsidies”) where a third country provides, directly or indirectly, a financial contribution providing a benefit to an undertaking engaging in an economic activity in the internal market. For the purposes of this Regulation, a financial contribution includes transfer of funds, tax exemptions, debt forgiveness, and provision or purchase of goods or services, to name a few. However, it does not end there – foreign financial contributions can come from public authorities, central government, and even private entities whose actions can be attributed to the third country.

Navigating the intricacies of the FSR regime poses a formidable challenge for dealmakers, demanding extensive background work, information gathering on foreign financial contributions, and the implementation of tracking systems. Although it seems that there is no other option, since failure to notify or completion before approval can result in fines of up to 10% of parties’ global turnover.

Transitioning to the context of national Foreign Direct Investment (FDI) rules, Portugal operates under the framework of Decree-Law 138/2014. This legislation establishes a system for safeguarding strategic assets vital to national defence, security, and the provision of essential services in the energy, transport, and communications sectors.

The Portuguese government retains the authority to oppose transactions that could jeopardise national defence and security, extending this to acquisitions of control by entities from non-EU (and European Economic Area) countries in specified sectors. Consequent to government objections, all legal acts and transactions related to the operation are null.

For legal certainty, acquirers can request confirmation from the government regarding non-opposition to the ongoing operation, though such notification remains discretionary.

Although much uncertainty remains around the application of these regimes, as there is still no decision-making practice; dealmakers must strategically weave the FSR regime into the intricate tapestry of cross-border M&A, aligning it with merger control and foreign direct investment (FDI) regimes. These regimes collectively shape the regulatory landscape, requiring astute navigation for successful cross-border transactions.

Focus on Sustainability and ESG 

Investors are increasingly expecting companies to do good while doing well. This is driven by several factors such as the COVID-19 pandemic, greater social and ecological awareness and a growing regulatory imperative. As a result, ESG factors are more and more present in investors’– notably asset managers and private equity firms – decision-making process.

The full extent of ESG issues to be addressed by investors remains to be seen. In fact, the European Commission issued its long-awaited Proposal for a Directive on Corporate Sustainability Due Diligence to tackle human rights and environmental impacts across global value chains. The proposal, albeit controversial both from the viewpoint of companies (which regard it as imposing far-reaching and costly obligations) and of NGOs (which consider that it should have targeted a higher number of companies and should have been stricter in terms of imposing bans on products made with forced or child labour), has been described as “a watershed moment for human rights and the environment”. The proposal will complement the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation and was accompanied by the publication of a Communication on Decent Work Worldwide (outlining plans to tackle forced labour and promote decent work worldwide, paving the way for a future ban of products produced with forced or child labour from the EU market). Other initiatives will likely unfold and, in the interim, practice will continue to step in and play a role ahead of the regulation.