PORTUGAL: An Introduction to Private Equity

General Overview of the Market and Trends

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

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

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

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

PE investors have been a catalyst for growth and sectorial innovation. Programmes like Programa Consolidar and SIFIDE channelled EUR2.1 billion in European Investment Bank (EIB) funding to SMEs in 2024, with PE funds driving operational efficiencies and R&D investment. Assets under management in Portuguese-based PE funds doubled from EUR4 billion 2015 to EUR9 billion in 2023, reflecting investor confidence in the country’s regulatory reforms and growth sectors. 

Publicly available M&A/PE databases reveal an increase in more than 50% of PE deal size (EUR3.5bn in 2024) which contrasts with a 20% decline in volume (70 transactions in 2024) vis-à-vis 2023 (year-over-year).

The European Central Bank’s rate hikes in 2023 slowed dealmaking by increasing financing costs. Portugal’s PE market mirrored this trend, with longer holding periods (three-four years stretching to five-six years) as funds deferred exits. The year 2024 already evidenced a significant increase of the number of divestment processes, which is expected to stabilise in 2025, though residual caution may persist. 

The most attractive/dynamic sectors for investment were renewable energy, real estate/tourism, internet, software and IT services and manufacturing.

Deal activity is expected to rebound in 2025, mainly driven by:

• Lower Interest Rates: Anticipated cuts in 2025 could reduce borrowing costs, easing pressure on EV/EBITDA multiples and reviving leveraged buyouts;
• Sectoral Growth: Energy & Infrastructure (E&I), healthcare tech, and AI-driven solutions will attract PE capital, supported by EU net-zero targets and Portugal’s focus on renewable energy; and
• Private Equity Liquidity Levels: The increasing interest from private equity investors, both domestic and international, is also expected to play a significant role in driving M&A activity in 2025. With ample dry powder and a growing appetite for Portuguese assets, private equity firms are likely to be key players in the market, particularly in mid-market 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

Technology plays a transformative role in enabling and streamlining M&A processes. By leveraging these technologies, companies can enhance the efficiency, accuracy, and success of their M&A processes, from deal-sourcing to virtual data rooms, AI-powered due diligence tools or post-merger integration solutions.

(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 in good terms for competitive premia. We have witnessed a progressive growth in the use of W&I insurance, particularly when a PE fund is on the sell-side. In fact, taking in consideration the limited duration of PE funds (usually between five and ten years), in an exit process through a trade sale, either in an auction process or in a bilateral negotiation, W&I insurance can be the ideal solution to ensure that the buyer enjoys protections against possible breaches of representations and warranties after the time the PE fund has ceased to exist.

New regulations impacting M&A deals

At the national level, Portugal has introduced several regulatory changes aimed at streamlining the M&A process and enhancing the attractiveness of the country as an investment destination. These include reforms to the corporate tax regime, which have reduced the tax burden on companies, and changes to the insolvency framework, which have made it easier for distressed companies to restructure and attract new investment.

At the European Union level, the implementation of the Digital Markets Act (DMA) and the Digital Services Act (DSA) is expected to have a significant impact on M&A activity, particularly in the technology sector. These regulations aim to promote competition and curb the dominance of large tech companies, potentially leading to increased M&A activity as smaller players seek to consolidate and compete more effectively.

Additionally, the EU’s Green Deal and associated regulations are likely to drive further M&A activity in the renewable energy sector, as companies seek to align with the bloc’s ambitious climate targets and capitalise on the growing demand for green energy solutions.

Decoding cross-border M&A

Effective 12 October 2023, the EU Foreign Subsidies Regulation (FSR), set forth in Regulation (EU) 2022/2560, introduced a mandatory concentration control framework aimed at addressing the impact of subsidies from non-EU countries, thereby adding an additional key element to cross-border M&A. 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.

Under this new regime, notification is mandatory whenever:

• there is a concentration (as defined in EU Law for merger control purposes);
• at least one of the merging undertakings, the acquired undertaking or the joint venture is established in the EU and generates an aggregate turnover therein of at least EUR 500 million; and
• the transaction involves aggregated foreign financial contributions of more than EUR50 million to any of the concerned undertakings in the last three years.

For the purposes of FSR, there is a "foreign financial contribution" whenever a third country provides, directly or indirectly, a financial contribution providing a benefit to an undertaking engaging in an economic activity in the EU internal market. "Foreign financial contribution" is thus a very broad concept, in line with the concept of "state aid" for EU member states, which goes beyond subsidies, rather encompasses any advantage (including transfers of funds, tax exemptions, debt forgiveness, provision or purchase of goods or services, just to name a few) coming from public authorities, the central government and even private entities whose actions can be attributed to the third country.

Navigating the intricacies of the FSR regime shall continue to pose a formidable challenge for dealmakers, demanding extensive background work, information gathering on foreign financial contributions, and the implementation of tracking systems. Taking the FSR lightly is, however, not an option, for failure to notify or await clearance may attract fines of up to 10% of the parties’ global turnover.

As regards Foreign Direct Investment (FDI) rules, Portugal operates under Decree-Law 138/2014, of 15 September 2014, which established a system for safeguarding strategic assets.

The Portuguese government retains the power to block transactions that could jeopardise national defence, national security or the provision of essential services in energy, transport and communications sectors whenever control over companies or assets is being acquired by entities from non-EEA countries. In case the government opposes the operation, all legal acts and deals related thereto are null.

For the sake of legal certainty, acquirers can request in advance confirmation from the government that it will not oppose the projected deal, though such notification is left to the discretion of the parties.

Despite being in force for over a decade, there are still no public decisions regarding FDI in Portugal. Considering the significantly negative impact of an FDI rejection and growing EU-wide harmonisation in the field, dealmakers must be mindful of the FDI framework whenever non-EEA entities are acquiring parties.

Dealmakers must strategically weave the FSR regime into the intricate tapestry of cross-border M&A, aligning it with both merger control and foreign direct investment (FDI) regimes. These regimes collectively shape the regulatory landscape, requiring astute navigation for successful cross-border transactions.