It is now a reality that private equity houses have become serious players in the Spanish market. Back in 1999 and 2000, the emerging technology market played a key role. It was in 2000 when private equity was at its height. While funds raised in Spain in 1999 amounted to e638.4m (£403m), according to Spanish venture capital association ASCRI, this figure rose to a striking e2.53bn (£1.6bn) in 2000. However, in 2001 funds raised stayed close to a discreet e1bn (£631.3m). Still, the 2000 figure does exceed by far that of 1999 and 1998.
Private equity could not remain oblivious to the market's downturn in 2001. Still, figures show a strong commitment by private equity houses to remain in Spain. Whether figures rise or fall is part of the stabilisation process ensuing from the erosion of the milestone carved by start-ups and other new market entrepreneurs in 1999 and 2000. Thus, according to the 3i/PricewaterhouseCoopers Global Private Equity 2002 survey, Spain still remains in a rather promising third position in the ranking of Western European countries, with the highest investment growth in 2001, behind Denmark and Sweden but well ahead of, among others, the UK and the Netherlands. On a global basis, Spain is positioned fifth, ahead of the US and France.
It is clear that the Spanish private equity market is far from reaching the figures boasted by other surrounding markets such as the UK, France or the Netherlands, but the dimension of the market in Spain is attractive enough to offer good opportunities to domestic investors. Given the moderate size of the market, local private equity houses operate in the confidence that larger and more powerful foreign private equity houses do not perceive Spain as the priority destination for investments. Also, the Spanish legal environment is now more flexible for private equity houses, both from an organisational and a tax standpoint.
The first and most direct consequence for law firms in Spain is fierce competition. Lower profile deals imply lower fees. However, clients expect the same quality of service from lawyers, regardless of discounted professional fees. Thus, legal teams need to be streamlined to attain maximum efficiency and optimal use of time. Lower fees cannot be achieved by deploying junior lawyers in lieu of senior associates. Besides, clients expect lawyers to not only provide legal advice and draft transaction documentation, but also to manage the transaction. Project management skills, especially in cross-border transactions, draw the line between first-class law firms and second-tier ones. In Spain, lawyers working on such deals need to take decisions that often fall within the definition of 'commercial issues'.
In order to understand what private equity houses seek from law firms, it is useful to look into how transactions take place in Spain. Compared with the UK, for example, M&A deals in Spain do face certain truths. Sellers in Spain (traditionally families with a long industrial track record, as in the case of Famosa, the leading Spanish toy manufacturer, now to be acquired by Inveralia) are not accustomed to approaching deals in a dynamic manner. The perception was that traditional Spanish lawyers viewed deals from a rather theoretical and static stance. Also, until recently, management teams did not have the right attitude towards deals involving European players. Besides, the low number of private equity deals in Spain make private equity houses wary of closing transactions without giving prior deep and careful consideration. The lower the number of deals, the greater the risk entailed by each of them. All of these factors, needless to say, drag out transactions.
As pointed out by Patrick Gandarias and Juan Cuesta, partners at independent private equity group Corpfin Capital, during the last few years law firms have been moving in the right direction. They acknowledge that clients do not need 'gurus', but rather transaction lawyers who make deals happen. Creativity and a practical approach to problem-solving in sophisticated deals is what they value most. Private equity houses, as financial investors, in most cases lack the expertise of industrial investors. Clients expect and demand lawyers (and other advisers) to bridge the gap. In addition to international tax planning, essential for private equity houses, law firms need to have a strong banking department capable of handling the financing of M&A deals in an efficient, expeditious and low-cost manner. All of the above entails day-to-day contact with clients; as a result, law firms need to ensure that, when embarking on a private equity deal, they will be able to cope with the demands of the client. Allocating resources and sharing them between deals is a challenge which makes the difference.
Given the new trends in the market, as well as the increasing number of law firms in Spain with a serious capability and desire to attend to the needs of private equity houses, deals are up for grabs. Although a strong brand does help, law firms with a solid track record also get the deals. In order to assess this track record, private equity houses look at past experiences with such a firm and, chiefly, with the partner who will lead the relevant team. Highly experienced senior lawyers began only a few years ago to change firms in a perceivable manner. These lawyers have been hired, in the vast majority, by UK firms – Allen & Overy (A&O), Ashurst Morris Crisp, Linklaters etc – to head and develop their Spanish ventures.
In spite of the developments and expansions in Spanish law firms, traditional domestic firms still lead in this field. Thus, Uria & Menendez and Garrigues may be deemed the top two firms in this field. Other smaller local firms, such as Garcia Añoveros & Perez-Llorca or Araoz & Rueda, are well respected. However, Clifford Chance, which has had a strong presence in the Spanish local market for a few years now, does pose a threat. This threat for domestic firms increases in size as other firms gain ground on the traditional players in Spain, as evidenced by Clifford Chance some six or seven years ago. A&O, Freshfields Bruckhaus Deringer and Linklaters are good examples. A&O has been involved, together with Linklaters, in CVC's acquisition of supermarket giant El Arbol from the Casino Group. On the other hand, Araoz & Rueda has recently advised on the Provimar management buyout, led by 3i.
In conclusion, law firms need private equity houses. The Spanish financial magazine Actualidad Economica conducted a survey which found that, in 2002, the venture capital companies with the highest reputation were Corpfin Capital, CVC, Mercapital, 3i, Bridgepoint and Dinamia. It is no coincidence that these are the most active players in the private equity arena in Spain. nIñigo Gomez-Jordana is a partner and Jose Sanchez Dafos a senior associate at Allen & Overy's Madrid office