Banks tightening the credit tap and/or the rising cost of traditional financing have given rise to new forms of alternative financing for SMEs. Known in Spain as capital riesgo, private equity is today one of the most widely used mechanisms for growing companies.
Unlike venture capital, which is aimed more at startups or newly created companies, private equity targets businesses that already have some track record. Last year, deals by these investment firms reached new all-time highs in Spain, according to SpainCap, with deal volume reaching €9,238 million, 22% more than in 2021. Of the total, 77% corresponded to private equity deals, with 181 acquisitions.
As for Spanish private funds, raised by these firms to invest in companies, they also reflect strong interest in this type of deal. In the 2006–2021 period, assets under management grew 1.6-fold. Specifically, 2021 saw a record annual investment volume, totaling €1,350 million. The main reason for this growth is that the annual net return over this period (2006–2021) was 11.2%.
What is private equity?
Private equity firms look for investment opportunities in SMEs to give them financial muscle and help them grow. In this way, investors acquire a stake in the company's share capital, provide it with liquidity, and drive its development.
Generally, the goal of these deals is a win-win. On the one hand, the company receives the financial boost it needed to keep growing, backed by experienced investors who, in many cases, contribute not only funds but also knowledge and a network of contacts that makes it easier to achieve the goals set. On the other hand, the investors win as they watch the company's value increase as it grows, with a view to selling it after five years or more.
10 advantages of private equity for SMEs
- Less dependence on banks
- They provide a capital injection, reducing dependence on bank loans, which lowers financial costs and allows greater flexibility in financial management.
- Network of contacts
- They usually have extensive networks in the industry. This can benefit the companies they invest in, since they can connect them with strategic partners, suppliers, potential customers, and industry experts, creating opportunities for growth and collaboration.
- Customer base expansion
- Private equity firms work closely with the companies they invest in to identify and seize opportunities to expand the customer base. This may include marketing strategies, product development, or entry into new niches.
- Entry into new markets
- They bring experience and resources to help companies enter new geographic markets or sectors, diversifying their operations and reducing their dependence on specific areas.
- Greater revenue and profit growth
- All of the above leads to growth in the income statement, increasing the company's value and visibility.
- Professionalization
- These firms implement more effective and professional management practices in the companies they invest in. This can include improving corporate governance, financial management, and operational efficiency.
- Muscle to invest in innovation
- They also usually provide funds for innovation and product development, which helps improve the company's competitiveness and its ability to adapt to market changes.
- Internationalization
- The first thing a private equity firm looks for when it becomes a shareholder in a company that hasn't yet expanded abroad is to internationalize it, since a global strategy is how a company grows fastest organically.
- Talent retention and attraction
- Once again, all of the above reduces turnover and helps retain and attract qualified talent.
- Succession
- Private equity firms are a solution when a company has no successor, as they ensure the continuity of the business.
Private equity: a clear lever for growth
Let's bring the role of private equity down to earth with two success stories from Spanish companies.
In the poultry sector, in 2017 Guadalajara-based DAGU was going through a crucial moment: it aspired to lead the consolidation of the market, but many of its directors and founding shareholders had no successor. So they opted for a corporate transaction that would help them move on to the next stage and ensure an orderly succession. “The key factor was identifying investors who shared the vision of the business project, were willing to back the sector consolidation plan with financial strength, and were committed to maintaining a stable, long-term presence without time constraints,” its chairman Juan Gigante told Deale.
And so, in 2019, the investment fund Master Gallus came in with an 85% stake. Today, the company's revenue has doubled after it carried out several M&A deals.
Málaga-based Freepik is another success story. This platform for sharing free graphic resources, founded in 2010, was acquired ten years later by the Swedish private equity firm EQT, without the deal amount being officially disclosed (the press put it at €250 million). It is now looking to divest for €700 million. The company generates €80 million in revenue.
In short, private equity plays a fundamental role in the growth and continuity of companies. If you want to take your company to the next stage and need financial muscle, sign up on our platform: there are more than 2,500 investors ready to help grow a business like yours!
