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Interview with Andersen's Managing Partner and Partner and Head of Corporate: "We foresee an increase in transactions in the Spanish distress market by 2023"

| News | Corporate Law and M&A

Interview with our Managing Partner, José Vicente Morote, and Partner and Head of Andersen in Spain's Corporate and M&A practice, Ignacio Aparicio Ramos, in Capital & Corporate

Andersen continues its development in the Iberian market with a strategy that mixes organic and inorganic growth. In the last year it has integrated several firms, such as CHR Legal, Sanz Torró and Soler & Mann, to grow in Barcelona and Valencia, has incorporated Lisbon, continues to strengthen Seville and in January will open an office in Malaga. The law firm has been present in some of the main transactions of the year (Nexxus Iberia - Aerocámaras; Institut Marquès - CVC) and expects to close 2022 with a turnover close to €42M.

In the last year, Andersen has experienced exponential growth, closing 2021 with revenues in excess of €32M, what is the firm's current situation? 

José Vicente Morote: We are going through a very good moment in Ander-sen Iberia. The results are excellent, both from a financial point of view - the most objective - and from the individual and group growth of our professionals. We continue to advance in our strategy of organic and inorganic growth and, in addition, we are paying a lot of attention to profitability. In view of the good results, last June we carried out a 'reforecast' as we were well above the figures budgeted at the beginning of the year. Today, we have already exceeded that second forecast.

How do you expect to close 2022? 

JVM: Our objective is to close this year with a turnover of between €41M and €42M, which represents a growth of more than 30%. These figures will allow us to start 2023 with a budget of between €50M and €55M and thus close the year with a growth similar to the one we have experienced this year. Over the years we have been able to demonstrate that Andersen meets the expectations it sets for itself and we have done so without sacrificing profitability, quite the contrary, and with a very consolidated financial position. Together with the incorporation of quality professionals and teams, these are the cornerstones of our business model. The Andersen project is a long-term project and, consequently, the financial parameters, etc. are very relevant to guarantee the viability of this project for the following generations. 

You currently have a presence in Madrid, Barcelona (expanded with the integration of CHR Legal), Seville, Lisbon and Valencia (with Sanz Torró and Soler & Mann), in addition to the incorporation of partners in all offices. There are rumours of new landings in Malaga and Bilbao, what needs have you detected in these two places? Is inorganic growth part of Andersen's strategy?

JVM: We want to close our geographical implantation in the Iberian market and these two are the only areas we are evaluating. In fact, the Malaga office will open its doors on 1 January. We believe it is a strategic location, closely linked to the legaltech, metaverse and cybersecurity branches of the firm. We want to be a benchmark in the places where we are present. In Valencia, for example, we are the leading law firm in terms of team and the second in terms of turnover. Lisbon and Barcelona continue to grow, as does Madrid. In order to become one of the main players in the legal services market, we will continue to combine inorganic growth, with new integrations from other firms, and organic growth. We are currently analysing applications for promotion to unit and salary partners in-house.

In recent months you have added several new profiles to your staff. Among them, Carmen Mozún, Federico Belausteguigoitia and Carmen March, all three as partners in the Energy M&A team. Is this a strategic area for the firm? Do you see a lot of movement in this sector?

Ignacio Aparicio: These are partners who have joined the Corporate and M&A department, with a very specific specialisation within the sector. The firm is making a very strong commitment to strengthen an area in which we are highly specialised, not only from the M&A point of view, but with a transversal practice. This includes aspects such as the drafting of PPAs and EPCs, financing of energy projects, regulatory issues, evacuation structures, etc. 

The energy area is a key area for the firm as it is a strategic sector for the national economy. We continue to seek a balance between the development of sustainable formulas and the use of traditional supply systems, which has made it a key segment for investment and one in which private capital has much to contribute. In addition, the development of ESG criteria in operations and the attractiveness of the Iberian market for players in the sector will mean that we will see new deals in the coming year, many of which will be led by foreign investors. Andersen wants to continue to be a relevant player and that is why we want to count on these professionals and create one of the most powerful energy teams in the country.

What other sectors are in focus?

JVM: We will continue to develop the firm's M&A practice in all its specialisations, which currently has a total of 15 partners. We will increase our capabilities by expanding in the areas of restructuring and capital markets, insurance or TMT. On the other hand, we also consider the areas of environment and the agricultural and agri-food sectors to be key, with a strong focus on the supply chain. In addition, we have detected opportunities in areas such as cybersecurity, Web3, metaverse and cryptoassets. These are our master lines and we have great professionals in the team to continue developing them. 

We started the year with very good prospects for the transactional market, but have geopolitical events, inflation, the rise in interest rates, etc. changed expectations?

IA: We started from a 2021 that, thanks to the liquidity available in the market and low interest rates, was a milestone at the transactional level, driving growth in sectors such as healthcare, technology, industry and the environment. However, current geopolitical and macroeconomic events have led to a slight decline in the first half of 2022. We detect a more conservative attitude in LPs as they have been forced to readjust to all the macro parameters that are unfolding. In this sense, we see more variable prices, since, as inflation increases, it is necessary to arbitrate formulas more focused on the success of the operation or precautions linked to the evolution of parameters linked to the international situation.

How are all these factors affecting corporate transaction activity? Is this a good time for divestments?

IA: As we head into the final stretch of the year, the big problem we see is the increase in prices, which may make it difficult to obtain financing. It should be borne in mind that the consequences of the war in Ukraine do not only affect the energy sector, but also the agri-food sector. They also mean an increase in industrial prices, as well as regulatory, anti-trust and foreign investment pressure in important M&A regions such as the US, Europe and Asia. Despite these factors, deals will continue to close. Funds still have dry powder. For their part, companies will continue with their inorganic growth strategies, especially in those verticals complementary to their activity. However, targets will be better selected and contracts will include price correction mechanisms, as we have already seen with Covid clauses after the pandemic, for example. On the other hand, as far as divestments are concerned, I don't think we can speak of a generalised trend. We have seen several Secondary Buyouts (SBOs) between funds, because there is still an expectation of profitability, especially in middle-market operations, where the Spanish business fabric has a lot of room to increase competitiveness and professionalisation.

Throughout 2022 we have witnessed several competitive processes and auctions. Players are increasingly opting for this model instead of bilateral processes, what is your perception?

IA: It is a symptom of the good health of LPs in the national market. The increase in national funds and the gradual entry of foreign private capital has led sellers to opt for auction processes in order to find a bigger and better investment. The Spanish middle market is a market with a multitude of variables when PE enters the market, so entrepreneurs are not only looking for investment but also for solutions for the future of the company. Quality assets attract the attention of private equity which, for the entrepreneur, becomes a perfect alternative to professionalise the company and develop, for example, an internationalisation strategy. In this sense, competitive processes give greater visibility to the seller and allow them to see the benefits of bringing in a new partner. Andersen is one of the most active firms in this segment. Although we are looking for growth, and we have done some high end work, we want to be the benchmark firm in M&A in the middle market.

You recently advised Institut Marquès on the strategic agreement with FutureLife for its entry into the Spanish market. How did this deal develop?

IA: It was a very agile transaction, with objectives very aligned by both parties and with a clear growth project. Institut Mar-quès, like other companies in the health sector, had a great need to continue growing and increase its international presence in order to maintain its competitiveness. For its part, CVC was intensifying its buy & build strategy in the sector through FutureLife and the entry into the Catalan company meant its landing in the Spanish market. This deal is a clear example of the operations that we will continue to see in the domestic market: transactions in strategic sectors such as healthcare, with a vocation for inorganic growth in Europe. 

In this sense, we see how Spain continues to attract the interest of international players, however, we have a foreign investment authorisation regime that may hinder the attractiveness of the market. What is the status of this regulation?

IA: Following Covid, Spain adopted a series of measures in March 2020 that modified the regime applicable to direct investments and restricted the freedom of economic transactions with residents of other EU countries. What was originally intended to be a temporary measure, based on Royal Decree 27/2021, has been extended by extending the period of application until 31 December 2022. For the time being, no further extension has been announced, so we expect a return to the previous normality. 

Currently, there is a draft Royal Decree that establishes the continuity of this foreign investment notification regime, but further detailing which sectors and activities are strategic. The existing regulation is rather confusing on this point, so it is necessary that the new regulation grants greater freedom and places fewer obstacles in the way of foreign investment. It is currently one of the most restrictive in the European Union. We need to learn from the mistakes that have been made over the last two years.

They also advised Segurfer XXI and Póliza Médica on the sale of their insurance mediation businesses to Grupo Concentra. In this sense, we are seeing multiple movements in the insurance sector, are we facing a process of concentration? 

IA: This is a very dynamic sector in which important operations have been closed in the last year, both by industrialists and funds. We see this process of concentration in the insurance segment, which is a highly regulated area with very complex operations. On the other hand, we detect that the brokerage segment is more atomised, with a large number of specialised players spread throughout the national market. In terms of transactions, we foresee that the brokerage area will continue to be the main player in large transactions.
In insurance, D&O clauses are becoming more and more common in Middle Market M&A transactions, how do they affect the transactions you advise on?

IA: We do not perceive that transactions suffer or are affected by these clauses. The standards for transactions evolve as circumstances change. So, with the proliferation of venture capital and the professionalisation of management by GPs and their teams, clauses that make it mandatory to cover these specific policies are more commonly included. 

On the other hand, you advised Nexxus Iberia on its entry into the Galician company Aerocámaras. What can you tell us about this operation?

IA: The entry of Nexxus as a strategic partner was aimed at supporting the company's national and international growth plan and boosting its expansion into North America. Aerocameras is in one of the sectors with the greatest future, with an annual growth of more than 40% and sales of more than €10M. The entry of this new partner will improve its management and allow it to consolidate its growth. For its part, Nexxus completes the ninth investment of its first fund. They have developed an investment philosophy that, taking into account the return on their investment, has more flexible structures.

In terms of startups, they have also been involved in several deals, such as Hotelverse or the sale of WinDelivery to Glovo. How do you see the development of the venture capital sector in the country and the upcoming approval of the Startups Act?

IA: Venture capital has undergone a great development in recent years, to the point of becoming a relevant sector in Europe. The available capital has been kept circulating, from the first founders who sold their startups and created the first national funds, to the current entrepreneurs in whom they have invested. In addition, public initiatives have been launched to support the national entrepreneurial ecosystem and we have witnessed the landing of international funds that have detected opportunities in the country. 

The new 'startup law' is part of these public initiatives we mentioned. It is a small step forward, although we still have to see how it will be implemented. I don't think it will respond to all the demands that the sector has been demanding for some time, such as everything related to the 'carry' of managers or limiting the definition of startups to those entrepreneurs who are just starting up. On the other hand, beyond the tax benefits, which are also important, the law should focus on reducing bureaucracy and avoiding delaying deals over time. The new startup law can be a catalyst for investment, but it needs to be aware of the requirements of the sector itself and the regulations of other jurisdictions that have taken advantage of the development of venture capital in order to be truly useful.

Will we see a wave of refinancing and restructuring once the anti-Covid measures are lifted, and how do you foresee this affecting the M&A market?

IA: Undoubtedly, and all players in the sector agree on this. The maturity of ICO loans and the end of the bankruptcy moratorium is leading to an increase in the number of entities in a pre-bankruptcy situation. We fear that this situation will worsen in 2023, increasing the number of refinancings. 

On the other hand, we believe that M&A transactions will focus on the distress market. The reform of the Insolvency Law has tried to anticipate this scenario. In other words, one of the fundamental points is the development in the regulation of acquisitions of production units, trying to speed up procedures and seeking to ensure that operations are carried out in the pre-insolvency phase, when the production unit is still operational and is not excessively damaged by the company's financial difficulties and, mainly, by the context in which you find yourself when you try to sell a company in the context of a judicial procedure of insolvency proceedings. These regulatory changes will facilitate an increase in refinancing and both restructuring and acquisition transactions. Naturally, funds will take advantage of these opportunities to buy companies that remain competitive and strategic. There continues to be liquidity in the market, so distressed transactions will be the 'perfect storm' for M&A next year.

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