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Private equity key players and sectors in 2021

| News | Corporate and Commercial Law

Ignacio Aparicio analyzes the forecasts for this year taking into account the economic crisis unleashed by the pandemic

EXPECTATIONS AND NEWS

"We hope that 2021 will be a year in which we can progressively return to normality, where we can achieve a recovery, with global economic growth and in Europe, according to some sources, close to 5%", Ignacio Aparicio begins by explaining. "It could be a year, especially in the first part, as we are seeing, with a lot of volatility, where news such as possible new confinements, restrictions or news related to vaccines and their effects, cause some instability in the markets. We believe that this will be a period in which investments in growing, quality companies will prevail. We also foresee a continuity in the preference for different sectors in which investments have already been widespread in recent months. Investment in the technology sector will continue to rise, consolidating the trend of recent years and, among others, because of its key role during the pandemic. Another sector that is here to stay is related to the environmental transition, Aparicio acknowledges.

"Another sector that is here to stay is related to environmental transition, a consequence of the global commitment to sustainability. In our opinion, this will undoubtedly be one of the star sectors," says Aparicio. "Of course, the healthcare and life science sectors will also be the object of investments with rising valuations, mainly in everything related to innovative initiatives". As Andersen's Corporate Partner explains, the pandemic situation "has changed habits in all aspects of life, in the way of contracting, relating, protecting oneself or enjoying leisure. Situations of so much change bring about innovative solutions, which will attract investors. Finally, another of the novelties that we perceive that the pandemic has brought about is a change in the investment ticket, which in many cases has lowered its minimum amount, favouring smaller operations and therefore greater risk diversification. In conclusion, diversification of investments in niche sectors and more and more business concentration and reorganisation processes for the second half of 2021.

MILESTONES AND FORECASTS

Despite the fact that, as Ignacio Aparicio comments: "For the first quarter of 2021, we foresee the same trend as at the end of 2020," we do detect "a greater investment mood, both because of the expectations brought about by the vaccination and collective immunisation, and the fact that the market is adaptive and has learned to function in the new pandemic circumstances. These circumstances have to some extent helped to relativise the fear of change and the unexpected, which has helped to avoid discouraging, as a matter of principle, investment. Moreover, there is investment capacity, money in the market and, as in any crisis situation, many opportunities”.

Looking ahead to the second half of the year, he adds, "we foresee a greater number of restructurings and reorganisations as a result of the deferred impact that the end of furlough schemes, the expiry of Official Credit Institute loans and/or the application of new aid from, among others, soft financing or the application of Next Generation EU funds, may have on the achievement of the objectives that the applicants themselves have set for their projects. In order to properly promote all of the above, it is essential for the government to provide a framework of security and stability that favours an attractive investment climate, avoiding excessive regulation and short-sighted fiscal and legal policies".

FLEXIBILITY AND ADPATABILITY

Last year's calendar affected almost all sectors in the same way, including Private Equity. "2020 started with moderate growth due to end-of-cycle forecasts, a pace that came to a screeching halt in March due to the declaration of the state of alert and confinement. A cautious upturn was experienced during the summer and a new slowdown at the end of the year due to the new restrictions", Aparicio summarises.

However, the very nature of investment funds gives them certain particularities or advanced properties, so to speak, to cope with the changes. In Aparicio's words: "Investment funds have always been aware of the importance of losing their fear of change, of knowing how to adapt to cyclical crises and of being ahead of the curve. This situation is certainly no exception and we are seeing how, in many cases, private equity is winning the battle for financing against banks or the stock market, knowing how to interpret the best options for mobilising money". Also, because of this very nature, the capacity to react is greater in this sector; "so far during the pandemic, we believe that the PE sector has been able to react quickly by adapting its way of investing to the many changes it has brought with it. This sector is currently focused, as we indicated, on investing in growth, innovative or booming sectors".

Ignacio Aparicio completes his argument by anticipating that "ESG criteria will undoubtedly be of great importance in 2021 when it comes to investment decisions. In short, the Private Equity sector will know how to find investment opportunities, transforming itself to adapt to the new post-Covid landscape and become the great ally of the business community, as it has always done".

ESG CRITERIA, ALSO IN PRIVATE EQUITY

We asked Ignacio Aparicio to elaborate a little more on the subject in order to find out what investment formulas we can find with these sustainable criteria he was talking about. "Mainly due to the European Green Deal and the criteria of the EU NextGen funds (focused on promoting, among others, everything related to sustainability), one of the sectors that will foreseeably lead investments in 2021 will be renewable energies and environmental transition (water management, waste management, clean energies, biotechnology and the new mobility sector). It should be noted that this is a sector that, in many cases, are businesses that have just started and have not yet been consolidated in the market, so they may be investments that involve some risk, but where the innovative component is very present, which, as we have already mentioned, will boost the investment mood," he says.

Other sectors to watch out for are those related to the UN calendar of sustainable goals, such as data protection, spatial computing and digital assets such as blockchain.

Furthermore, Aparicio continues, "with regard to the aforementioned technology sector, due to the needs caused by the Covid crisis and changes in consumer habits, funds will continue to be very interested in continuing to invest in any business, traditional or otherwise, where this component is very present. Companies are strengthening their technological capabilities to create investment opportunities. Such is the boom in this sector that, for example, banks are in the process of creating subsidiaries specialised, among other things, in analysing technology companies and providing them with financing. Technology consultancy firms will also have a good year.

In line with this, Aparicio anticipates that "another sector that will have an important presence in investments this year is the industrial sector, especially everything related to process automation and robotics". And, of course, without forgetting the healthcare sector which, "strengthened in 2020, will continue to experience rising values in 2021".

As for sectors that until now have historically been very solid in our country, such as tourism, real estate or leisure, to mention just a few, "have ceased to lead investments due to the consequences caused by the pandemic, such as limitations on travel, continuous perimeter closures, restrictions on capacity or opening of establishments". However, Ignacio Aparicio is optimistic: "We expect that in the long term, as immunisation progresses, from the second half of the year onwards, these sectors will gradually recover their strength, not counting current investments by funds pursuing opportunities in companies in crisis, offering to gain position for when the situation in these sectors returns to normal".

FOREIGN INVESTMENT

How has the health crisis affected foreign investment in Spain? Aparicio responds that "we cannot forget that Spain was at the forefront of restrictions on foreign investment due to the breadth of sectors it covered with its regulations, unlike other countries that were much more selective in establishing limitations only in sensitive sectors such as healthcare or information. Royal Decree Law 8/2020, of 17th March, suspended the liberalisation regime for certain foreign direct investments in Spain, where a high component of government discretion was established, as virtually all businesses handle personal data.  To what extent these restrictions may have limited the investment climate at the time cannot be reliably measured".

Despite the fact that, he says, "foreign investment decreased by more than 80% in terms of investment volume due to the absence of mega investment rounds", Aparicio is positive, despite the restrictions and uncertainty of this period, due to the reactivation of investments in startups in our country, "since during the last quarter of 2020 it was observed that the number of operations in investments by Venture Capital funds grew by 312.9%.  In total, according to some sources, some 154 Private Equity and 453 Venture Capital operations were registered".

CUBA, AN INVESTMENT DESTINATION?

In addition to being managing partner of Andersen's Corporate Department in Spain, Ignacio Aparicio is director of the firm's Cuban desk. That is why we have taken the opportunity to ask him about the situation there in terms of investment. We offer his analysis below.

"2020 was a very tough year for the world economy and also for Cuba. In addition to the effects of the pandemic and tourism at a low level, there is the lack of liquidity in foreign currency, a general shortage of supplies, the problem of late payments and the strangulation it has suffered from the continuous measures of the US government - among others, the cuts in remittances from the US, limitations on US travel, the disappearance of US flights and cruises to the island, as well as the effect that the activation of Title III of Helms Burton (the possibility of suing entities in the US that "traffic" in assets confiscated by the Revolution) has had on the investment climate.

In relations with the US, it will be necessary to await developments and new measures by Biden, who has anticipated that he will resume Obama's policies and will surely lift many of the sanctions imposed by Donald Trump who, before leaving the White House, has once again included Cuba this January among the countries sponsoring terrorism, a list from which Obama removed it in 2015, which will make the country's access to international financing even more difficult.

The official figures for 2020 are not bad compared to other years. According to Cuba's Ministry of Foreign Trade and Investment, in 2020 the country obtained foreign investments of more than two billion dollars through 30 authorised businesses on the island (an amount that corresponds to the average of the last three years according to official figures).

But Cuba faces 2021 full of uncertainties. In addition to the 2020 effect and Covid, it remains to be seen how the monetary reunification underway will develop, which will undoubtedly have a major social impact, generating price rises and inflation.

In addition, necessary reforms must be undertaken to boost the private and cooperative sector, as well as to encourage foreign investment. The replacement of Raúl Castro as head, as first secretary, of the communist party due to the expiry of his mandate in 2021 is yet another element of a new scenario in which the island will find itself.

Although Cuba is not a recurrent market for Private Equity, due to the particularities of its economy and legal regime for foreign investment, it nevertheless offers many opportunities for medium- or long-term development in investments linked to production. The government's priority is that investment projects should contribute to increasing exports. Sectors such as infrastructure, renewable energy and environmental transition (water management, waste management, biotechnology and clean energy) are some of those that the Cuban government considers strategic and promotes in its portfolio of opportunities that it periodically publishes and in which it may be interesting to position itself.

The government is seeking to concentrate investment in these strategic sectors, in addition to food production, since every year considerable amounts of foreign currency are spent on acquiring supplies that are insufficient and do not correspond to the population's demand. In short, another objective is import substitution; domestic shortages also encourage investment in these basic and/or traditional sectors, such as agri-foodstuffs, but also logistics, technology and industrial equipment, among others. This is without forgetting the tourist-recreational and hotel industry, which is currently ailing, but still has great potential for development and growth".

You can see the article at Iberian Lawyer

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