Private investment capital that acquires stakes in unlisted companies with the aim of creating value and achieving returns through a subsequent exit.
Private equity is probably the most widely used — and most misunderstood — term in the world of mergers and acquisitions. For many Spanish business owners, it conjures images of vulture funds that buy companies cheaply, strip them down, and resell them. The reality is far more nuanced, and understanding how PE works is essential for any entrepreneur considering a corporate transaction.
Private equity (PE) is an asset class that involves acquiring significant stakes — usually majority positions — in companies that are not listed on a stock exchange. PE investors contribute capital, management expertise, and networks with the aim of increasing the company’s value and subsequently selling it at a profit.
The standard vehicle is the PE fund: a legal structure (typically a limited partnership) that raises capital from institutional investors (known as limited partners or LPs) — pension funds, insurance companies, university endowments, family offices — and invests it in a portfolio of companies over a defined period.
The typical PE fund structure works as follows:
For a business owner receiving interest from a PE fund, there are direct implications to understand:
The clock is ticking. A PE fund has repayment obligations to its investors. This means that from the day it invests, it is already thinking about when and how it will exit. The typical investment horizon for an individual company is 3 to 5 years. The entire value creation plan is designed to maximise exit value within that window.
The financial structure will change. PE funds typically use leverage (debt) to finance part of the acquisition. This amplifies returns but also increases the financial risk of the acquired company. It is common for the target company to take on acquisition debt on its own balance sheet.
There will be a detailed value creation plan. PE funds do not buy companies to keep them the same. They arrive with a concrete plan: improve margins, professionalise management, make bolt-on acquisitions (buy & build), expand geographically, or prepare the company for a sale to a strategic buyer or an IPO.
Management is key. Most PE funds want to retain the management team and align them with incentives (usually equity participation). If the founder wants to exit completely, the fund will need to find or develop an alternative management team.
Spain has a mature and growing private equity ecosystem. According to ASCRI (the Spanish Association for Capital, Growth and Investment), annual PE and venture capital investment volume has exceeded 7 billion euros in recent years.
The market segments by deal size:
This last segment — the lower mid-market — is where the distinction between private equity and other types of investors (such as family offices) becomes most relevant for the business owner. Companies of this size tend to be family-owned, with founders deeply emotionally attached to the business, and the choice of partner is often as important as the price.
An industrial engineering services company in northern Spain with 35 million in revenue and 4.5 million EBITDA receives approaches from two PE funds:
Fund A (mid-cap): Offers 9x EBITDA (40.5M enterprise value), financed with 50% debt. Value plan: acquire three smaller competitors in two years, consolidate operations, reach 80M in revenue, and sell to a larger fund at 10-11x EBITDA in year four.
Fund B (lower mid-cap): Offers 7.5x EBITDA (33.75M), with only 30% debt. Value plan: gradual internationalisation into Portugal and North Africa, improved process digitalisation, organic growth of 10% per year. Five-year horizon.
The founder, who wants to retain 20% and continue as CEO for at least three years, chooses Fund B. The price is lower, but the debt load is more manageable, the growth plan is more realistic, and the timeline gives room to execute the transition calmly.
Advantages:
Disadvantages:
No. Private equity invests in mature companies with stable cash flows, while venture capital invests in young companies with high growth potential but also higher risk. In Spain, the umbrella term “capital riesgo” (risk capital) has historically been used for both, but technically they are different activities with different risk profiles and investment strategies.
That is a stereotype that does not reflect standard practice in the Spanish mid-market. Most PE funds seek to grow the company, not shrink it. That said, funds do review the organisational structure and may propose adjustments — particularly in support functions or duplicated positions after an acquisition. But the primary goal is usually to invest in additional talent, not to cut the existing workforce.
The main alternatives are: sale to an industrial buyer (a company in the same sector), sale to a family office, a management buyout (MBO) financed by the management team itself, or a combination of these. Each option has different implications for price, timelines, business continuity, and the founder’s involvement after the transaction. A competent M&A advisor should present all alternatives before recommending a process.
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