Finance & economics | Kick-starting southern Europe

Some like it hot

Whether they are in it for a quick buck or the long haul, foreign investors are helping Europe’s troubled southern periphery out of the mire—so far

|MADRID AND PARIS

“MONEY is pouring in from everywhere,” said Emilio Botín, chairman of Santander, Spain’s largest bank, late in 2013. Others in southern Europe might say the same as they stumble over representatives of foreign-investment firms legging it round office blocks and down-at-heel plants looking for the deal of the century.

Net foreign direct investment, broadly in retreat since 2007-08, is growing again, most strongly in Spain, followed by Italy, with Greece and Portugal still laggards (see chart 1). The totals are nowhere near their levels before the crisis but the ebbing tide seems to have turned.

Some of that is the old-fashioned sort of investment that foreign multinationals make in their subsidiaries. General Motors, Renault and Volkswagen are putting fresh money into their automotive plants in Spain; VW has done the same next door. Portugal has also attracted foreign investors, notably Chinese, through privatisations, and Greece is belatedly following suit. Private-equity auctions for stakes in promising firms are becoming ever more bare-knuckled. Other kinds of investment are growing too: specialists are queuing up to buy property, and banks’ dubious loan books. And foreign portfolio investors in a yield-starved world have helped to push share prices up and bond yields down.

The countries of Europe’s southern periphery no longer look like the four horsemen of the apocalypse, even if they are far from being likely Derby winners. The euro seems out of imminent danger of breaking up, but its resulting appreciation has not helped exporters. There are signs of economic recovery, aided by tough adjustments to aid competitiveness, especially in Spain and Portugal. Market reforms, realised mainly in Spain but promised also in Italy, have boosted confidence.

But what is really driving investment is less a presumption that the periphery is set to boom than the hope that undervalued assets and earnings will revert to trend. In addition, a slew of assets are coming to market as banks seek to slim their balance-sheets before the European Central Bank’s asset-quality review this summer, which will shed a glaring light on the loans they have made in the past—unless they offload them beforehand. PwC, a consultancy, estimates that European banks have perhaps €80 billion ($109 billion) of loans to shed this year, of which 20% may be in southern Europe.

Lone Star, a private-equity firm, and JPMorgan Chase, a bank, are putting the final touches to an agreement to buy around €4 billion-worth of Spanish property loans from Commerzbank, a German lender. Foreigners account for over 60% of the burgeoning investment in commercial and multi-dwelling residential property in Spain these days, and for over 70% in Italy, according to Real Capital Analytics, a research firm. In Italy KKR, an American buy-out firm, is negotiating a deal with the two biggest banks, UniCredit and Intesa Sanpaolo, that would sweep a chunk of mainly corporate loans from the banks’ balance-sheets to a shared special-purpose vehicle, permitting both sides to benefit from the eventual profits if the loans come good.

The question is what all this foreign-investment ferment is doing to the countries concerned. Is it helping to restructure economies, stripping out inefficiency and boosting productivity in a way that will make them grow faster? Or is it all about making a fast buck and going home, leaving behind higher asset prices and trimmed workforces? Spain, in particular, has reason to recall unhappily the flood of foreign investment before the crisis which contributed to its property bubble.

Private-equity firms which search out solid companies in need of capital to grow are perhaps the first place to look for Schumpeterian creative destruction. “People must have wondered when we invested a couple of years ago in a firm whose main customers were local governments,” says Jesús Olmos, head of KKR’s new office in Madrid. The firm took a 49.9% stake in Spanish-Italian Avincis in 2010 from Investindustrial, an Italy-focused buy-out group, and helped it develop its helicopter-emergency and offshore services abroad. In March, when Avincis was sold to Babcock, a British firm, KKR collected two and a half times its original investment. In all KKR has invested almost $1.5 billion in Spain since 2010.

Other private-equity firms have similar heart-warming stories to tell, despite the odd cautionary tale. In 2009 Bain Capital bought most of Cerved, Italy’s biggest provider of credit and business information, combined it with the second-largest, strengthened its management and sold on a bigger, healthier firm in December 2012. That same month Bain acquired Atento, a call-centre business, from Spain’s debt-laden Telefónica for over €1 billion. Atento is growing overseas, especially in Latin America, and plans to go public.

When economies crash, private-equity boots are often the first on the ground, especially when it is cheap to borrow money to invest. They came with capital—and a healthy desire to maximise profits—at a time when southern Europe was starved of it. Things may be changing now, though wayward statistics make it hard to be sure. Fewer private-equity buy-out deals are being logged in these countries these days (see chart 2). Preqin, a research firm, thinks that buy-out funds have “dry powder” of almost €5 billion, money raised specifically for southern European funds but not yet committed.

It is no bad thing that foreign (or domestic) investors are taking dodgy old loans off banks’ balance-sheets, freeing them to make needed new ones; there are signs that credit is reviving a bit. Similarly, it is better for property to be in the hands of an investor who has the means and appetite to put money into fixing it, not one who is carrying it at a loss. But the heroic days in which investors waded in, scooped up wobbly companies and set them on their feet again may be drawing to a close.

This article appeared in the Finance & economics section of the print edition under the headline "Some like it hot"

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