Private Equity: Fundraising, Entry and Exit with Independent Advisory

Private equity refers to investment in the equity of companies that are not publicly listed on a stock exchange, typically through funds that acquire controlling or significant minority stakes, apply operational and financial improvements, and seek to exit at a higher valuation within a three-to-seven year investment horizon. In Spain, private equity funds are regulated as Entidades de Capital Riesgo (ECR) under Law 22/2014, which governs their authorisation by the CNMV, investment limits, and reporting obligations, while European funds operating in Spain benefit from the AIFMD passport framework. Transactions above Spanish or EU competition thresholds require prior notification to the CNMC or the European Commission under Law 15/2007 and Regulation 139/2004 respectively, and the shareholders' agreements governing the fund-entrepreneur relationship include PE-specific provisions — liquidation preferences, anti-dilution, drag-along, and management carve-out mechanisms — that determine the economic outcome for all parties at exit.

Private equity has transformed Spain’s M&A market over the past decade. Funds bring capital, management discipline and networks, but also complex contractual clauses, demanding return expectations and an exit logic that does not always align with the entrepreneur’s or management team’s interests. Navigating this process without independent advisory is one of the most costly mistakes an entrepreneur can make.

Pre-PE preparation: the work that determines valuation

The valuation a company achieves from a private equity fund does not depend solely on its financial metrics at the time of negotiation. It depends on how those metrics are presented, what adjustments have been anticipated, what risks have been identified and mitigated before the fund finds them in due diligence, and how compelling the growth thesis is for the investment period.

A well-constructed equity story is not just a set of slides. It is the central argument for why the fund should invest in this company, at this valuation, at this moment. It includes the organic and inorganic growth thesis, the normalisation of historical EBITDA (removing non-recurring items the fund may not accept), the determination of structural working capital (which directly affects the closing price), and the three-to-five year strategy the fund will use to justify the investment to its own investors (LPs).

The pre-fundraising work is also the best antidote against post-due diligence revaluations: if the weaknesses are identified and explained before the fund discovers them, the fund’s capacity to reduce the price decreases significantly.

PE-specific shareholders’ agreement: the clauses that matter most

The shareholders’ agreement in a private equity transaction (SHA, or LPA in a fund context) is the document that governs the relationship between the fund and existing shareholders throughout the participation period and at the time of exit. It is considerably more complex than a standard founders’ shareholders’ agreement.

The clauses with the greatest economic impact on the entrepreneur’s return are, in order of importance: (1) liquidation preferences, which determine how much the fund receives before other shareholders see anything at exit; (2) the management carve-out or sweet equity, which determines how much the management team receives from the upside at exit beyond their co-investment; (3) anti-dilution (ratchet) mechanisms, which protect the fund against subsequent rounds at lower valuations and can dilute management; (4) information and control clauses (information rights, veto rights, board representation), which determine management’s operational autonomy during the investment period; and (5) the drag-along, which defines the conditions under which the fund can force all shareholders to exit.

Negotiating these clauses without understanding their economic impact in different exit scenarios (upside, base case, downside) is equivalent to signing a contract without reading it. Sensitivity analysis of each clause as a function of exit price is the starting point of any serious negotiation.

MBO and LBO: when management is the buyer

A Management Buyout is the most aligned transaction that can exist between a management team and a private equity fund: management co-invests, co-risks and co-gains. But it is also the one that generates the most potential conflict of interest when management negotiates simultaneously as buyer (representing their interests as investors) and as executives of the company being sold.

Structuring an MBO requires designing the management co-investment vehicle (typically a holding company), defining each executive’s participation, establishing vesting and good/bad leaver conditions for the team, and structuring financing on terms that balance debt service pressure with the company’s investment needs. The debt/equity ratio (leverage) is the lever that amplifies returns on the upside but also amplifies losses on the downside.

Regulatory context: Law 22/2014 and the European framework

Private equity funds operating in Spain are subject to Law 22/2014 on venture capital entities (ECR) and other closed-end collective investment entities. This law governs fund authorisation, activity and supervision by the CNMV, and sets out the requirements applicable to their managers. At the European level, the AIFMD regulation establishes the European passport framework that allows funds to invest in Spain without local authorisation if they are authorised in another member state. Transactions exceeding concentration thresholds (Article 8 of Law 15/2007 on Competition Defence, or European Commission thresholds) require prior notification to the CNMC before closing.

Private equity advisory coordinates naturally with the mergers & acquisitions team for process management and SPA negotiation, with valuations for metrics analysis and fairness opinion, and with due diligence for vendor DD coordination. The tax structuring of the transaction — including treatment of goodwill and the tax regime of the management carve-out — is managed with the tax planning team.

Private equity in Spain: an active and maturing market

Spain’s private equity and venture capital market has grown significantly over the past decade, with Ascri (the Spanish Private Equity and Venture Capital Association) reporting consistent increases in both fundraising and deal volume. Spain is now the fourth-largest private equity market in continental Europe, with active participation from global funds (KKR, Carlyle, CVC), pan-European mid-market managers (HgCapital, Investindustrial, PAI Partners), and a growing domestic fund ecosystem.

This market activity creates advisory needs across the transaction lifecycle — for portfolio companies seeking to understand and manage a PE investment relationship, for entrepreneurs considering private equity as a growth or exit option, and for PE sponsors requiring specialist advisory on specific transactions or portfolio issues.

The private equity transaction from the company perspective

For a business owner considering private equity investment — whether seeking a majority partner, a minority growth investment, or a full exit — understanding the private equity model is essential for negotiating effectively. Key elements include:

Investment thesis and value creation plan: PE investors do not simply provide capital — they acquire based on a thesis about how the business will grow or improve during their ownership period. Understanding the investor’s thesis, and its alignment (or misalignment) with management’s own view of the business, is fundamental to assessing whether a particular investor is the right partner.

Deal structure: PE investments typically involve a mix of equity and acquisition debt (leveraged buyout or LBO structure). The debt burden on the acquired business has direct implications for management’s operational freedom — covenant headroom, permitted investment levels, and dividend policies are all constrained by the financing structure. Our corporate finance team models multiple leverage scenarios to ensure that management understands the financial dynamics before closing.

Management equity: almost all PE transactions include a management equity package — a mechanism through which the management team participates in the value created during the investment period. The structuring of management equity (number of sweet equity shares, hurdle rate, leaver provisions, good leaver/bad leaver definitions) is one of the most important negotiating points from management’s perspective. Our valuations team provides independent modelling of management equity economics under multiple exit scenarios.

Due diligence for PE transactions

PE-driven due diligence is typically more intensive than in trade acquisitions — PE funds have experienced deal teams and specialist advisers who conduct detailed commercial, financial, tax, legal, and operational investigations. Preparing the target company to withstand this scrutiny — and to present its strengths credibly — is a significant element of sell-side advisory in PE contexts.

Vendor Due Diligence (VDD) reports — prepared by the seller’s advisers and shared with potential buyers — have become standard practice in competitive PE sale processes. A well-prepared VDD report reduces process friction, gives sellers more control over the narrative, and allows buyers to move faster to exclusivity with greater confidence in the financial information.

Portfolio company advisory

Once a PE investment is completed, portfolio companies require ongoing advisory support — often more intensive than in independently owned businesses due to the reporting and governance expectations of institutional investors. Our advisory to PE-backed portfolio companies covers: corporate governance implementation, corporate tax planning, transfer pricing documentation, outsourced CFO support, and audit readiness.

Contact our private equity advisory team to discuss your transaction or portfolio advisory requirements.