Bankers overcome doubts to open offices in Spain

International financial services companies are vigorously debating their prospects in Spain, with several companies setting up offices while others wonder whether to scale back commitments.

Private equity funds are leading the way into the country.

In October, Permira, a pan-European buy-out firm, announced plans to open an office in Madrid next March. Intermediate Capital Group (ICG), a specialist provider of mezzanine finance, intends to open a Spanish office in January.

Other types of firms are also moving in. MilleniumAssociates, a financial services mergers and acquisitions boutique, formed a joint venture with the Spanish boutique Strategic Services last month.

Ray Soudah, managing director of Millenium, expects a wave of foreign acquisitions in the Spanish wealth management sector next year.

Soudah said: "Spanish clients are now more accepting of foreign partners, and foreign firms are interested in Spain because the margins there are higher than elsewhere in Europe."

Private equity funds already in the country sound an equally confident message. Advent International opened a Spanish office last year and is engaged in a €165m ($194m) bid for Parques Reunidos, a Spanish theme park operator.

Juan Daz-Laviada, co-head of Advent's Spanish operations, said corporate restructuring in Spain would create many more investment opportunities. "There will be plenty of secondary and public to private buy-outs, as well as spin-offs from large companies."

Jose Maria Vegas, a director of ICG, forecast similar interest in mezzanine finance.

He said: "Spain has a lot of mid-cap companies that went public five or six years ago. Many have seen their value drop and are ready to go private. Mezzanine funding could really help." ICG has already been involved in four Spanish transactions, each valued at more than €25m, said Vegas.

For all the optimism, private equity firms' Spanish ventures have yet to translate into a rush of new business. Parques Reunidos would be Advent International's first Spanish investment in four years. Figures from Initiative Europe, the data provider, suggest the value of Spanish buy-outs has grown little since 2000, to just over €1bn this year.

Eduardo Rodriguez Legorburu, a consultant at the headhunter Russell Reynolds in Madrid, said a patchy dealflow meant some private equity funds were hesitating before establishing a Spanish office. Until big deals become more common, private equity recruitment would remain slow.

A €1.4bn stock market listing last month by Antenna 3 de Televisión, the first listing in Spain for more than a year, has raised hopes that more initial public offerings will take place in 2004. CSFB, which helped to manage the listing, said it was encouraged by the market's positive reaction to the move.

The outlook for investment banking remains uncertain, however. Though the value of Spanish mergers and acquisitions has risen more than 4% this year to $24.9bn (€21.2bn), bankers believe the pipeline for future deals is patchy.

One headhunter said firms were scrutinising their Spanish operations carefully, and considering upgrading teams or pulling out altogether.

The head of Spanish operations at one US investment bank was more candid: "Many firms will either have to reduce drastically or pull out. There are some banks that haven't done any business in 18 months. You have to question whether it is still profitable, whether to carry on betting."

Senior departures have fuelled speculation that some bets may be off. Morgan Stanley has lost four senior bankers in Spain this year, including Jorge Lucaya, head of investment banking, and Gregorio Arranz, secretary of its board in Spain.

In September, Jaime Bergel, chairman of Merrill Lynch's Spanish operations, left after being sidelined in a reshuffle. Claudio Aguirre, a former head of Merrill Lynch in Spain and current chairman of investment banking for Merrill Lynch Europe, Middle East and Africa, said he would be retiring soon but declined to say when.

The Spanish newspaper Expansión said in October that Merrill had already cut 50% of its private banking staff and 25% of its capital markets staff in Spain since 2000. Merrill declined to comment but said it remained committed to Spain. It said it had closed its office in Barcelona in the summer but had moved the staff to Madrid.

Morgan Stanley also said it was committed to the country.

Headhunters advise against closing Spanish offices. Imke Rodriguez Messmer, director of banking and financial services at Alexander Mann in Madrid, said Spanish clients were wary of foreign banks that did all their Spanish business from London. Rodriguez said: "Clients in the Spanish market want long-lasting and committed banks. You cannot build in one or two years when times are good and pull back when times are bad."

For companies that are prepared to bet on Spain, the commitment may be worthwhile. Economic growth of much more than 2% is likely this year, a healthy figure by EU standards. A senior banker at a US institution in the country said: "You need a team on the ground, but there is a good living to be made in the Spanish market."

This is a lesson that private equity firms may have learnt already. Laviada at Advent said: "If you try to have a timid presence and invest from London, it won't work. Funds need to be staffed by locals who are 100% based here, who know the deals to be done, and who know how to source them."