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.
This service is part of our corporate advisory practice.
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.
Five Questions Every Entrepreneur Should Answer Before Entering a PE Negotiation
- Have you calculated the exact economic impact of the participating liquidation preference the fund is proposing — under a realistic exit scenario at the same entry multiple (not the fund’s optimistic scenario) — and do you know how much you would receive net of preference and carried interest?
- Is the proposed management carve-out structured as a separate equity pool with its own vesting schedule, or is it simply a percentage of your existing shareholding after preference — and have you modelled the difference?
- Does the drag-along clause require a minimum price threshold, a non-accelerating formula, or any management consent right for exits below a certain IRR — and what is the realistic scenario in which the drag-along would be activated against your interests?
- Have you negotiated a consent right over the sale of the company to a competitor, and have you defined what constitutes a competitor specifically enough that the clause cannot be circumvented?
- Does the SHA include a good leaver/bad leaver distinction in the management equity plan, and have you defined “bad leaver” narrowly enough that a resignation for cause — including constructive dismissal — does not result in your losing your equity at cost rather than market value?
Worked Example: SHA Negotiation — Liquidation Preference Economic Impact
A technology company founder (45% shareholder, retaining role as CEO post-transaction) received an offer from a mid-market PE fund for a 55% stake at a EUR 12 million pre-money valuation (EUR 6.6 million consideration to existing shareholders). The fund proposed:
- 1.5x participating liquidation preference on all invested capital (EUR 7.3 million total investment including the primary subscription).
- Management carve-out: 5% of net proceeds above a 2.5x invested capital return to all investors.
- Drag-along: board resolution sufficient (no minimum price, no founder consent right).
BMC analysed the clause economics under three exit scenarios:
| Exit scenario | Exit enterprise value | Without preference negotiation | After BMC renegotiation |
|---|
| Base case (3x entry) | EUR 36M | Founder receives EUR 11.2M | EUR 13.8M |
| Upside (5x) | EUR 60M | Founder receives EUR 19.1M | EUR 22.4M |
| Downside (1.5x) | EUR 18M | Founder receives EUR 2.1M | EUR 4.8M |
Renegotiated terms: non-participating preference (not participating), carve-out threshold reduced to 2.0x, drag-along requiring 75% investor + founder consent for below-2.0x exits, and broad “good leaver” definition protecting the founder’s equity in all termination scenarios except gross misconduct. Advisory cost: EUR 42,000. Economic impact of renegotiation in the base case scenario: EUR 2.6 million additional proceeds to the founder.
LBO Structuring: Leverage, Tax, and the Holding Structure
In transactions where the management team leads or co-leads a Management Buyout (MBO), the acquisition structure determines both the ability to service debt and the tax efficiency of future returns to management. A typical Spanish MBO structure involves:
- A Spanish acquisition vehicle (Newco) incorporated by management and the PE fund, which acquires the shares of the target using a combination of equity and bank debt.
- Senior bank debt (typically 2.5–4.5x EBITDA) serviced from the target’s operating cash flows via upward dividend distributions.
- Management co-investment through a sweet equity mechanism that maximises the carve-out return relative to the amount co-invested.
- Tax deductibility of the acquisition debt interest at Newco level, subject to the Spanish thin capitalisation rules and the 30% EBITDA limitation on financial expense deductibility (Art. 16 LIS).
We design and model the LBO structure, advise on management co-investment sizing and mechanics, coordinate with lending banks on the debt package, and ensure the holding structure is optimised for the management team’s post-exit tax position — including the interaction between the carve-out return and the Spanish personal income tax savings rates applicable to long-term capital gains.
Geographic Coverage
Our private equity advisory practice operates from Madrid and Barcelona, the two centres of Spain’s PE ecosystem, with capacity to advise on transactions involving companies headquartered anywhere in Spain. We have transaction experience in all major sectors active in the Spanish PE market: technology, healthcare, industrial, consumer, logistics, and professional services.
Exit Preparation: The Two-Year Horizon
The most common mistake in PE-backed companies is beginning exit preparation too late. A well-executed exit requires at least 18 to 24 months of preparation: financial metrics cleaning (adjusting EBITDA for non-recurring items that a buyer will challenge), management team reinforcement to address key-person dependencies, commercial pipeline development to demonstrate revenue momentum, and governance improvements (audited accounts, documented processes, board-level reporting) that demonstrate institutional quality to a strategic or financial acquirer.
We begin exit preparation advisory 18–24 months before the intended exit, working with the management team and the PE fund to design and execute the initiatives that maximise exit value. Specific activities include: commissioning a pre-exit vendor due diligence (VDD) to anticipate buyer findings, preparing the management presentation and financial model that will anchor the buyer process, and identifying the optimal buyer universe — including the possibility of an initial public offering (IPO) on the Spanish or European market as an alternative to a trade or secondary sale.
The timing of the exit process matters as much as the preparation. We advise on market timing, sector transaction comparables, and the sequence of actions that creates competitive tension among buyers — ensuring that the management team and the PE fund enter the exit process from a position of strength rather than urgency. Our track record on PE exit advisory in Spain includes transactions in technology, healthcare, logistics, and consumer sectors where proactive exit preparation added measurable value relative to market comparables. For founders and management teams who have already completed a PE entry transaction and are approaching the exit horizon, we provide a free exit readiness diagnostic — a structured assessment of the company’s preparation across financial metrics, governance, commercial pipeline, and management team — that identifies the specific actions available in the remaining time horizon to maximise exit value. Contact our private equity advisory team for an initial conversation about your specific transaction or exit timeline. We offer a no-obligation initial meeting to assess where you stand, what options are available, and what preparation is worth doing before the next step in your PE journey.