Private Equity in Portugal: The Best Way to Break into Finance as a Consultant?
How can you break into private equity as a consultant?
But the best strategy might be to go to Portugal – or, better yet, be from Portugal.
It’s one of the few places in the world where consultants, rather than bankers, dominate the PE industry.
I was immediately interested when I heard about this, so I recently spoke with a reader who gave me all the details:
Origin Story: How I Learned to Stop Worrying and Love Consultants
Q: Can you please tell us your story, and then explain how consultants took over the industry?
A: I’m originally from Portugal. I studied at a few well-known European universities for my undergraduate and Master’s degrees, and then I worked for several consulting firms in both internship and full-time roles.
I became interested in private equity when I did a short internship at a regional PE firm, and I decided that I wanted to get into the industry.
My adviser told me to get more work experience in banking or consulting first, but there isn’t a strong culture of investment banks here – if you want to do IB, you have to go to Madrid or London.
I chose consulting and then returned home and won a role at a local private equity fund.
Before the 2008-2009 financial crisis, there were two major PE firms here: Explorer, which focused on traditional leveraged buyouts, and ECS, which did a lot of restructuring deals.
A third fund was Magnum Capital, which focuses on Iberia as a whole and which has done deals across all sectors. Other Iberian funds exist, but they tend to focus on Spain.
One good example is Oxy Capital, which was founded in 2012 and is now the 2nd biggest fund in the country by AUM (see graph 7 on page 11 of this report); it’s also one of the most active recruiters of students straight out of university.
I believe Explorer is still bigger, but some of its funds might be based outside of Portugal, so CMVM doesn’t consider them.
These funds focus on recruiting:
- Consultants who want to move into PE.
- Students straight out of university.
Firms recruit consultants because compensation here is lower than PE compensation in London or NY, so it’s unrealistic to attract bankers from large banks and elite boutiques who are working abroad.
Also, there’s more of an operational focus, and consultants are often better-suited for that.
Q: And it sounds like you need to be from the country to win an offer.
A: Yes. You stand almost no chance of getting into the industry here as a foreigner – not only in Portugal, but also in Spain, France, and Italy.
It’s not just the language requirement; plenty of Europeans learn these languages growing up.
A big part of it is the culture and making local companies feel comfortable with you.
If a banker from Portugal wants to return to work here, we’ll welcome him/her with open arms.
But it’s usually not realistic, so we plan to recruit consultants and train them on the job.
Q: And what should you expect in the recruiting process?
Are there any differences compared with standard private equity interviews?
A: Not really; you still go through 2-3 rounds of interviews, speak with most of the team, including the Partners, and do a final round with the most senior person (often the CEO).
You’ll also get the usual “fit” and technical questions. The main differences are:
- Case Studies – They’re more like consulting case studies rather than traditional modeling or LBO-related case studies.
- Information on the Firm – Many PE firms in Portugal list very little information publicly, but you’re still expected to know a lot. So, you need to read newspapers or find information about deals and portfolio companies online. Capital IQ access helps, but it’s not essential.
Also, even if you join from university or consulting, you’ll still be expected to know valuation, the trade-offs of different multiples and methodologies, and other nuances.
The Industry Landscape
Q: How would you describe the industry?
Let’s start with the breakout of domestic and international funds.
A: No big international funds (KKR, Blackstone, Carlyle, etc.) operate here.
Some of them have offices in Madrid, but if one of these funds is interested in Portugal, they’ll assign a Portuguese team member in London to the deal.
So, besides the occasional huge deal, domestic funds are responsible for almost all the activity.
Besides the four funds I mentioned previously – Explorer, ECS, Magnum, and Oxy Capital – other active funds include Atena, Vallis, Inter-Risco, and several bank-affiliated funds, such as Caixa Capital and BCP Capital.
Q: And what’s the deal focus?
A: Immediately after the financial crisis and Eurozone crisis, restructuring deals were the most common ones, but regulations under Basel III have made them less common and lucrative.
A lot of deals here used to involve acquiring Non-Performing Loans (NPLs) from banks’ Balance Sheets, but those are also less common now.
Deals have become more diversified since there are growth funds, mezzanine funds, and even venture capital funds operating in the country.
There isn’t one particular focus since different funds use different strategies, but the overall differences are:
- Deals Are Smaller – For example, some firms acquire minority stakes in SMEs for less than €5 million, and some SMEs here could be acquired in full for under €10 million.
- We Often Do the Due Diligence Ourselves – So, at least at some funds, there’s less emphasis on hiring outside consultants.
- IPO Exits Are Not Common – This is partially due to the size of the companies and partially because the Euronext Lisbon is smaller than other exchanges.
- We’re Sector-Agnostic – The economy is diversified, so no single industry dominates deals.
- But We Like Companies with Strong International Exposure – Since the economy is small, it’s risky to invest in companies that sell mostly to the local Portuguese market. As a result, we have a strong preference for companies that produce goods that can be traded.
In practice, this last point means that we favor industrial companies since many service companies focus on the domestic market.
Q: And what about the operational vs. financial engineering focus?
A: You see both, but traditional leveraged buyouts have become less feasible over time due to credit constraints and the financial crisis in Portugal.
Companies still operate with higher leverage levels than in the rest of Europe, and they’re also more used to raising debt than equity, which is why private equity has far lower penetration in Portugal than in other European countries (2% of GDP vs. 11% of GDP in Denmark, for example).
Many funds here also focus on growth equity deals where strategy and competitive positioning are more important; even if they use some leverage, it’s less than in other markets.
A lot of the “financial engineering” comes not from using more leverage, but from helping portfolio companies to renegotiate their debt and reduce costs.
Since deal sizes are typically smaller, you may assume more responsibility earlier on: It’s not unusual for an Associate to go to meetings alone or with only an Analyst.
Analysts often lead some of the deal negotiation, reporting back to senior team members for guidance and approval of terms.
You’re also more likely to close a higher number of deals here because companies are smaller and many transactions are for minority stakes.
It would not be unusual to close 5-10 deals over 2-3 years, but that would be very rare at funds in other regions.
Q: What about the work environment and culture?
A: The hours are better than in banking or consulting because we don’t have external clients, but as with PE anywhere else, it’s still far from a “standard” work week.
The typical path in the industry is Analyst –> Associate –> Manager –> Principal –> Partner, with some funds going directly from Associate to Principal, and other funds making fewer distinctions between junior and senior roles (e.g., Analysts, Investment Professionals, and Partners).
Since many of these funds are relatively new, it’s tough to say what the advancement opportunities are like.
As with private equity anywhere else, the most senior professionals are unlikely to leave, but you might see faster advancement at briskly growing funds.
Q: You also mentioned in the beginning that compensation is significantly lower, which is why it’s tough to attract bankers.
How much lower is it?
A: Total compensation is 1/3 of what you would earn in NY or London.
So, an Associate at a local PE fund here might earn a base salary of €50K and a €20K bonus (roughly $75K USD at current exchange rates).
By contrast, middle-market funds in NY might pay $200-$250K in total compensation to Associates, with a 50/50 split between base salary and bonus.
(NOTE: Compensation figures as of the end of 2016.)
However, the cost of living in Lisbon is also far lower: You could easily rent a nice apartment in an “expensive area” for under €1,000 per month, which would be impossible in the other cities.
I believe PE Associates in Madrid earn significantly more, though it’s still a discount to compensation in London and NY.
Q: Great, thanks for sharing that.
What are your long-term plans?
A: I’m not sure yet, but I’m thinking of completing an MBA in the future.
I want to work on more complex and international deals, and I may complete the degree so I can move to a larger fund in the long term.
Q: Thanks for your time!
A: My pleasure.
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