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INVESTMENT LEADERS

Interview with Jaroslav Haščák, member of the board of PENTA INVESTmeNts

He attended a special secondary school in Banská Štiavnica for gifted students, and then the Moscow State Institute for International Relations (MGIMO), specializing in international studies and China. He attended the University of Peking for a year, before returning to Slovakia with classmate Marek Dospiva to found a small brokerage named Penta Brokers in 1994. Over a decade later, Penta is Slovakia's largest domestic private equity group, and he is a member of its board. Jaroslav Haščák.
photo: Courtesy of Jaroslav Haščák

The Slovak Spectator (TSS): Much has been written about the arrival of private equity investors in Central Europe as the next phase in the investment process, following privatization and brownfield investment. But haven't financial groups like Penta being doing private equity-type deals since they began?

Jaroslav Haščák (JH): Basically, yes. You could say that with companies where we bought 51 percent or more, where we had control either by ourselves or with a partner or a consortium, that those were essentially private equity deals. They could be further subdivided into restructuring deals and asset-stripping operations, by which I don't mean "tunneling" targets, but getting rid of non-core assets. Some of them were a combination of restructuring and asset stripping, such as VSŽ [steel mill], which had eighteen daughter firms when we bought it [in 2002] and various manufacturing facilities. About nine of them were sold off as loss-makers, while the rest were restructured, with new management, new production programmes and operating principles and structures.

On the other hand we had a lot or projects where we were in a minority position, such as Slovnaft [refinery], where we had 15 or 16 percent, or Komerční banka or IPB - those were arbitrage deals, where we bought shares and then sold them a year or a year-and-a-half later at a profit.


TSS: So in what sense is private equity investment now "arriving" in Slovakia? Is it just the arrival of foreign private equity funds that is attracting notice?

JH:Slovakia is a small market, and not particularly interesting for larger foreign private equity funds. Nevertheless, there have been several larger transactions over the last few years, such as Globtel, which is now Orange, where the private equity investor was Enterprise Investors, or Slovakofarma [pharmaceutical company], where you had Warburg Pincus, or more recently NAY [electronics firm, sold in September 2005], which was Enterprise again, and then Advent had a couple of deals.

I think that in Europe in general, apart from Great Britain, private equity is still a relatively new term. Private equity, especially through the form of leveraged buyouts, has its origins in North America in the 1980s. It didn't reach Europe until quite a lot later.

Three years ago the largest European private equity fund opened with €5 billion. This year it managed to open with €13 billion, which means an increase of 100 percent over three years. The market is growing quickly, and more money is being invested. Slovakia is still too small to attract the largest funds, but has begun to draw the interest of the medium-sized players.


TSS: It is said that installing the right management in restructuring investments is the key to success. Where do you find your managers for the restructuring deals you do?

JH: Finding the right people is our biggest problem, our greatest weakness. And it's not just about finding the right people, it's also about getting the right organizational structure, it's about the right motivation system, the right education, training and human resources development.

We've had quite a few purely restructuring projects, such as Elektrovod [electricity distribution], ZSNP [aluminium factory], Sanitas [pharmaceuticals], or Fortuna [betting shops]. We work with top-flight headhunting firms, both regional and global, and combine it as best we can with our own networking. Right now we are in the process of looking for some top and middle management for our insurance operations - or rather I am, because it's my project - and in the first round we got about 450 names of people who fit the profile. From that group we selected 10 for interviews. The search process takes about half a year and countless hours, and ends with a three or four hour interview for candidates for top management. But it's worth it, because finding the right top management is the absolute key to successful restructuring.

Actually, you could break this down into two main ingredients. The first is your approach to the management of the company, which includes finding the right people and choosing the right motivation, and the second is best practices, a list of steps and approaches that are to be generally applied and that you define as best practices.


TSS: What qualities do you look for in your top management for private equity restructuring investments?

JH: You want to see a certain amount of professional skills and background, especially for very specific fields like health care insurance, as well as a certain amount of loyalty, to ensure the person is playing for our team. But the most important quality is the ability to get things done, which requires a person who has drive, and can get you from point A to point B. That's one thing I find lacking in human resources in this country. A lot of people are good at marketing themselves and talking the talk, but less good at walking the walk. You see a lot of people with pretty CVs, but fewer who actually know how to do things.


TSS: Does it say anything about Slovakia that foreign private equity firms are taking an interest in the country?

JH: It's more a European phenomenon than a Slovak one. It's also more than anything else a natural Europe-wide development in ownership, in which the state is withdrawing from ownership because it has been proven to be an ineffective owner. De-etatization has become a global trend, and concerns sectors such as health care, transport, energy, education and culture. If you look at Europe, a decade ago the entire energy sector was in state hands, now it's basically only France. Enel is private, RWE is private, EON is private. Or look at railways - Estonia was the first, we will be the second to go private, and in five years I believe a lot of railways will be sold, because they're all making losses, and the state isn't capable of turning them into profit makers. It won't affect just Hungary, Poland and the Czech Republic, but probably other West European countries as well.

The other thing that's happening with ownership is that we're seeing people withdraw who don't want to go further. Take Fortuna for example, a family business that was started 13 years ago, and where the owners were 55 and older and had other priorities in life than continuing to develop their business. Then you have people who are incapable of going further, owners who maybe privatized some assets and have realized they don't have what it takes to beat the competition, and are now cutting their losses.

Finally, you have bankruptcies, where the assets of people who weren't able to run their businesses have ended up.


TSS: How are you regarded by the medium-sized European and international private equity firms like Advent, Enterprise, Warburg-Pincus and others? Are you a kind of private equity Artmedia for them, or are you getting a bit more respect?

JH: We're still maybe a league below them, but we're starting to meet them in some tenders, such as in the Czech Republic tender for CCS, a mid-sized firm dealing in gasoline cards, where we were in competition with Advent, and they're in the premier league, globally. So we're starting to bump into them. They submitted a better offer than us in this case, unfortunately, and we lost, but I think that at least in Central Europe we can now compete with any private equity firm, and we can now do medium- to medium-large sized deals of €500 million and up, which are interesting also for global players. You can see some of them already in the consortia lining up for Cargo [Slovak state railways firm about to be privatized].


TSS: Do you have anything to surprise them with?

JH:Our competitive advantage is twofold. We are very flexible and can respond very quickly, because our firm is based on a network structure, not hierarchies, meaning that decisions can be taken very quickly. I also believe we are better at evaluating risk in the local and regional market.


TSS: Penta is known to cooperate with several former establishment figures from pre-1989 Slovakia, such as the Communist-era economic planning commission head, Vladimír Lexa, and the former head of the ŠtB secret service, Alojz Lorenc. Do these contacts represent a measure of risk for banks when they are considering whether to give you a loan?

JH: They're totally OK with it, they have absolutely no problems. They are far more interested in our organizational structure, whether we have a risk department and how it works, how we eliminate risk. They simply aren't interested in who worked where and when, of course as long as there is no criminal aspect involved. We did have one unpleasant incident in the past regarding someone who was criminally charged, but even there, a one-minute explanation was sufficient to get beyond it, and there were no further questions.


TSS: Private equity firms are succeeding in this part of the world by replacing the state as owners in sectors of the economy where it used to have a monopoly, such as health care, energy and infrastructure. Are you ever conscious that your very success could arouse a wave of public resistance, resulting in the election of a government opposed to turning the economy entirely over to the private sector?

JH: There will always be a large group of people who will listen to populist slogans about how it's better to feed off the state than to work. That's true all over the world. In Slovakia, the transition from socialism still isn't complete, and there is still a group of people in society who prefer not to work and are susceptible to that kind of populism. But that's democracy, and as we haven't yet come up with a better way of managing society, we just have to live with the negatives.

There will also always be politicians who will abuse public opinion against private equity firms like us, who will paint us as financial groups who buy out companies and go around firing people. No one enjoys firing half of the employees at a factory, but given that our competitive advantage is the fact that we run things more efficiently than other types of owners, that's one of the things we have to do. And just like 250 or 300 years ago, when workers used to destroy the machines being introduced to factories because they mistakenly saw them as the cause of trouble, we too are often labeled as the cause of the layoffs. But the truth is that many factories are terminally inefficient, and if no one was laid off then the company would collapse and everyone would lose their jobs. So we don't take work away from anyone, we actually create jobs.


TSS: That doesn't stop people from seeing you as the problem, just as it doesn't stop the most popular party in the country from being one that promises to turn back or change the recent right-wing reforms. Aren't you afraid Slovakia could take a substantially different direction after 2006 elections?

JH: No, and I rule it out as a possibility. The statements that Smer [main opposition party] has been making are merely attempts to confront the parties of the government, mainly the SDKÚ [Slovak Christian and Democratic Union of PM Mikuláš Dzurinda]. Voters themselves believe that the reforms that have been undertaken are good, because they are good on a very pragmatic level that everyone understands - they work. Besides the reforms, there have been an enormous number of pragmatic decisions that have been taken, and those can't be undone, no matter what you think of the reforms.

We also belong to a larger European context, and there are quite narrow boundaries in place as to how each country addresses the basics, such as private ownership. What we are hearing [from Smer] is pure populism, and there is no way for any party to push the limits and test private ownership.

As for smaller corrections like changes to the tax system, I think the flat tax for corporates will stay in place at 19 percent, and may even fall to 15 percent, because it's purely a matter of mathematics: The state collects more in taxes when the rate is 15 percent than when it is 30 percent, end of story. As for personal income tax, it sounds good to a lot of people when they promise to re-introduce tax brackets, to go after the rich and give it back to the poor, but again I don't think room really exists for such a change. It's more likely that some adjustments would occur with VAT.

Basically, I don't see room for a purely left-wing government in Slovakia. We'll either have a centre-right government that is committed to reform, or a combination of social democrats and reformists that will have to reach a compromise. But I don't foresee any major changes.


TSS: So populism in Slovakia is a cover for pragmatism?

JH: It would seem so.

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