WITH the recent global credit crunch applying pressure on the financing of deals, experts say the Private Equity sector in Slovakia is facing a tougher environment. This could turn some investors more conservative, but, so far, private equity players in Slovakia don't seem to be changing their investment plans.
The tougher environment means more caution when making acquisitions and, for Europe, a key challenge will be developing alternative exit routes alongside secondary sales, said Vladislav Severa, partner for Ernst&Young Transaction Advisory Services in the Czech and Slovak Republics.
"However, market participants view this as a short term dip in activity preceding a return to a more rational climate in 2008," Severa said. "There is widespread faith in the private equity model, and the long-term fundamentals remain strong."
Severa also said that the tightening of conditions for providing acquisition loans might have an impact on the situation in Slovakia. But the question remains to what degree.
"If the banks turn more cautious in judging credit risk, those private equity investors who plan to draw acquisition loans will most probably be more critical of acquisition opportunities," Severa told The Slovak Spectator. "Therefore, only high quality projects which can carry the credit burden will pass the process."
Slovak private equity investors expect that the cost of loans will swell and the structure of financing might change moderately, while investors might use more of their own resources in preference to bank loans. However, the players do not expect any dramatic shake-ups on the market.
"In Slovakia, the result might be a short-term surge in the price of money on the market," Peter Gabalec, chairman of the board of directors of Slavia Capital, told The Slovak Spectator. "It could also mean a change in the structure of financing of projects in favour of own capital. Thus, the share of credit financing may partially drop."
The credit crunch in developed countries will most probably result in a wait-and-see attitude among global investors, Gabalec added.
"The credit crunch will have a larger impact on the economies of developed countries than the emerging markets," Gabalec said. "The local banks of Central and Eastern Europe do not operate on the US markets, and they have also been more careful when financing real estate, for example."
However, it might happen that some of the global investors will withdraw some of their funds from our market to cover their losses on other markets, he said.
"However, the effect of the credit crunch should not be dramatic here," Gabalec said.
Juraj Kováčik, manager of the department of investment risks of Penta Investments, assumes that the availability of credit resources will drop, and the exit will become more complicated as a consequence of the drop in demand.
However, the situation with the availability of loans to finance private equity investments in Slovakia still differs slightly from that in developed countries.
"The banks have a healthier portfolio, and thus they are less risk-averse when providing new loans," Kováčik told The Slovak Spectator. "But in the event of global recession, of course this no longer applies."
The Institute of Economic and Social Studies (INESS) said that the bursting of the mortgage bubble in the United States led to huge losses among financial institutions. The measure, and, even more importantly, the allocation of these losses is not yet fully known, which increases the risks on the market and overprices loans, Juraj Karpiš, the INESS analyst, told The Slovak Spectator.
Despite the fact that the core of the problem is in the United States, the increasing risks on the financial markets has a global impact, he said.
The second annual study by Ernst & Young on the business performance and strategies of Private Equity concluded that the private equity industry is still healthy and consistently able to grow and strengthen the companies under its ownership.
The annual rate of growth in enterprise value achieved in 2006 by the largest private equity-backed businesses significantly outperformed the equivalent public companies in the same country, industry sector and timeframe, the Ernst & Young study said.
Average annual enterprise value growth rates were 33 percent in the US and 23 percent in Europe, compared to public company equivalents of 11 and 15 percent respectively.