Private equity eyes crisis-hit opportunities

A POSSIBLE tightening of banks’ lending policies as a result of the financial crisis could lessen the investment activity of private equity investors; at the same time, the crisis is opening up new investment opportunities, say private equity firms in Slovakia.

A POSSIBLE tightening of banks’ lending policies as a result of the financial crisis could lessen the investment activity of private equity investors; at the same time, the crisis is opening up new investment opportunities, say private equity firms in Slovakia.

Though locally the crisis appears less severe than it is proving globally, the first industries and transactions affected in Slovakia may be those which depend on relatively cheap resources, according to Rastislav Velič, finance and project manager with Arca Capital.

These are mainly developers, large mergers and acquisitions, and big investment projects.

Secondly, enterprises which relied on cheap resources when they were calculating their return on investments may feel a negative impact too.

According to Peter Benčurik, spokesman for Slavia Capital, various analyses suggest that the sectors which are likely to be most affected by the crisis are consumer and luxury goods manufacturing, which might lead to a slow-down in the car and electronics sectors.

The financial crisis might also undermine companies’ access to banking resources, private equity companies said. The banks may be more cautious when evaluating investment projects proposed by companies.

“A crisis equals a risk,” said Velič. “Private equity investments are able to absorb a higher rate of risk than, for example, banking investments. It can happen that a more cautious approach by banks towards investments will open a larger space for private equity investments.”

However, he stressed that private equity investors too thoroughly analyse each risk and its consequences. Also, for a higher risk a higher risk premium is expected.

“Private equity can be, naturally to a smaller extent, an alternative to the current, harshly felt, loss of trust in the banking sector and the lack of liquidity,” Martin Danko, spokesman for Penta Investments told The Slovak Spectator.

Benčurik added that the private equity can also become a serious alternative to investing in mutual funds and some securities.

Velič added that Slovakia is currently experiencing fear of the crisis rather than the crisis itself, since its real effects have yet to hit the Slovak economy. However, the concern is enough to set of a spiral, he added.

“Banking houses are the first ones to respond to the crisis, or the fear of the crisis,” Velič said. “They respond with unwillingness to provide loans, increased risk margins on loans and greater caution.”

The crisis will partially affect private equity investors too because, as well as their own money and cash entrusted to them by private investors, they too work with money borrowed from banks, said Velič.

According to him, the situation will affect both acquisitions and exits – i.e. the sale by a private equity firm of the share it has taken in a company.

However, at the same time, unwillingness to bear a risk and invest might mean that too many resources “which aren’t being put to work” will accumulate.

“And because private investors can, in general, invest well and generate returns on the resources entrusted to them it is possible that this type of investor in particular will succeed in attracting more resources in a time of crisis than at other times,” Velič said

Danko expects that acquisition activity might even grow and that buying prices will be lower than at present. Mainly those private investors who are not heavily indebted, have sufficient disposable resources, and are ready to make flexible decisions will have an advantage, he added.

The ratio between the use of investors’ own resources and the use of the borrowed funds or debt will also move in favour of existing resources.

“Apart from bad news, the crisis brings opportunities,” Danko said. “We expect that there will be an opportunity for purchases on the market which will have the potential to bring internal rates of return (IRR) of 60 or even 70 percent. Our current investment criteria, for example, show that IRR must be at least 30 percent.”

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