A year of crisis and opportunity

PRIVATE equity firms in Slovakia rate 2008 as a year which some players might have a hard time recovering from. In the course of the year, the market was hit by the financial crisis. As a result, the market might next year see less flexible firms departing, but at the same time new investment opportunities opening up.

PRIVATE equity firms in Slovakia rate 2008 as a year which some players might have a hard time recovering from. In the course of the year, the market was hit by the financial crisis. As a result, the market might next year see less flexible firms departing, but at the same time new investment opportunities opening up.

In terms of competition, no substantial change in the private equity market occurred in 2008, said Martin Danko, spokesman for Penta Investments. Apart from local players and several mid-sized foreign firms, none of the large international players such as Blackstone, KKR or Carlyle have so far entered the Slovak market.

Most changes in 2008 will continue in 2009 or will arrive as a consequence of the crisis, private equity players agree.

“From the point of view of private equity’s history we can characterise the end of 2008 as a milestone and at the same time as a period of growing financial and, later, economic crisis,” said Peter Benčurik, spokesman for Slavia Capital.

Rastislav Velič, chairman of Arca Capital, said the private equity market in 2008 developed in two periods – before and after September 2008.

“Whereas until September, the private equity segment grew dynamically, since September we have sensed a certain cautiousness caused by the arrival of secondary impacts from the financial crisis,” Velič told The Slovak Spectator.

In 2008 investments were mainly directed towards retail, consumer goods and construction. On the other hand, this year also saw a gradual stepping back from the health care sector – mainly for political reasons, according to Velič.

Due to the financial crisis, the market experienced a general slow-down of economic activity during the year as economic recession took hold in major consumer markets, and the opportunity to obtain external, mainly bank, financing worsened, said Danko. Potential private equity and venture capital investors also sensed a lack of free cash flow available for investments, he added.

As concerns industrial sectors, real estate projects have been toned down and the outlook for investments in the machinery industry have decreased, Benčurik said. At the same time, some investment plans by large companies have not been confirmed and the influx of global capital was affected by the declining fortunes of some traditional investment houses, he added.

However, private equity groups are more insulated from the impacts of the financial crisis than other players, said Velič. The reason for this is that while private equity investments typically use a combination of financial resources from investors and banking institutions, others depend mainly on bank financing.

As concerns existing investments, the main issue currently concerns communication between private equity groups and investors on one side and banks on the other, according to him.

“Of course, private equity groups are sensing a lack of liquidity connected to the financial crisis,” Velič said. “However, despite this, it is precisely private equity groups which can handle this scarcity better than other companies. If one thing is typical for private equity groups it is flexibility in obtaining the financial resources.”

Currently, Velič said, the largest problem which the private equity groups have had to face is uncertainty about how to exit from their investments. Due to the financial crisis, the opportunity for potential strategic investors, which are a counterpart to private equity projects, to access loan financing has worsened.

Another standard exit route is via initial public offering (IPO) on a stock exchange. However, Velič said it is probable that due to current conditions planned IPOs will be delayed or revised.

And unwillingness to invest will probably also affect access to finances from the funds with which private equity investors typically work.

Private equity firms expect the crisis to affect investment activity across Europe - but at the same time they think it might open new horizons.

Although the crisis will lead to a slowdown in Central and Eastern European (CEE) economies, the region will still be more attractive for private equity investors than Western Europe, according to Danko.

“On the other hand, the crisis is leading and will lead many well-functioning firms into a situation when their owners will have to sell them, mainly because of financing issues,” said Danko. “This is also why our firm is open to investment opportunities across the whole European market.”

Slavia Capital expects similar developments in both halves of Europe over the next year.

The effects of the crisis will linger during the first part of next year and firms will be counting their losses, Benčurik added.

“During the second part of the year, the market should gradually clear and it will be possible to identify suitable assets for acquisitions at interesting prices,” Benčurik told The Slovak Spectator.

Despite the effects of the crisis, Velič said, there is and will be a lot of room for investments and expected returns on these investments will be higher in the CEE region than in Western Europe.

In Velič’s opinion, the majority of investments will continue to be oriented towards retailing, consumer goods, telecommunications, IT and – if a suitable legislative frame is created – health care and utilities.

“As concerns Western Europe, analyses suggest that the private equity market there has reached a climax and a decreasing volume of deals is expected,” he said. “With regards to the fact that the banks in Western Europe are under much stronger pressure than in the CEE region, a temporary halt to large leveraged buy-out projects is expected - at least, until the trust between entrepreneurs and banks is renewed, allowing overall sentiment in the market to return to a positive level.”

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