THE SMALL size of the Slovak market places limits on the activities of local investment and private equity groups but this characteristic is not unique to Slovakia. The main difference, when compared with abroad, is that Slovak private equity groups typically invest the money of their owners, while foreign private equity groups invest money on behalf of other institutional investors.
The Slovak Spectator spoke with Stanislav Šumský, director of the mergers and acquisitions department at KPMG in Slovakia, Rastislav Gajarský, manager of PricewaterhouseCoopers Slovensko, and Jozef Mathia, senior manager in transaction advisory services at Ernst & Young in the Slovak Republic, about local investment and private equity groups, their appetite for acquisitions, and whether the crisis has brought them some cheap purchases.
The Slovak Spectator (TSS): How would you assess the activity of Slovak investment and private equity groups in Slovakia? What is their current appetite for investment?
Stanislav Šumský (SŠ): With regards to its size Slovakia is an insufficiently attractive market for important foreign sectoral investors and locally owned companies do not usually meet the required size criteria. Transactions which abroad are considered to be small or medium-sized, exceeding €100 million in value, occur only very rarely in Slovakia. In Slovakia, transactions of between €10 million and €30 million, the size that is attractive for local financial investors and private equity groups, are regarded as large.
But this is not a special characteristic of Slovakia: in general it is valid for the whole of central Europe, except Poland. This situation creates an opportunity for financial investors and private equity groups who, by consolidating more companies, optimally at the central and eastern European (CEE) regional level, can manage to create entities which by their size and scope can draw the attention of global players.
Rastislav Gajarský (RG): To assess their activity at the moment I would not focus only on Slovakia as these groups have ‘grown up’ to be regional central and eastern European players with ambitions to become players on a European level. In this respect I would assess their activity positively, as these private equity groups represent a limited number of Slovak investors that make acquisitions abroad and are present on markets other than Slovakia.
In terms of investment appetite I believe that all Slovak private equity groups are looking for opportunities that fulfil their investment criteria. Some Slovak private equity groups are becoming more sector-focused. For example, Penta focuses on healthcare, energy, banking and real estate, and J&T on banking, hotels and the energy sector. This helps them to become experts in respective sectors and realise opportunities more quickly and more efficiently.
Jozef Mathia (JM): Let’s divide the question into two parts, i.e. operation of global and local investment and private equity groups. While the operation of global players in Slovakia is negligible, the operation of local players was active prior to the crisis. The reason for the absence of global players is quite simple. The small market generates insufficiently large investment opportunities, with relatively small revenues. These fall through the investment net of the global players. Czech, Slovak and central European financial investors are starting to be optimistic and feel an improvement, especially in financial conditions, i.e. loans available to carry out new transactions.
TSS: What effect has the economic decline had on these groups?
SŠ: There are only two preconditions for carrying out a transaction. The first one is that there is a seller with a realistic estimate of the value of their company, and on the other side there is a buyer who has enough funds at their disposal to wrap up the transaction and is willing to reflect the value of the company in their offer.
Between 2009 and 2010 we saw a drop in activity in terms of the number of realised transactions. But this does not mean that financial investors and private equity groups had no interest in acquiring companies. Instead, the crisis affected the expectations of financial investors.
They assumed that sellers would reflect the worsened performance of their companies in lower price expectations, and that investors would acquire them more cheaply than before the crisis. This has obviously not happened to the extent that investors had assumed.
RG: The economic crisis had a double effect on the activities of private equity groups. The first was on the amount and price of external capital (debt) to finance their acquisitions and ongoing investments. The second was in the form of disrupted IRR (internal rate of return) expectations in some of their portfolio companies. Basically, all private equity groups needed to reassess their expectations in IRR terms for some of their portfolio companies. Slovak private equity groups were no exception.
JM: Globally the number as well as the value of acquisitions carried out by private equity companies decreased. In total, private equity companies carried out 1,612 acquisitions in 2009, 35 percent less than in 2008. Deal value shrank by as much as 56 percent. We saw a similar trend also in Slovakia.
In 2011 we expect an increase in the number of announced and completed transactions, but the volume of individual transactions will be probably lower than during the pre-crisis years.
In general we can say that expectations for returns on investment are lower than they were in 2008. This trend was significantly visible already in 2009.
TSS: Do investment and private equity groups in Slovakia differ in any way from those operating abroad?
SŠ: It is necessary to distinguish investment groups, which we can regard rather as loose groupings of investors, from private equity, which is a standardised term abroad. The latter represents a company which via its funds administers investments in clearly defined sectors and/or countries, has publicly known investment criteria, returns on investments, a way of assessing assets, stable and specialised teams, is able to obtain new financing, etc. In this respect it is necessary to say that the private equity groups operating in Slovakia are taking a more and more standardised path and that we have seen significant headway over recent years. This is especially true for the most active private equity groups, which are eyeing many potential acquisition targets, taking part in standard tenders, actively working with acquired companies and increasing the value of their investments.
RG: The main difference is that Slovak private equity groups typically invest the money of their owners (physical persons) while foreign private equity groups invest the money of other institutional investors such as pension funds and insurance companies.
JM: Global private equity groups enter projects in Slovakia rather as partners in financing projects for which smaller players in the region lack funds. Or they enter Slovakia via acquisitions of international firms which have Slovak subsidiaries. Basically, each of them wants a maximal increase in the value of their investment at a level somewhere between 15 and 30 percent annually. On the other hand, each of them has specific characteristics, investment criteria, markets and branches where they invest and especially access to individual investments, and this is the main distinction.
TSS: What benefits or downsides do you see in the activities of investment and private equity groups for Slovakia and its economy?
SŠ: In general, the benefits as well as the negatives of investment activities and private equity groups in Slovakia are the same as anywhere abroad. A special characteristic is that with regards to the absence of a capital market in Slovakia, private equity investments are basically the only opportunity to obtain financing via equity as an alternative to debt financing. In some segments private equity groups represent the only possible buyer, thereby creating an exit opportunity for company owners. Otherwise owners would have no possibility to leave their businesses in a standard way.
JM: Investment and private equity groups are motivated especially by returns on investment. These represent in most cases 20-30 percent annually. This means that these groups invest mostly in companies in strongly developing segments (for example the internet in the early 1990s) or in segments where they see space for consolidation of the market (for example a lot of smaller companies which can utilise synergies). Thus we think that these companies represent certain benefits for Slovakia because they support development of the market where it is difficult to obtain financial capital directly from banks. On the other hand, it is a bit of a pity that they do not employ their rich experience from various branches to carry out more acquisitions in segments and companies where returns are lower.
14. Feb 2011 at 0:00 | Jana Liptáková