Publication: Budapest Business Journal
Provider: New World Publishing
Date: July 10, 2006

Where the money comes from

Companies can expect different kinds of investments at various stages of their development.

Venture capital funds focus on providing seed capital or early stage investment for young companies with perceived, long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but has the potential for above-average yields, probably an average of 30%-35%, according to Zoltán Fekete, corporate finance advisor at Bartha and Partners Kft.
Venture capital firms active in Hungary include Primus Capital Partners LLC, Argus Capital and Fast Ventures.
Venture capital firms generally exit their investments by selling them on stock exchanges, or to professional investors or private equity firms.

Private equity firms invest in more mature companies which are growing fast, or which are market leaders in their areas but need development capital. Private equity firms like to pick companies that operate in a field where the cost of entry is high, competition is limited, and the firm's cash flow-generating ability is excellent.

"Airports or fixed-line telecom companies are typical examples," said Craig Butcher, Budapest-based partner at private equity firm Mid Europa Partners LLP.
Some private equity funds specialize in financing mergers and acquisitions, or transactions whereby the management of a company wants to buy the firm or part of the firm they are working at (MBO), or where managers want to buy a firm they think they could manage better and earn profit on the deal (MBI), Fekete added.
According to Butcher, traditional mainstream private equity funds are rarely interested in buying troubled companies; instead, they focus on firms that are undervalued for some reason, and that can be made more valuable with better management, portfolio cleaning and some further capital investments. This happened in the case of Hungarian fixed-line telecom Invitel Rt, which is so far the only Hungarian firm in Mid Europa's 14-company investment portfolio.
"In the case of Invitel, we did a restructuring [including cutting back overspending] and a significant capital investment into developing broadband services," Butcher said.

Other private equity firms active in the region include Royalton Partners (which invested in Hungarian publishing house Láng Holding and printer Állami Nyomda Rt), Innova Capital, AIG-CET Capital Management and Mezzanine.
The activities of traditional private equity firms somewhat overlap with the activities of specialist private equity funds, known as restructuring funds, of which American Patriarch Partners is an example. Restructuring funds focus on buying so-called distressed assets, i.e. troubled companies or bankrupted firms, which can either be saved by restructuring and recapitalization, or can be broken up into well-performing and non-performing assets.
"By doing this, an investor can sell the valuable assets of a non-performing company for a better price than he could sell the troubled company as a whole," Fekete explained.

Asset stripping is yet another kind of investment, whereby the investor buys an untroubled company which has a potentially very high-value asset in its portfolio.
"These investors tend to have a negative perception on the market, because they often buy firms – even using hostile takeover tactics – which are not in debt or any other kind of trouble, but which have assets that can be sold at a very high premium when separated from the rest of the company," Fekete said.
While he declined to mention any classic asset stripping deals that have taken place in Hungary, Fekete noted that private equity investors were looking at Hungarian Rába Automotive Rt in the 1990s with a view to separating its most lucrative axle unit from the less lucrative automotive components and specialty vehicle business.
"If this deal had happened, it would have been a typical asset-stripping deal," Fekete said.

Wealthy local private individuals may also appear on the scene when a bankrupt or indebted company is sold.
"These people are experienced in snapping up assets of distressed companies and turning them around, or selling the remains for a good price," Fekete explained.

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