NEWS
Publication: Budapest Business Journal
Provider: New World Publishing
Date: October 10, 2005
So much money, so little activity on venture cap scene
The venture capital industry is unlikely to break any records this year, as privately owned funds sit between a rock and a hard place. Though there is plenty of money in several newly raised funds, hardly any deals in Hungary are worth making, industry experts told the BBJ.
While there are several interesting companies on the market, which would present good opportunities for leveraged buyouts, current owners are asking unrealistically high prices for them – far beyond what private equity firms are usually prepared to pay, said Béla Lendvai-Lintner, investment director of private equity fund DBG Eastern Europe Kft.
The average price for traditional industries is 4 -5 times EBITDA, more than eight times EBITDA for media companies, and 10 -12 times EBITDA for IT firms, one industry expert revealed on condition of anonymity.
On the other hand, funds have to invest money over 2 -3 years' time, which can be difficult, especially for those that invest mainly in Hungary, said another industry expert who wished to remain unnamed.
Lendvai-Lintner is withholding complaints for the time being, as his fund has offices in four Central European countries, and is able to make deals in Romania when no such opportunities are available locally.
Another non-local investment came to the rescue of private equity fund Bancroft, which bought Prague-based food service firm Nowaco, together with JP Morgan as a co-investor.
In many cases, families or private individuals who privatized or started companies in the early 1990s, who are now growing older, might be thinking about selling their company and investing, for example, in real estate, observed Lendvai-Lintner. However, he added, when they realize they will have nothing to do after selling their company, and that their companies may well not need investment urgently, they often step back, sometimes even after lengthy negotiations.
Divestments that were big business in Western Europe, meanwhile, have been few and far between in the CEE, where few multinationals wanted to divest, Lendvai-Lintner said.
Some private equity funds tried to take part in the privatization of Antenna Hungária Rt and Budapest Airport Rt, but could not compete with strategic investors paying very high prices for those companies.
Also, attempts to lure venture capital funds into the privatization of Malév Hungarian Airlines Rt stalled as no one proved keen on buying into a loss-making company in a troubled industry, observed Viktória Zombory, director of Raiffeisen Private Equity Management.
Lendvai-Lintner added that banks are also competing against venture capital firms. With several industries practically owned by banks, he noted, they are lending huge amounts of money with very low down payments, so that they can finance significant leveraged buyouts.
State hogs the pie
Another factor distorting the market is the presence of state-owned investors, Lendvai-Lintner and Zombory agreed. These funds say they only provide capital for those not able to provide the yields that venture capital funds expect; in reality, however, no firm will use more expensive private equity if it can obtain government money while providing a lower yield, Zombory noted. She added that it would be better if government funds followed the path of the EBRD and other multilateral institutions by only co-investing with private funds.
The approval of a private fund for each government-funded investment would also ensure that investments provide a decent return, said Zoltán Bruckner, fund manager of Primus Capital Partners LLC.
This year, state-owned funds are once again the league leaders in terms of the number of transactions.
The Hungarian Development Bank Rt (MFB) has so far this year invested Ft 17.1 billion ($68.4 million) into 23 funds. Meanwhile, the state-owned Small Enterprise Development Fund has invested Ft 237.4 million in four companies – which should increase to Ft 570 million–Ft 600 million by the end of the year with the addition of 6–7 more portfolio companies, said Krisztina Arató, CEO of Small Enterprise Development Financial Rt (KvfP).
"The last quarter is always the busiest for investors, and this year applications for investments really picked up – especially in September," Arató added.
For its part, the venture capital fund of the state-owned Regional Development Holding Rt (RFH) has made two new investments, and will make one or two more by the end of 2005, thus spending all of the fund's Ft 2.7 billion.
"I think the amount of money invested this year [by venture capital funds] will be similar to 2004," predicted Zombory of RPEM. "There have been only two large transactions in both [2004 and 2005]: global fund Warburg Pincus' acquisition of FiberNet Rt last year, and Euromedic Rt this year. Both deals happened on the secondary market."
Among mid-sized transactions, the Wallis Group was active this year with the sale of IT group Navigátor Csoport to EuroWeb Rt, and the buying of server host firm Dataplex Kft from Béres Investment Rt.
In the IT sector, Motorola Ventures bought a stake in Asylum Telecom LLC. Among those investing smaller amounts, Primus Capital Partners was the busiest this year, carrying out three transactions.
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