PE and VC investments are increasing in CEE

November 01, 2010 | 11:10

The present interview is relating to a 3-day seminar on Private Equity & Venture Capital organized by MBAcademy and taking place on 19-21 November 2010 at Silver House Hotel in Sofia.  The delegates will gain comprehensive understanding of the industry workings, managing investment funds and PE/VC investments, as well as the methods of valuation and financial engineering that are used.

The focus is on the practical aspects of this industry by covering real business situation, practical sessions and negotiation.  Participants will learn how to use venture capital, how to manage an investment, how to prepare investment plan, and how to manager PEVC fund portfolio.

The training seminar is led by Gavin Ryan – a professional with over 25 years of experience in the financial industry working as investment banker for Nomura Securities, HSBC Investment Bank, Price Waterhouse in Italy, Advent International and Soros Investment Management.  Currently Gavin is Managing Partner of PE investment holding firm, Wider Europe Capital Management, which invests in Emerging Europe.  Gavin has made and managed private equity investments in Croatia, Serbia, Bulgaria, Romania, Moldova and Ukraine.

Q: What is the role of private equity and venture capital (PE/VC) investments for the country’s economy?

It is estimated that in the UK, private equity funded companies account for one million jobs.  In Central and Eastern Europe private equity has developed greatly from its small beginnings 10-15 years ago.  Private equity can help promising medium sized local companies to grow into larger companies.  Private equity therefore is an alternative source of capital for company growth; and those private equity companies that successfully grow represent an alternative model to foreign multinationals and local oligarchic type groups.

Q: Can you compare the PE/VC market and investments in EU and in Bulgaria (EU emerging markets)?

PE markets in developed EU countries are highly specialized.  Different funds will focus on relatively narrow geographies, or sectors or life cycles of companies.  Eastern European funds are more generalist funds, although in recent years there has been some specialization between venture funds and expansion capital funds.  Still, most PE in Eastern Europe is expansion capital.

Q: How the PE/VC contributes for a company’s development process?

An entrepreneur looking to expand his company needs a source of long term capital, in order to expand in a way that is financially stable.  The two sources are long term debt and/or private equity.  Many entrepreneurs prefer debt because they do not have to give up ownership in their company.  However, this is not always viable and therefore private equity represents a source of equity capital for a company.  Often the private equity manager is also able to bring knowledge and experience, apart from just the capital, which a bank does not have.

Q: Please explain in short the working process (operations) at a VC fund?

A fund manager goes to investors and persuades them to put money in a future fund which he will manage.  If he succeeds, he then seeks out investment opportunities in his market.  He makes and number of investments over a period of say, 3-4 years.  The manager sits on the board of the investee companies and supports their operations.  After some more time, the fund manager sells his ownership in the companies he invested in, hopefully at a profit.  From these monies he pays back his investors and keeps a proportion, usually 20%, as his reward.

Q: Which evaluation and financial engineering techniques and methods are used the most when valuing a PE investment opportunity?

PE funds use a range of techniques which will depend upon the type of company he is looking at.  The most common is discounted cash flow (DCF); the other main method is applying a multiple to an earnings figure, such as Earnings before Interest, Depreciation and Amortization (EBITDA).  The manager will also use some empirical techniques specific to a sector, like for example value per hectoliter of production, in the case of a brewery.

Q: How company owners can use the VC to finance their firms?

In two ways:  Firstly, they will have fresh equity capital which will allow them to make new investments and finance the working capital needs for expansion.  Secondly, if they have a good fund manager as partner, this person will be a good source of support and new ideas for the company.

Q: How important is the complete company due diligence and the documentation related with it?

All PE funds perform due diligence as part of their investment process.  There is no investment without due diligence.  Knowing how to do due diligence well and cost effectively requires experience.  But it all boils down to the fact: would you buy a used car without opening the bonnet?

Q: In short, what are the main fundamentals when managing a PE fund portfolio?

The fund manager should balance having the empathy with the management to support the operations, with the need for control which in some cases can mean changing management.  The main areas in which a PE manager helps are helping with acquisitions, financings, hiring of senior staff, international expansion and generally all the extraordinary operations of a company's life.

Q: What is the strategic investors’ role for the investment climate in emerging markets?

Strategic investors and PE investors are the two sources of long term Foreign Direct Investment in an emerging market.  Strategic investors have more specific sector knowledge than PE funds, for obvious reasons.  PE funds have the versatility to manager different sectors in their portfolio.  So both types of investors have complementary roles in any emerging market.

Q: What opportunities is the JEREMIE Funds Program going to provide to Bulgarian economy and companies?

JEREMIE funds represent the biggest opportunity for developing the Bulgarian private equity market in many years.  They can be compared to the American enterprise funds of some 10 years ago.  These funds can serve to energize the PE market and create a fresh class of PE fund managers.  What will be critical to the success or failure of this program will the process of selection of the Fund Managers, which needs to balance candidates with experience on one hand, and local knowledge on the other.

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