Venture capital vs. bank loan: The perfect time to choose

November 01, 2010 | 11:10

June 2010 marked the Bulgarian launch of the initiative JEREMIE – Joint European Resources for Micro to Medium Enterprises, through which EU funds will be allocated to three private equity funds – for venture capital, growth capital and mezzanine.  Private Equity is a very popular form of raising capital in the developed world.  Is it however becoming popular in Bulgaria? We are discussing this topic with Gavin Ryan, a longtime investment banker with Nomura Securities, HSBC Investment bank, Price Waterhouse, Advent International, Soros Investment Management.  He is currently managing partner of an investment holding company Wider Europe Capital Management, which invests in emerging European markets.

Q: From the prospective of the present global crisis, how appropriate is the use of venture capital for financing the business?

Venture capital should be seen as extremely appropriate.  In the current times companies could use some more equity to strengthen themselves financially, rather than borrow more.  This will give them an advantage over competitors who because of a focus on short term cash flow and short term survival, have stopped thinking strategically and have given up expanding their activities, even when there are attractive new opportunities in the market.

Q: Can you compare the current use of venture capital in the developed countries to the pre-crisis times?

The current use is still limited, although this would be the perfect time.  This is for two reasons, firstly because entrepreneurs prefer not to revise their valuation expectations; and secondly because many funds are simply frightened to invest.  This second reason is especially the case with fund managers who are less experienced and perhaps only started a few years ago.

Q: Is venture capital developing (gaining positions) as a financing tool in SEE markets?

During the last 10-15 years the private equity and venture capital investments have increased fast and developed sensibly in SEE.  That’s how local companies with good potential will be stimulated to develop, to grow in bigger ones.  In a manner of speaking this type of investing is an alternative source, providing the resources needed for company’s development.  

Q: In the SEE region what is preferred – private equity or venture capital?

These are both forms of private equity.  Venture capital simply means private equity invested into a younger or start up company.  The term is also associated more with technology companies.  Most investments in SEE are a subset of private equity referred to as "expansion capital".  This is an investment into a more established company in order to take it to the next level.  Most fund managers will specialize in one of the two forms of investment; although in SEE it is quite common to see funds do both types.

Q: Do you think that because of the problems that US and EU investment banks had, now the perspectives for PE and VC advisory are better?

Usually the pattern with investment banks is that when there is a crisis and their market dries up, they start to accept smaller deals.  In SEE I would say that 90% of deals are to small for investment banks to get involved in.  The other question is what value would a London-based investment bank add to an SEE deal.  Unless it is a very large transaction, it would not make much sense.  Local advisors could occupy this space in the market, but they need to develop a credible PE know how to convince fund managers they add value.  This element is still lacking for the most part.

Q: Do you think that there is direct connection between the level of development of a country’s stock market and the PE & VC market in that same country?

There is no evidence the two are strongly correlated.  In SEE, this is not the case at all.  Most CEE PE funds do not look to the stock market as a credible exit route (with the exception possibly of Poland).  The development of stock markets is related to other factors, such as the development of local institutional investors and good regulation.  So for many companies, PE investment is an alternative to an undeveloped stock market.

Q: Did the crisis affect the price of PE & VC financing for the companies?

PE and VC funds have not changed their return expectations, which are absolute returns.  What has changed are the valuation expectations of PE funds, which are lower.  This has resulted in a stand off between funds and companies.

Q: From the companies perspective is there a competition between the stock market, PE and VC as a way to finance their business? If yes, which way is now prevailing?

No there not.  Firstly, PE funding is for companies at an earlier stage of their development.  Once a company is ready for the stock market, it is already bigger.  If a company has the choice the stock market could be more interesting.  But this depends on market conditions at the time, unlike PE which is a more stable source of funding.  The reality in SEE is that the stock markets offer less opportunity even in good times.

Q: Is the SEE region still interesting for investors at the present moment when each bigger country with developed economy has its own internal problems that need attention and investments?

This is a good point.  SEE development has been driven by FDI from Western Europe.  This has dried up due to their internal problems and has created big problems for many SEE countries very dependant on this, such as Romania for example.  So now investors will have to take a longer term view, also because the EU convergence story which was attractive in the mid 2000s is not no valid anymore.


The present interview is related to a 3-day seminar on Private Equity & Venture Capital organized by MBAcademy 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.

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