Transcript June 2004 Private Equity in the Balkans

Private Equity in the Balkans
Agis Hiliarhopoulos. Global Finance
June 2004
GLOBAL FINANCE
Private Equity in the Balkans
1. The case for Private Equity in the Balkans
2. “Reality check”
3. Case study: UMC Bulgaria
June 2004
GLOBAL FINANCE
Bulgaria and Romania
 Both catching up with other CEE countries
 Both on the right track, although still some ground to
be covered
 Both offered a target date (2007) for EU membership
 Pre-accession status should accelerate growth
 NATO membership was also seen as potential
catalyst
A textbook growth play
June 2004
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Bulgaria
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Key indicators
Real GDP growth (%)
CPI (%)
Unemployment rate (%)
FDI ($bn)
Population 8 million
Consistent growth
Healthy macro-economics
Currency pegged to the Euro
Pro-business environment
FDI recovering
1999
2.3
6.2
16.0
0.8
2000
5.4
11.4
17.9
1.0
2001
4.1
4.8
17.3
0.8
Source: Foreign Investment Agency
June 2004
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2002
4.2
3.8
16.3
0.9
2003
4.3
5.6
13.5
1.4
Romania
 Population 22 million – biggest
market in the region
 Growing over the past four years
 Improving macro-economics
 Recent signs of stabilisation
Key indicators
Real GDP growth (%)
CPI (%)
Unemployment rate (%)
FDI ($bn)
1999
-3.2
55
11.5
1.0
2000
1.6
45.7
10.5
1.1
2001
5.3
34.5
8.6
1.2
Source: National Statistics Agency
June 2004
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2002
4.9
22
14.0
1.0
2003
4.9
14
9.0
1.5
Private Equity Advantage
 A window of opportunity for Private Equity:
 Most banks still quite conservative,
 Stock markets effectively closed to new issues,
 Local conglomerates and wealthy entrepreneurs
opportunistic rather than long-term.
 Increasing presence of private equity funds, either
with or without local presence, follows period during
which early movers pulled-off or remained on the
sidelines.
June 2004
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Investment Focus
 Companies in need of expansion capital, which have
significant potential for growth
 Companies building strong brand names and
distribution networks, taking strong positions in the
local markets as those emerge
 Companies taking advantage of local resources to
successfully compete in niche segments in the region
 Companies which could be attractive acquisition
targets a few years down the road
 Companies with strong and sustainable cashflows.
June 2004
GLOBAL FINANCE
Private Equity in the Balkans
1. The case for Private Equity in the Balkans
2. “Reality check”
3. Case Study: UMC Bulgaria
June 2004
GLOBAL FINANCE
Environment still difficult
 Purchasing power remains low – price competition
stiff – margins squeezed.
 Currency depreciation in Romania eats into assets.
 Lots of unfair competition in many sectors.
But it’s getting better by the day
June 2004
GLOBAL FINANCE
Investing remains challenging
 Widespread practices of non-recording revenue and
expenses to avoid VAT an obstacle to private equity
investors.
 Entrepreneurs are more often than not unfocused or
unsophisticated.
 Shortage of experienced professional management.
 Private equity often competes with “grey” money.
But it’s getting better by the day
June 2004
GLOBAL FINANCE
Private Equity in the Balkans
1. The case for Private Equity in the Balkans
2. “Reality check”
3. Case Study: UMC Bulgaria
June 2004
GLOBAL FINANCE
Some background
 Global Finance invested in April 2003 in what was
then a EUR 12m dairy company.
 UMC was loss-making with declining sales and
overdue payments to milk suppliers.
 Global Finance invested EUR 5m through a Share
Capital Increase for a majority stake and embarked
on an effort to turnaround the company.
 In the first 5 months of 2004 UMC grew 56% with
focus product lines growing even more.
June 2004
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Key lessons – before the deal
 Need to be extremely patient and persistent in
discussions and negotiations.
 Personal relationships matter as much as
everywhere.
 “Accounting gymnastics” are to be expected (as
much as everywhere).
 It’s of paramount importance to bring value to the
company (and the other shareholders).
June 2004
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Key lessons – after the deal
 Maintaining a good relationship with partners is key.
 It pays off to have more funds than originally
envisaged.
 Striving for efficiency is negatively influenced by an
environment of largely inefficient business partners
(suppliers, banks, media agencies, etc.) – Time and
close supervision (and lots of patience) are needed.
 Building a strong and coherent management team is
a challenge.
June 2004
GLOBAL FINANCE