Transcript Private Equity Investments in SMEs

Private Equity Investments
in SMEs:
SEAF Experience in the Balkans
Vladimir Pesevski
Director General
SEAF Macedonia
Belgrade, October 2003
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What is Private Equity
• It’s additional money invested by an outside investor in
exchange for additional ownership in a given company
• The investor is not an individual, but an institution called Private
Equity Investment Fund
• It’s not a grant, it’s not a loan, the Fund is not a bank
• The Fund takes a higher risk than the bank, targeting for higher
returns (typically above 30% on compounded basis)
• Most PE Funds are focused on larger companies or high growth
industries such as IT and biotechnology (venture capital)
• After certain period of time (3-5 years), the Fund will sell its
ownership in a given company, either to a strategic partner, to
the public via stock markets, or back to the management of the
company
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Who is SEAF?
 SEAF - Small Enterprise Assistance Funds is an international
private equity fund manager specalized in SME financing in
difficult regions (Eastern Europe, Russia, Asia, South America)
 Close to $200 million under management, by the end of 2003 to
be over $300 million
 Investors include both IFIs and private capital
 In the region has investment funds in Croatia, Romania,
Macedonia, Bulgaria
 In the region, shareholder in the leading Croatian ISP, leading
Croatian cable TV, leading Romanian software developer, leading
Bulgarian ice cream producer, etc
 Activities are under way to start operation in Serbia and
Montenegro, hopefully in the first half of 2004
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SEAF in Macedonia
 In Macedonia operation started in 1998, funded by USAID, EBRD,
IFC and DEG
 Investment limits – $200,000 to $1,000,000 per company
 Typically a Minority Shareholder – (25-49%), although we take
majority position as well
 Active partner – provides technical assistance to help company
development, heavily involved in making key business decisions
 Exit – 3 to 7 years – sale to other partners, strategic investor
 Target IRR > 30%
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Business background in Macedonia
• Small country (population c.2m.) - small market – low purchasing power
(GDP/capita < $2,000) - “enclosed” thinking due to regional instability /
sanctions / restrictive visa regime with western countries
• High unemployment – officially close to 40%
• Fewer Large/Medium enterprises - 591 v. 31,204 small (< 20 employees)
• Privatization not completely successful - Started 1994 - many companies
“sold” to the workers - foreign investment in major utilities or companies
with monopolistic market position (e.g. Telecom, Oil Refinery, Cement
factory), not resulting in expansion, increased exports and transfer of
knowledge, but merely transfer of ownership
• Stock exchange market not functioning, IPOs do not exist and probably will
never exist
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Business background in Macedonia
• Poor legal / regulatory environment
– incoherent, contradictory and imperfectly understood legal system
– lack of solid legal counsel
– inconsistent / selective enforcement (including political interference as well as
administrative problems)
– many changes to follow, following the recommendations of EU
• Lack of transparency
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incomplete and inaccurate accounting (IAS adopted but not implemented)
widespread tax evasion (somewhat reduced through VAT)
inadequate corporate governance
uncertainty of property ownership
active gray economy
distrust of banks
political connections seen as necessary for obtaining government contracts
• Poor Banking sector
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obtaining loans is difficult and tedious process
interest rates relatively high (14-22% per annum)
production is viewed as more risky than trading
generally, real estate is needed as collateral
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Business background in Macedonia
• Balkan instability - potential strategic investors cautious
• Reluctance to accept an equity partner
– Many businessmen prefer loan financing (despite high interest cost & collateral
requirement)
– fear restriction and loss of control (despite tax benefits / reduced interference risk if
foreign financial partner)
– Ambitions restricted just to the local market
• Lack of good quality business ideas
– business plans poorly developed (marketing not understood as a concept)
– proposals tend to be opportunistic / imitative rather than strategic in outlook
– no basic culture of industrial entrepreneurship (most successful businessmen have
“foreign” experience)
– may be consequence of small enclosed market
– need to develop means for Macedonian businessmen to obtain practical experience of
“Western” business methods (i.e. learn how to identify and exploit opportunities)
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SEAF Experience
• The Fund went through two difficult years (Kosovo crisis in 1999 and incountry crisis in 2001):
– Kosovo crisis brought the level of investment almost to zero, took the businessmen focus
out of business, resulting in anti-west sentiment in the country
– In-country stability crisis in 2001 changed the consumer spending pattern, exhausted the
budget and resulted in severe GDP decline
– The effect on the pipeline of new investments and existing portfolio was very negative,
proving that the country risk is high, and making Macedonia not attractive place for equity
investment
• During the life of the fund, many regulations, laws and taxes have been
changed, greatly affecting the operations of the local companies thus
making the planning very difficult and unreliable
• The widespread corruption and nepotism made life very difficult for honest
businessmen and investors
• Yet the performance of the portfolio companies was satisfactory, with some
of them highly exceeding expectations. The key success factor was finding
companies with good management.
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SEAF Experience
• Despite the difficulties SEAF has made 15 investments, out of
which 13 are active at the moment
• The list of active investments include:
– Dnevnik, the leading daily newspaper
– Tinex, the leading local supermarket
chain
– Login Systems, distributor of Microsoft
and other leading brands
– Fonko, the leading local HVAC
company
– Mako Market, one of the largest FMCG
distributors
– Datapons, a medium size printing
company
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– Pilko, the only fresh chicken producer in
the country
– Nasto, local dairy with a well established
brand
– Planet Press, publisher of several
leading magazines
– On.net, a well known ISP
– Magnolija, children clothing retailer
– Medium Export, an exporter of lamb,
paprika and other Macedonian products
– Gica, the leading local egg producer
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Some Benefits to SMEs from SEAF
• Tax benefits due to the foreign ownership (reduced corporate
income tax, customs, any other by the local regulations)
• Consulting services from experienced experts
• Assistance in obtaining additional financing (banks, grants, etc.)
• Training programs for the company management and sourcing
additional management skills
• Additional financial advise in day-to-day operation
• Support in the analysis and participation in the key business
decisions
• Network of SEAF throughout the world and experience from
similar investments
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Recommendations to the Government
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SME sector is where most of the new jobs will be created, but don’t full yourself that they
will solve the problem of the Serbian economy. Pareto’s 80:20 rules applies even here.
You need big companies in order to be successful, and many SME’s to support them.
Use combination of donors’ and government money to create programs for transfer of
knowledge and know how. Local professors rarely have the knowledge, experience and
motivation to do it.
The highest priority on long run should be to improve education. Install system for
checking the quality of the education.
Simplify the taxation, but don’t change taxes every day. Foreign investors want stability
so they can plan on medium to long term basis. Improve the laws, and especially their
enforcement.
Don’t buy every idea that international donors/experts sell. It’s true that they don’t fully
understand the local environment and the first thing they want is their fees. But many of
them do have the knowledge and experience that could be used and transferred locally.
Do not reject the opportunity to work with them and tailor their support to the country
needs. Create win-win situation.
Spend time in recruiting local talent even for the government. Face it, the best people
are not members of the political parties nor they will ever be (at least in Macedonian
parties). But due to their self interest to live and work in a better country, many of them
are willing to help. Utilize them.
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Recommendations to the Entrepreneurs
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Partnership in the business could be very beneficial. The most successful companies
are not owned by a single individual. Find the right partner(s) and define the partnership
terms in detail.
Think whether you really want a foreign partner. Think what will make your company
attractive to someone else, or to you if you want to buy it. Are you willing to give up
control, truly report revenues and earnings, honestly discuss future plans together.
Surround yourself with talented people with lots of energy, willing to learn and adopt.
Spend time in recruiting local talent. Although scarce it exists
Think medium to long term. Avoid political involvement.
CAPEX is not enough. Invest in people, respect them and delegate responsibility.
Be transparent and pay taxes. Do audits. On long run the payoff will be much greater
than hiding the profits. Low profits will rarely attract foreign investors.
Accept the fact that you don’t know everything and that you will never know everything,
even in your own business. Use outside help.
Think regionally. In three to five years, even the Serbian market will be dominated by
regional players. Being the best company in your small city (and small country) will be
far from enough. The best in the region (which will be associated with the best in the
world) will be the winners. Do you see yourself as one of them?
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