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| Interview with Mr. Pecina: Private equity leads way in CEE |
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Private equity leads way in CEE - And its role could be even greater if certain obstacles were removed, such as clashing European Union regulations. The founder of a financial advisory comments.
Heinrich Pecina is the founder and managing director of a leading independent investment house and financial advisor in the region, Vienna Capital Partners Ag., a company with a stellar record in direct investment and corporate financing in Central and Eastern Europe over the past two decades. Together with Permira Funds, VCP was instrumental in the biggest private equity (PE) deal in the region to date - the euro 850 million buy-out and delisting from the Budapest Stock Exchange Zrt (BÉT) of Hungary's BorsodChem. Pecina's VCP is active in all countries in the region, and is, he says, focused on both corporate finance advisory and selective direct investments in undervalued companies with high potential for growth. Pecina spoke to BBJ reporter Matthew Higginson about the growing role of private equity in the region and globally, the future for the banking industry, the BÉT, and that of his own company. What follows is an edited transcript of their conversation.
Q: When we spoke to Permira's Thomas Jetter following the BorsodChem buy-out, he praised Hungary's financial regulator, PSzÁF, for its role in the deal. Is VCP's own experience with PszÁF similar?
A: I think in relation to the BorsodChem transaction, what Mr. Jetter wanted to say, and I can only endorse it, is that the transaction was highly complicated , I think there has been no transaction in Hungary, and in the region as I can remember, that was as multi-faceted , and I must say PszÁF was very professional and thorough.
However, one of the problems in the European Union is that each country, big or small, has its own regulatory framework. If you compare the takeover codes and regulations in each country, in one country things are permitted for which in another you would be fined. Now, if you have a transaction that involves several countries and stock exchanges, to navigate through that is very complicated, costly and time consuming.
There should be one single EU takeover code and one regulatory board, and then it would be so much easier. In most cases regulations tend to become "unguided missiles," where civil servants applying them do not have in mind what the original purpose was , they tend to look at things from a highly formulaic point of view in order to ensure no blame can be apportioned. This is a big, practical problem in the EU right now. But I'm not blaming anybody or any country in particular; it's a Europe-wide problem. I'm a devoted European but I still think we are in the building phase of Europe, and this may continue for several generations.
Q: Recently in the CEE, and increasingly in Southern Europe, banking and finance has seen a wave of mergers and acquisitions activity with OTP, Raiffeisen, GE Money, Erste Bank and others very active. What's private equity's role here?
A: There is a lot of private equity financing lined up, and PE is very active in banking and finance deals. If you look at the banking industry as a whole, it depends on which angle you look at it from. If we stick to the CEE area and the EU, then we are speaking of a market where the real market potential was only understood recently , in the last three to four years I think. Which is why the banks you mentioned, and others, are keen to move in to acquire market share. The assumption is that by market growth , e.g. how many people in Russia or the Ukraine have a bank account and so on , you can say that whomever acquires market share quick enough and can then grow in line with the GDP in these countries, can secure fantastic business for the future. If you do wish to do this, you pay incredible prices for what you acquire today because you are doing so on future expectations of earnings. We get to book multiples of six and above, as Erste paid recently in Romania, which by any standard looks expensive.
But, banking as I see it is becoming separated into two distinct parts. One is what I'll term the regulated sector, where the name "bank" is shown, and the second is the unregulated sector , PE funds, hedge funds, mezzanine funds, etcetera , these to me are also banks; they may not carry the name "bank" but they do banking at its best. And this unregulated sector, where there is little central bank regulation, no Basel II requirements, is growing much faster than the regulated sector. In the case of structured financing and acquisition financing in Germany and Western Europe, almost 50% of lending capacity now comes from funds, which is amazing I think.
Q: Is it fair to say that M&A in the regulated bank sector is, really, just a straight bet on future economic growth of the various nations in the region?
A: Yes, I fully agree. It's a bet that you can say, well if GDP growth is X percent, retail financing then grows by X plus. Then in addition local currencies have a pressure to revalue rather than devalue so in the early stages retail financing is a very tempting play, but it's very dangerous I think for the banking industry to provide retail financing in non-home currencies, yen, Swiss francs etcetera, but this is how you get the double leverage on the macro play.
Q: So as Euro convergence in certain countries slips further away is this becoming a more dangerous play?
A: In the case of Hungary this might be a dangerous play, indeed. Hungary is lagging behind. But I'm a strong believer in the Euro and I think the sooner a country joins the better, because what is the alternative? But the temptation to micro-manage and to have short-term political gains by defending the strength of the forint, for example, is high. In reality the bigger the Euro zone becomes, the harder it becomes to be outside of it, and you open yourself up to manipulation and speculation. Just look at the external value of the forint in the last 12 months , totally unpredictable, it's a casino gamble. Somebody gained, somebody lost, but I think those that gained are in the minority. But I think Mr. Simor, the new governor of the Hungarian National Bank, is a very thorough, professional, no-nonsense man. But he is just one player in the orchestra , though perhaps the most visible. But I thought his appointment was a very positive surprise, and the fact that the parties could agree was very positive as well.
Q: How does the future look for the banking sector in general?
A: Regulated banks have to become bigger and bigger, as the regulators and Basel II squeeze them. This is the reason for the formation of groups such as Unicredit and so on , and it's a trend that will continue, and that will affect Hungary as well of course.
The other development here is that more and more markets and niches become empty, for which the high street banks have no time, and thus you see new financial institutions developing small, efficient and or highly specialized operations.
In the regulated sector, there is so much pressure on the institutions, so many things they cannot now do , if a bank wishes to invest in a company by buying its equity, it has to fully underpin it with its own equity. It's therefore impossible basically. But if equity fund XYZ collects money from pension funds, high net worth individuals and so on, and buys the same company's equity, there is no similar regulation.
Then the fund goes to the same bank and asks for acquisition financing, which is basically on a non-recourse basis. So, look through that scenario and the bank ends up with exactly the same risk on its balance sheet as if they were to invest themselves, but they have no upside. Regulated banks therefore have less and less freedom to make money, so therefore they have to consolidate to become bigger, to restrict products, to cut workforce, reduce expenses and become mass producers of limited retail products.
For the others, like us, what we are doing is banking, but we don't have a banking license. I invest in banks but I do not want to have a banking license myself. The unregulated sector is where the real activity is. This is where new markets are formed, call it PE, call it mezzanine, call it whatever , here the imagination is still allowed to work.
Q: In March of this year VCP upped its stake in FHB Bank [Nyrt] to 9.86%. Is this an example of the straight macro bet you talk about?
A: To make a long story short, yes. I believe they are well managed, they know what they are doing, there's no magic behind the business, and investors like simple things
There are now three main shareholders in FHB: Allianz, the Hungarian government and us. One of the three intends to sell, which to my mind is not a further privatization per se, it's just that one shareholder, the government, intends to sell its stake. Let him do so.
I'll put it this way: There are a lot of good reasons to have FHB remain independent in the future and kept on the Budapest Stock Exchange, to give local equity investors, private as well, an asset to invest in because I believe that in the medium to long term it's a very safe way of doing so, as it's practically risk free. I also think it's in the best interest of the country to have at least one local bank kept under local management. Otherwise, you know people may wake up one day and say, "There's not even a Hungarian bank any more."
Q: Is increased banking regulation the reason behind the recent explosion of PE activity?
A: Off-hand I could give you five names of PE firms, which 99% of people will have never heard of, and each has in excess of ~$30 billion under management. In excess. None of the big banks , let's say Deutsche Bank , could invest from their own balance sheet so much into equity. And then if I thought about it for half a day I could give you a hundred names of PE firms with a similar level of managed funds. That means there is a new concentration of capital, of banking, now in the hands of totally, hitherto unknown institutions, new people, smart people, driven by performance only. The more regulated one sector becomes, the more the non-regulated grows. And what amazes me is that this is not being really discussed.
Q: Should we really be worried about PE's increasing role? As I see it, private equity funds exist purely to make money, and to do so they need sound investments in profitable businesses, so where's the downside?
A: It's a good question. I must say I can hardly remember a company that was acquired by a PE fund and then later mismanaged. I see only transactions where companies taken over by PE funds have been made leaner, less expensive, more efficient, more focused. Typical for PE is to acquire control of bits of conglomerates and then spin them off and create new business. One should look at it from the point of view of the impact one is creating in promoting and rejuvenating companies. All in all I think it's very positive.
Q: Since we last spoke in 2006, another two companies have left the BÉT. How can this trend be stopped?
A: I think a company disappearing from a stock exchange is a very normal thing, and unless they went bankrupt, it's not a negative at all. What is negative, in the case of the BÉT, is that there is no flow of new companies to the market, say compared to Vienna where it's a constant flow. There are around 100 new IPO candidates in Austria and I'd expect around 20 to come to the market in the next 12 months. But what is wrong in Budapest is there is no sign of the flow of those new companies. Is there enough capital, no doubt? So why not any new companies? I do not really know. But sentiment is also crucial, what I see here is that in spite of the facts, the business sentiment here is rock bottom right now, and that affects all aspects of the economy , and Hungary needs to be pulled out of this.
Q: Can we expect any shift in investment philosophy or geographical focus from VCP in the near future?
A: We are totally focused on the region, we are private, and we believe in old banking principals: Know your customers and know what they are doing. I would like to continue on these principles, at least as long as I am behind the wheel. The world has not changed that much, basic principles have not changed. Do not be confused by new technological developments. The basis, the actual content, has not changed, just the package and the branding.
We feel we understand this region, and we have been active here for a long time. We believe we know the institutions and people in this region and, very importantly, that we understand them, the languages, and the cultures. We want simply to benefit from the developments in these economies from two ways: one we are advisers, the second we are investors. The combination of both makes us efficient and successful, and for the next 20 years I see outstanding growth opportunities in the region.
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Source: BBJ; 20070625 |
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© VCP AG 2010
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