Finding prospects easier, cash harder for venture capitalists
The Russia crisis caused at least one venture capital company, Pioneer, to delay closing one of its new funds because it had difficulty raising the necessary cash. Other venture capitalists said that the chilling effect Russia has had on some Polish industries, as well as the general downturn in interest in emerging markets, has made fund-raising more challenging.
"Of course there are signs of recovery, but still the situation is uneasy," said Marcin Hejka, a local adviser to venture capital company PGF Management.
While nobody keeps reliable figures on how much venture capital money flowed into Poland in the last year, venture capitalists estimated that the amount of investment has almost reached the $1 billion mark.
"We are estimating that the amount of equity for investment into Poland would be about $900 million to $1 billion," said Jacek Siwicki, executive vice president of Enterprise Investors, which manages about $600 million through the Polish-American Enterprise Fund (PAEF) and other funds. (See the List, page 17).
In Western countries, venture capitalists are primarily known for providing seed or start-up capital of as little as $100,000. In Poland, however, their investments tend to focus on the larger needs of development capital and can run anywhere from $5 million-$15 million, PGF's Hajka said.
Venture capital funds often take a minority stake and earn a return on their money by selling at least a portion of their holding when the company is publicly floated or acquired.
We "help them (companies) to develop by taking an active role in the strategic development of the company and looking for significant returns," said Adam de Sola Pool, chief investment officer at Netherlands-based Environmental Investment Partners.
The expected return, de Sola Pool said, runs around 35-45%. Others, however, put the figure at 25-35%.
Finding the kinds of companies that can yield those demanding returns is not easy. Venture capitalists said they have traditionally struggled to find quality companies with strong management here. While Siwicki said he did not expect the difficulty to decrease anytime soon, he said the quality of deals the fund is presented with is getting stronger.
"I've found that the quality of proposals being made to us each year is improving," he said.
Traditionally, Siwicki said his fund could look at as many as 200 requests but would probably only invest in 10 or less. The fund has placed money with 12 companies in the last year and a half, he said.
"Your portfolio is always doomed to be composed of very good, very bad and indifferent," Siwicki said, noting that three out of 10 investments are usually complete failures.
Venture capital investments so far have focused on the manufacturing and food processing sectors, executives said. While interest in information technology has been growing, Hejka said, "their number is relatively small."
In the past 18 months, however, funds have shown more of an interest in media investments, such as radio and television, said Neil Milne, managing director at Copernicus National Management.
Copernicus, which had invested $12.5 million by the end of 1997, has closed two deals in the past year, Milne said. The fund hopes to invest a total of $25 million by the end of 1999. While Milne would not say exactly what type of return Copernicus was looking for, he said that most funds shoot for 25-35%.
Interest has also grown in certain financial markets, such as services that help consumers finance appliance or auto purchases. "There is probably a lot of opportunity in semi-financial or niche services," Siwicki said.
One area that venture capitalists have not delved deeply into is heavy industry, such as factories and cement plants, which have been more the target of strategic investors.
Agriculture and the environment are also sectors that have not received very much attention. But "one person's dog is another person's gem," de Sola Pool said.
Environmental Investment Partners focuses on the "dogs." The fund looks primarily at environmental projects, such as landfills or air-pollution monitoring systems.
"We think this is a great business because there is a lot of money being spent these days to bring Poland into line with EU (European Union) standards," de Sola Pool said.
While Poland is still perceived as a risky place to invest, the relatively healthy economy, which has grown at 5-6% annually for several years now, has lured more than 20 venture capital funds.
"The main reason is that the country is full of opportunities," Hejka said.
While currency risks and a dearth of management talent make this a difficult environment to work in, venture capitalists said that the country does benefit from its strong regulatory structure which protects the interest of many investors, including minority shareholders.
"It certainly has been a good country for all investors to operate in whether they be strategic or venture capital," de Sola Pool said.
"Of course there are signs of recovery, but still the situation is uneasy," said Marcin Hejka, a local adviser to venture capital company PGF Management.
While nobody keeps reliable figures on how much venture capital money flowed into Poland in the last year, venture capitalists estimated that the amount of investment has almost reached the $1 billion mark.
"We are estimating that the amount of equity for investment into Poland would be about $900 million to $1 billion," said Jacek Siwicki, executive vice president of Enterprise Investors, which manages about $600 million through the Polish-American Enterprise Fund (PAEF) and other funds. (See the List, page 17).
In Western countries, venture capitalists are primarily known for providing seed or start-up capital of as little as $100,000. In Poland, however, their investments tend to focus on the larger needs of development capital and can run anywhere from $5 million-$15 million, PGF's Hajka said.
Venture capital funds often take a minority stake and earn a return on their money by selling at least a portion of their holding when the company is publicly floated or acquired.
We "help them (companies) to develop by taking an active role in the strategic development of the company and looking for significant returns," said Adam de Sola Pool, chief investment officer at Netherlands-based Environmental Investment Partners.
The expected return, de Sola Pool said, runs around 35-45%. Others, however, put the figure at 25-35%.
Finding the kinds of companies that can yield those demanding returns is not easy. Venture capitalists said they have traditionally struggled to find quality companies with strong management here. While Siwicki said he did not expect the difficulty to decrease anytime soon, he said the quality of deals the fund is presented with is getting stronger.
"I've found that the quality of proposals being made to us each year is improving," he said.
Traditionally, Siwicki said his fund could look at as many as 200 requests but would probably only invest in 10 or less. The fund has placed money with 12 companies in the last year and a half, he said.
"Your portfolio is always doomed to be composed of very good, very bad and indifferent," Siwicki said, noting that three out of 10 investments are usually complete failures.
Venture capital investments so far have focused on the manufacturing and food processing sectors, executives said. While interest in information technology has been growing, Hejka said, "their number is relatively small."
In the past 18 months, however, funds have shown more of an interest in media investments, such as radio and television, said Neil Milne, managing director at Copernicus National Management.
Copernicus, which had invested $12.5 million by the end of 1997, has closed two deals in the past year, Milne said. The fund hopes to invest a total of $25 million by the end of 1999. While Milne would not say exactly what type of return Copernicus was looking for, he said that most funds shoot for 25-35%.
Interest has also grown in certain financial markets, such as services that help consumers finance appliance or auto purchases. "There is probably a lot of opportunity in semi-financial or niche services," Siwicki said.
One area that venture capitalists have not delved deeply into is heavy industry, such as factories and cement plants, which have been more the target of strategic investors.
Agriculture and the environment are also sectors that have not received very much attention. But "one person's dog is another person's gem," de Sola Pool said.
Environmental Investment Partners focuses on the "dogs." The fund looks primarily at environmental projects, such as landfills or air-pollution monitoring systems.
"We think this is a great business because there is a lot of money being spent these days to bring Poland into line with EU (European Union) standards," de Sola Pool said.
While Poland is still perceived as a risky place to invest, the relatively healthy economy, which has grown at 5-6% annually for several years now, has lured more than 20 venture capital funds.
"The main reason is that the country is full of opportunities," Hejka said.
While currency risks and a dearth of management talent make this a difficult environment to work in, venture capitalists said that the country does benefit from its strong regulatory structure which protects the interest of many investors, including minority shareholders.
"It certainly has been a good country for all investors to operate in whether they be strategic or venture capital," de Sola Pool said.
