ING Baring sets up new CE fund

By Aleksander Nowacki

The private equity arm of ING Groep is looking to set up a new fund two to three times the size of its current E86-million Central European Fund. After several barren years, the worldwide private equity market is widely expected to pick up in the coming year, and the central European region has been singled out by industry insiders as being particularly attractive. ING Baring Private Equity Partners is one of the institutions keen to benefit from a predicted upturn in the region's economic fortunes.

"The case, as we see it, is this: Invest now and reap the benefits of your investment in five to seven years," said Jacek Pogonowski, ING Baring's Warsaw-based partner, who sees the region's mid-term growth potential as significantly higher than in the EU due to lower labor costs.

"For a long time a narrowing of the gap has been predicted, but we haven't seen it happen as yet," he said. "We have a clear competitive advantage over western Europe as a place to invest in manufacturing." He also pointed out that the region has great potential for productivity gains.

From this it could be concluded that the fund is to focus primarily on manufacturing. Gyuri Karady, the London-based managing partner of Barings Private Equity Partners, seems to corroborate this. "Central Europe is the quintessential mid-market, old-economy play," he said.

Pogonowski, however, sounded a different note. "We do not intend to focus exclusively on manufacturing, although our current portfolio might suggest that," he said. "It will be an all-purpose fund. Firms in the service sector will also benefit from increased consumer spending in the medium-term."

The new fund would target mid-sized companies carrying price tags of €10 million-€25 million, up from E5 million-E15 million in the first round.

"We are not going to invest in greenfield or start-up projects," Pogonowski declared. "We want to keep that as an option, but it will not be the mainstay of our strategy." Instead, he said, it would be a typical buyout fund, offering development capital.

The current ING Baring Central European Fund, which will retain the option of reinvesting its assets until the end of 2005, holds stakes in seven firms in Poland, Hungary, Romania and Bulgaria. Last year it made its first exit, selling off a Romanian factory to a strategic investor. Pogonowski said that most companies would be developed with a view to a similar exit strategy, although in one case a listing of part of the stocks is also an option.

"It has become a credible exit mechanism," Karady said of the Warsaw Stock Exchange, although the other regional bourses are thought to be too small to serve the purpose.

"We have made two investments each in Poland and Hungary and a similar ratio will likely be retained in the new fund," Pogonowski said. "Investors - not unreasonably - expect a large proportion of the assets to be allocated to the largest market in the region."

The country's engagement in Iraq has also played in its favor as a destination for investment, Pogonowski said. The publicity this has attracted made U.S. investors in particular curious about the country.

However, the most important reason for heightened investor interest is the approaching EU accession. According to Baring Central European Fund's managers, three foreign media groups made inquiries about the fund's stake in ad broker CR Media in the weeks leading up to the referendum. A recent meeting with a U.S. investor that had balked at committing to the region just a year before drew an enthusiastic response this time around.

ING Private Equity Partners is at a preliminary stage in its preparations to launch the new central European fund. Pogonowski describes the current stage as "a more aggressive version of pre-marketing."

"Unlike some of our competitors, we have not yet gotten to the stage of issuing a placement memorandum," he explained. "We are in the process of selecting an adviser, preparing the necessary materials and holding some preliminary talks with a wide range of investors." Pogonowski said that investors from both EU member countries and the U.S. are being targeted.

Formal fundraising is planned to begin in early 2004 and the fund aims to be finally closed by the end of that year, although the first investments could be made before that date.

"We allow, however, for a possibility that, should the expected global economic upturn not materialize, the fundraising could carry on into 2005," Pogonowski said.