Venture capital looking to new law to increase funds

Domestic private equity funds are recommending legislative changes that will enable them to raise capital from domestic pension funds - the biggest sources of portfolio investment in Poland. Last week, the recently established Polish Private Equity Association (PSIK) presented data indicating that most money invested in venture capital and other equity funds comes from abroad. PSIK's members said they would like to be able to raise more money domestically, adding to the $1.8 billion already invested in private equity. "If you look at any European country, the majority of venture capital funds come from domestic institutions, such as pension funds, but this is not happening in Poland," said Robert Manz, partner at Enterprise Investors, Poland's largest venture capital fund, and chairman of the PSIK. "We would like to change this trend. Internationally, it's about 25% of venture capital funds that come from pension funds while pension funds allocate up to 5-7% of their money to private equity." Under the current law Polish pension funds have been discouraged from investing in venture capital funds by investment caps and legally mandated rates of return, pension and equity fund managers said.

"While we're allowed to hold up to 10% in a closed-end investment fund, through which we can invest in (venture capital), such a limit makes it practically impossible to actually raise the fund," said Adam Chełchowski, member of the Credit Suisse Life & Pensions PTE's board, which runs the OFE Winterthur pension fund. "Even if you find let's say six pension funds, what about other necessary investors? The future of a specific private equity fund cannot be subject to a question whether the entire pension fund sector manages to come together and invest or not. So without extending that limit to 20% it won't be possible for us to invest in private equity at all." If the government's Enterprise First strategy, designed to help businesses, is to be implemented the first thing politicians should do is to raise the 10% limit to 20%, added Chełchowski. Also according to Marek Góra, co-author of the 1999 pension reform and current adviser to the Pension Fund Chamber of Commerce (IGTE), the law should evolve in such a way that pension funds will find more ways to invest. "The Polish financial market is growing and there are still not so many financial instruments available so improving investment opportunities of pension funds is simply a must," he said. The 1999 reform set up the current pay-as-you-go pension fund system that partially privatizes retirement savings plans and mandates that workers pay into the system.

Jumping hurdles While the 10% investment limit is one of the main barriers stopping pension funds from investing in private equity, the funds have yet another hurdle to clear - a required rate of return. "The minimum rate of return, required by the law from all pension funds, makes them uneasy about investing in a long-term scheme, such as a venture capital fund," said Dariusz Stola, PSIK's executive director. "Private equity funds generally invest for a period of up to 10 years so if we have to compare our rates of return every two years we cannot sacrifice our short-term results for achieving something in the long-run," added Chełchowski. PSIK plans to support the IGTE in calling for changes in the law, which now stops Polish pension funds from investing in venture capital funds. "There is no short-term pressure for us to do that but if we could get this new capital channel up and running in the next one-and-a-half years or so everyone would be satisfied, including Polish entrepreneurs," Stola said.

"Hundreds of millions of złotys" In 2001 the aggregated sum of assets of all pension funds exceeded zł. 12 billion ($3 billion), four times more than in the beginning of the year 2000, according to Pension Fund Supervision Office (UNFE) estimates. "So, we're talking about hundreds of millions of złotys we could raise from them," Stola said. PSIK has already begun cooperation with pension funds to find ways to invest into venture capital funds. "They are also interested in it because they are looking for diversification of their own portfolio," Manz said. Chełchowski said that the chamber would come up with independent research on possible changes in law. "We would like to start a serious discussion," he said. "If you raise the current 10% to 20%, pension funds will start to invest in private equity and that will translate in real economic growth. It's how Silicon Valley was created, thanks to the private equity and venture capital investments," he added, referring to the United States' most successful technology corridor. According to Roger de Bazelaire, regional director for Central and Eastern Europe at Dresdner Kleinwort Capital private equity group, private equity funds may become an alternative asset class for pension funds in Poland. "In the U.S., funds like California Public Employees' Retirement System (CalPERS), the main investor in our fund, which are very experienced investors, typically allocated up to 5% of their funds into alternative assets like private equity, hedge funds," he said. "And for us, as private equity funds managers, Polish pension funds will certainly represent an interesting source of funding in the future because in fundraising here, we will not need to explain or sell the region, its specific risks and advantages."