There is no reason to be concerned about the private equity market for the time being, Thomas Howells, partner at Euroventures, told Portfolio.hu in an interview. He believes, however, that global loan market woes will sooner or later leave a scar on Central and Eastern Europe, as well. He also believes that a reduction in the availability of debt will reduce valuation levels.
You find news on M&A transactions and market trends in Portfolio.hu's Corporate Finance sub-section. Portfolio.hu: What are the main geographical investment focus and investment strategy of Euroventures? Thomas Howells: The Central European region with a focus on Hungary where our advisory team is based is in our main geographical focus. The funds we advise invest up to EUR 8 million primarily in expansion, development, late stage and buy-out investments in companies operating in the countries of Central and Eastern Europe.
P.: How have leveraged buyout transactions been affected by recent developments in the financial markets both globally and in the CEE region? T. H.: Globally there are a number of transactions on hold, but this does not apply to anything we at Euroventures are currently involved in. It is too early to predict what the impact on CEE will be, but it maybe naïve to imagine that the conditions experienced in the west will not also apply here.
P.: Will this trigger bankruptcies in the private equity market? T. H.: General economic growth is a lender's best friend, with time it can make even fairly dubious lending decisions turn out alright. As CEE has and will continue to have higher growth than Western Europe the risk of lending default on over-leveraged private equity deals is probably less in CEE.
P.: How will the possible liquidation of assets affect valuation levels? T. H.: It is too early to predict many liquidations, but a reduction in the availability of debt - which will be a fact of the future Private Equity leverage market - will in itself reduce valuation levels.
P.: How do you see the private transactions in the mid-size M&A segment in the CEE region? T. H.: Short-term IPO activity will be determined by global emerging markets sentiment, not by the specifics of the Hungarian or other local markets. In the medium term there is a growing body of CEE institutional money seeking long-term equity investments and an increasing number of CEE institutional-quality mid-size companies looking to issue listed equity. So the long-term trend is up whatever the ups and downs on the way. Of course the question of on which market CEE equities are listed and traded is a separate issue.
P.: Do strategic investors and venture capital investors use different valuation models in the M&A transactions? T. H.: Of course. Historically strategic investors outbid venture capital investors. The reason given was their ability to reap benefits of synergies with their existing business. But this argument also to some extent applies to private equity where "buy and build" strategies involve acquiring several companies in the same business segment throughout the region. The Petőfi Nyomda transaction in the summer where I believe a German strategic buyer outbid local private equity bidders may mark the beginning of a return to normality.
P.: There is a bullish IPO activity globally and Hungarian investors are craving mid-size (HUF 5-10 bn) stock market transactions. Can sellers reach a better price in a private transaction in this segment? T. H.: Historically the average EBITDA multiple paid by private equity was around 6.5x and far greater prices than this have been paid by private equity in the past couple of years. This needs to be compared to stock market valuations of specific companies.
P.: How do you pick investment targets? T. H.: First of all we need a strong reason why the target business is a good business to be in Hungary or CEE region; Secondly the target has to have a believable growth plan; and last but not least, we need an excellent management team to implement the plan.
P.: Strong cash flow generation or growth potential is the more important for a private investor? Why? T. H.: For smaller Private Equity deals growth is as important as strong cash flow as growth and not pure financial engineering (leverage) is part of the value enhancement.
P.: How do you assess Euroventures' well-known Skyeurope investment? T. H.: This was an early stage growth investment with an unbeatable growth story in Bratislava. In 2002 Slovakia had no national airline and was on the threshold of EU Accession. In addition Bratislava airport was very close to high-income Vienna. All of these combined to make Bratislava very attractive for launching a low cost airline.
At the time we invested in (2002) Skyeurope, the company had one 30-seater turboprop aircraft, by the time we exited (2005) the company had grown spectacularly to a fleet of 4 turboprops and 11 737 jet planes. Although not typical this investment was profitable for our investors, which of course is the main measure of success. We are no longer investors in Skyeurope.
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