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Private Equity in Poland: A Historical Survey
The private equity industry has been developing dynamically since 1990 both in Poland and the whole Central and Eastern European region. By many measures, the Polish market is the perfect environment for private equity. Entrepreneurial spirit is rampant, with 77% of the economy dominated by the private sector . Economics have played a role, no doubt, with Poland's inflation falling from a high of 585.8% annually in 1990 to 0.5% by mid-2003, and with historic periods when annual GDP growth reached 7%.
In the early 1990s the few private equity investors that were active in Poland ranged in profile from public sources with a specific mission to stimulate the private sector (e.g. the Polish American Enterprise Fund) to private sources (e.g. Invesco) that had an interest in exploring what was truly an emerging market. Since then Poland's capital markets have become far more sophisticated, giving life to business and financial services diversity. While capital for business development is now available from several sources (banks, public equity markets, leasing companies, national investment funds, corporate investors, etc.), private equity continues to play a major role in support of companies that occupy dynamic market segments and require equity to seize growth opportunities; it is also increasingly provided for buyout transactions.
During the past thirteen years more than 60 private equity funds have been established to invest in Poland and other neighboring country markets, representing total committed capital of an estimated EUR 5 billion. This capital is predominantly from foreign institutional and multilateral sources, with domestic funding sources notably lacking. Some investment advisory groups have raised successive and separate (i.e. third and fourth) private equity funds, which confirms that the Polish market has interesting and attractive investment opportunities. As the Polish private equity industry matures, certain more established funds are able to demonstrate impressive returns from exiting their portfolio of investments, reinforcing the prospect that Poland is a bona fide market for private equity investors.
With Poland and seven other countries in the region (the Czech Republic, Slovakia, Hungary, Slovenia, Lithuania, Latvia, and Estonia) poised to join the EU May 2004, the Polish Private Equity Association decided to survey its membership of fund managers and several other advisory groups actively managing investments in the CEE region. The survey was conducted in early 2003 by PricewaterhouseCoopers and with the cooperation of the European Private Equity and Venture Capital Association (EVCA) with the goal to gather important information about historical private equity investment activities. The results will form a foundation for further research and will provide useful information and measurement tools for fund managers and investors already operating in or interested in the Polish market. The survey does not include funds that have no investment focus in Poland (i.e. country funds for Hungary, the Czech Republic, etc.). The survey encompasses responses from 21 fund managers managing 52 funds between 1990 and 2002. These funds under management amount to committed capital of approximately EUR 4.1 billion. It is worth noting that approximately eleven funds did not respond and therefore are not included in the survey results. However, adding them to the total indicates approximately EUR 5 billion of committed capital has been made available for investment in Poland and the CEE region since 1990.
Chart 1. Funds Under Management
Chart 2. Capital Committed to Private Equity Funds for Investment in Poland and Surrounding CEE
Chart 3. Sources of Capital
From the total capital of EUR 2.3 billion represented by 32 funds that responded to this part of the survey, an estimated 51% has been invested in Poland and 29% in other countries in the CEE region. 20% of the total still remains available for investment.
Chart 4. Capital Invested
Survey participants reported that 638 companies received funding between 1990 and 2002, of which approximately 65% are located in Poland. Of the 638 companies, approximately 325 had been exited by the end of 2002.
Chart 5. Total Number of Private Equity-backed Companies
Chart 6. Concentration of Sectors
Conclusion
The survey results show that in a relatively short period of time both Poland and the CEE region have become dynamic private equity markets. Significant funds have been raised and deployed. Large numbers of local companies have benefited from private equity support, helping tens of thousands of employees. Successful divestments of more than 300 companies indicate that exits are happening on a wide scale. The fact that third and fourth successive funds have been raised by some long-standing fund managers proves that private equity in Poland is bearing fruit to those who invest in the asset class.
It is expected that the trends seen in the past will only accelerate in the foreseeable future. Private equity fund managers eagerly anticipate the changes that will take place as Europe expands to encompass Poland and other countries in the CEE region. Fund managers share enthusiasm for the promise and fortune that EU accession may hold, and in particular look forward to: 1) elimination of technical trade barriers with existing EU country markets, which will add momentum to export-strong companies; 2) an inflow of EU structural funds that will significantly improve infrastructure and aid economical development; 3) recognition by multinational producers that cheaper skilled labor in accession countries makes relocation of manufacturing facilities to the CEE region sensible; 4) the accession countries becoming eligible for funds reserved for the EU, as this creates opportunity to increase foreign investment in Poland in the CEE region, and; 5) regional consolidation opportunities among similar companies operating in continental Europe, eliminating distinctions between 'East' and 'West'. Whatever the path, whatever the challenge, there will always be an important role for private equity investment in the Polish and CEE capital markets.
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