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Private equity overview - Poland

Poland is a relatively new market for venture capital, and the sector is growing quickly. Here the EVCA gives an overview with key statistics.

Poland is still a relatively new market for venture capital and private equity institutions. However, the sector is growing very quickly, attracting more capital and greater interest from big international companies.

Since 1990, Polish governments have been committed to pursuing a wide range of economic reforms, including recent efforts in health care, social security and pension systems and education reforms, with appropriate changes in the law in order to achieve EU membership. Introduction of competitive forces in many sectors of the Polish economy and the privatisation programme has created a strong and dynamic private sector contributing over 70 per cent to the country's GDP.

The strong performance of the domestic economy, improvement of the entrepreneurial environment (eg the gradual lowering of CIT from 30 per cent in 1999 to 22 per cent in 2004 and proposed changes in the Commercial Code), establishment of the secondary stock market as well as NATO membership have all contributed to attracting foreign investors and the development of the private equity and venture capital industry.

Sources of capital

Total funds raised in 1999 were PLZ1.097m, down almost 20 per cent from the total funds raised of PLZ1.363m in 1998. Independent funds contributed over 95 per cent of the total funds raised at PLZ1.044m in 1999, which represents a similar percentage to a year ago. Realised capital gains contributed only a very small proportion, 1.5 per cent or PLZ17m in 1999, reflecting the fact that Poland is a relatively new and developing market.

Funds of funds were the main source of fund raising (59 per cent of total amount raised), with insurance companies and private individuals contributing 23 and 12 per cent respectively. Government agencies accounted for only three per cent or PLZ36m of fund raising.

As an emerging economy, Poland continues to benefit from substantial inward investment, attracting almost US$39bn in foreign direct investments by the end of 1999. This pattern was also reflected in fund raising for private equity investment, with almost 80 per cent of total funds raised coming from overseas countries (68 per cent from non-European countries, mainly the US, and 12 per cent from other European countries).

Investment patterns

The total amount invested by Poland-based venture capital and private equity organisations rose by 70 per cent from PLZ432m in 1998 to PLZ737m in 1999, with the number of investments increasing from 61 to 111. Initial investments represented almost 61 per cent of the total amount invested.

Independent organisations invested over 28 per cent of the total amount. Captive and semi-captive investments amounted to PLZ468m and PLZ61m, which represented 63 and eight per cent respectively of total investment in 1999.

Over 80 per cent of the total amount invested went to companies' start-up (nine per cent) or expansion (71 per cent) stage while replacement capital represented over 13 per cent of the total amount invested in 1999. Buy-uts are becoming more popular in Poland and represent almost 6 per cent of the total amount invested with the number of buy-out investments increasing form zero in 1998 to nine in 1999.

Over PLZ418m (56 per cent of the total amount invested in 1999) went to domestic companies, down from almost 83 per cent in 1998.  There was substantial growth in the share of investments in other European countries, reaching 43 per cent in 1999 compared to only 17.5 per cent in 1998.

In terms of amount invested, communications attracted the highest volume of funding representing 37 per cent of the total amount invested, up from 0.7 per cent in 1998. However, by number of investments, other manufacturing was the most popular industry sector.

Legal and fiscal environment

Positive signs for the development of venture capital companies are connected with the legislative changes in Poland, especially the Investment Funds Act, which was put into force on February 21, 1998.  This law has changed the previous inflexible legal construction and filled the gap concerning closed-end investment funds.

The process of consolidation in the banking sector and the creation of pension funds in line with the pension system reform) have had positive effects on the Polish capital market and the capital supply.  However, the efficient operation of the private equity market requires not only sufficient capital supply, but also the existence of proper entities to invest in and an environment conducive to its creation as well as flexible means by which to ‘exit' from the investment.

The possibility of share trading in small and medium-sized enterprises is still not very high in Poland although the situation is changing after establishing a so-called ‘free market' on the Warsaw stock exchange and the over-the-counter market (CeTo). These markets are still growing: there are 26 companies listed on the free market and 25 companies on CeTo.

Exiting

Total amount of divestments at cost increased significantly in 1999 and amounted to PLZ634m compared to PLZ205m in 1998. The primary exit routes in Poland were trade sale, public offering and sale to financial institution, representing 25, 28 and 29 per cent of the total amount of divestments respectively. Divestments by public offering significantly increased from zero in 1998 to PLZ182m in 1999, demonstrating the growing importance of the Warsaw stock exchange and CeTo (over-the-counter market) as an exit route.

During 1999, the official index of the Warsaw Stock Exchange, WIG, increased by 41.3 per cent reaching the level of 18,084 points. At the same time, the capitalisation of the Warsaw stock exchange went up to US$31.1bn compared with US$20.7bn in 1998. In 1999, there were 54 successful public offerings of which 21 were initial public offerings. The number of listed companies increased to 221 entities in 1999 compared with 198 in 1998.

FUNDS RAISED