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An overview of the Austrian market

Compared to other European markets, the Austrian private equity market is still very small and underdeveloped. Nevertheless, it has taken a sharp upturn in recent times. In Austria, the funds made available for investment have increased significantly from E1m in 1995 to E163m in 2000 - a record year so far. Government incentives, such as federal guarantees, have begun to take effect with the result that private equity is becoming increasingly important. Stefan Weber of Saxinger Chalupsky Weber & Partners looks at recent developments.

Available data on the activities of private equity funds in 2001 indicate that the Austrian private equity industry has shrunk slightly (along with the weakened performance of the stock markets) but not suffered greatly. In the first half of 2001, E54 m were invested in 74 targets, which lead to the paradoxical situation of a decreased volume of funds invested into an increased number of targets. Compared to the first half of 2000 (in which investment activities amounted to euro 96 million) the amounts provided in the first six months of 2001 have fallen by 44 per cent. On the other hand, within the same period of time, the number of investments in targets increased by 8 per cent to 68 per cent. This may be seen as a consequence of the following three reasons:

• Fewer exit options lead to a lower valuation of targets and to increased incentives for investments: During the boom in the international growth markets investors of venture capital could expect high returns, which led to an increase of enterprise valuation and investment costs. Due to the downward trend of the stock markets and the cooling of other exit options, the price for participation fell and, therefore, has created incentives for investments. Overall, these price reactions, on the one hand, have a stabilizing impact on participation activities and, on the other hand, reduce the involved volumes of investments.
• The holding activities extend to a longer duration: In a period of fewer exit options, private equity investors start to calculate differently. The primary objective of an investor is not providing funds to a rapidly growing enterprise and selling the acquired shares in a profitable manner after one or two years. The investor instead strives for a step-by-step growth of the target enterprise: The holding activity therefore extends to an ordinary duration of up to three to five years. Accordingly, new investments are made less often and the involved volumes of investments decrease.
• Investors prefer more mature projects where the returns are easier to assess: Investors have become more careful. Projects, which give the expectation of initial losses and a breakeven after years, hardly give incentives for investments in the present situation. The returns may not be sufficiently forecast and the capital requirements are high. This shift in investors' selection of potential targets has a weakening impact on new investments and the involved volume of investments.

Overall, this indicates that the weakened performance of the stock markets, in combination with the tense economic situation, has a significant impact on investors' strategy and leads to a decline in the volume of provided funds. Due to a consistently strong demand for private equity, the number of participations has even increased slightly compared to the record year 2000. Even though the figures in the second half of 2001 will be lower, there is no reason to expect a sharp break in the Austrian private equity sector in the long term.

Private equity participations are usually held in companies with limited liability (Gesellschaft mit beschränkter Haftung; GmbH) or stock companies (Aktiengesellschaft; AG). The aim of each exit strategy is to achieve the highest return possible on the investments made by the holding company when selling its shares of the target company. The most lucrative way is a sale on the stock exchange by going public. The investors may also sell their shares to other companies.

The minimum share capital is E70,000 for an AG and E35,000 for a GmbH. The articles of association must be executed before a notary public by means of a notarial deed. A GmbH/AG comes into legal existence upon its registration in the commercial register. When a GmbH/AG is founded with contributions in kind, an initial audit (Gründungsprüfung) by a certified public accountant is mandatory. A person acting in the name of the company prior to its registration may be held personally liable for obligations arising from such acts. The GmbH/AG must appoint one or more managing directors. In the GmbH, the managing directors are appointed by the shareholders' assembly; in the AG by the supervisory board. The managing directors represent the company and run its day-to-day business. Managing directors are typically shareholders in the target company. They are under a statutory obligation not to compete with the company. There is no legal requirement that one or all managing directors be domiciled in Austria. A supervisory board must be established for the AG and, inter alia, for GmbHs that employ more than 300 persons. In other cases in the GmbH, a supervisory board may be established voluntarily. Whenever a supervisory board exists, members of workers´ council (betriebsrat) form one third of the board's members and are charged with representing the interests of the staff.

Since May 2001, the Aktienoptionengesetz (Act on Stock Options) is in force. Under Austrian law it is possible to install a stock option programme and to issue stock options to management and employees. Stock options may be structured according to the needs of the markets and the shareholders. In general, all features of the stock options have to be published.

The factors considered when choosing between an AG and a GmbH are typically the negotiability of the shares, the influence on the management and the anonymity of the shareholders. In general, the articles of association of a GmbH can be designed to be more flexible than those of a stock company:

One crucial feature of the AG is the easy transfer of stock and the possibility of placing the stock in the public markets. The AG's share capital is divided into stock (Aktien) with a par value of at least euro 1 each. Stock can be issued in the form of registered stock or bearer stock. If the stock is not fully paid up, it must be issued in the form of registered stock. Up to one third of the stock capital of the AG may be ‘non-voting preferred stock', granting a right to a preferred dividend without a voting right. The liability of each shareholder is limited to the unpaid portion of the par value of his stock, except in the case of malevolence. The stock of an AG can be transferred easily (without a notarial deed). Registered stock must be endorsed (Indossament) to the new owner, who must also be registered in the shareholders' list.

Managing directors of a GmbH may be given instructions by the shareholders' assembly; managing directors of an AG must not be given instructions in the course of the day-to-day business, neither by the supervisory board nor by the shareholders' assembly. Private equity funds and financing institutions sometimes require that an advisory board (Beirat) is established, to advise the managing directors. Generally, no staff representatives have to be appointed as members of the advisory board as long as it does not exercise controlling influence on the managing directors.

The names of shareholders of a GmbH are published through the Companies' Register (Firmenbuch). As the AG provides for bearer stock, shareholders of an AG may stay anonymous.

Private equity funds

According to the stage of the target company's development and to its special needs, several financing instruments can be distinguished such as seed, start-up, first-stage, second-stage, third-stage, MBO, MBI, spin-off, turnaround, project, bridge finance or privatisation.

The private equity funds act as intermediary between the investors and the target companies. The investors may choose to provide their contributions directly to the fund or through an investment fund for managing purposes. The fund-structure is based on the establishment of two separate legal entities, namely a fund company and a management company. In the Austrian market the majority of all transactions are made by a holding company as the only legal entity. In most cases these holding companies are subsidiaries of institutional investors (eg banks or insurance companies). The contributions are provided by the parent companies or by other shareholders.

Holding companies as private equity funds

Holding companies usually are formed as a GmbH or an AG, even though any Austrian corporation, regardless of its other business activities, can function as a holding company. Foreign investors may obtain numerous tax benefits by establishing an Austrian holding company. Dividends received from an Austrian company (the target) are exempt from Austrian corporation tax under the participation privilege (Schachtelprivileg). The participation privilege does not require a minimum shareholding or a minimum period of shareholding. In Austrian, a broad network of double taxation treaties is in force which either eliminate withholding tax rate for investments from or to foreign countries. A strict debt-equity ratio is not applicable under Austrian tax-law.

The Austrian Reorganisation Tax Act (Umgründungssteuergesetz) facilitates a tax-free reorganisation of corporations and partnerships and applies to both national and cross-border transactions. The EU Merger Directive was implemented by the Reorganisation Tax Act.

Foundations as private equity funds

Austrian law provides for a foundation can also be established for private purposes (Privatstiftung). A foundation may operate as a holding company, eg for private equity purposes. The foundation is represented and managed by a board of at least three individuals. The founder may retain certain rights, eg of nomination and dismissal of board members. Foundations are subject to a statutory audit.

The minimum assets of a foundation amount is euro 70,000. In principle, the transfer of assets to an Austrian foundation by the founder triggers a 5 per cent gift tax (Schenkungssteuer).

Numerous revenues of an Austrian foundation are exempt from tax, eg certain interest income from national or foreign investments and capital gains on the disposal of substantial shareholdings (excepting speculative deals). The domestic participation privilege is also available. Sometimes foundations are combined with an Austrian holding company.

As a general rule, the disposal of substantial shareholdings triggers a 12.5 per cent corporate tax. Distributions to beneficiaries trigger (another) 12.5 per cent withholding tax. Relief through double taxation treaties may be available. Non-resident beneficiaries may be subject to income tax in their country of residence.

Government incentives

Government incentives are provided through (limited) equity guarantees, in particular, by Bürges Förderungsbank and Finanzierungsgarantie-Gesellschaft (FGG). An amendment of the Guarantee Act (Garantiegesetz) in 1996 led to an extension of the guarantee instruments of the FGG (capital markets- and fund-related guarantee were included). A further amendment in 2000 established a specific limit for capital guarantees of AS12bin ($776m). Since 1998, 13 of the 27 Austrian companies which have gone public and listed on the stock exchange of Frankfurt, Easdaq, Zurich or Vienna were supported by such a guarantee.

Specific guidelines were implemented, such as the technology finance guidelines of the FGG. This guideline aims to mobilize private equity to be invested into technology-oriented projects in order to improve the realization of innovative ideas and support the growth of the technology industry in Austria.

As capital guarantees for investors, these instruments attract venture capital. Austrian government incentives distinguish between fund-related and an investment-related capital guarantees.

Under the fund-related structure, a guarantee agreement is concluded by the private equity fund and the FGG. The lifetime of a guarantee is seven to 12 years. The guarantee is understood as an asset protection and provides a (limited) put option that requires the FGG to redeem the shares of the fund.

The investment-related guarantee is offered to the investors in the fund and provide for a put option for the investor. The beneficiary is not the private equity fund but the investor herself. In such a case, the capital guarantee may be construed as a negotiable instrument.

Saxinger Chalupsky Weber & Partners, Rathausplatz 4, Vienna, A-1010, Austria, 43 1 427 2000, www.scwp.at

© Copyright IFLR 2002

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