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The venture capital/private equity market in Poland

The Polish private equity industry is the largest in central Europe. It is already 12 years old and the value of PE funds managed in Poland exceeds E3bn. Based on research and estimates, Piotr Tamowicz and Dariusz Stola of the Polish private equity association present an overview of its history and current state.

Phases of development

The beginnings of the VC/PE market go as far back as the year 1990 and are closely linked to several initiatives undertaken mostly by foreign public entities. In 1990, almost simultaneously with the implementation of Polish economic and societal reforms, the Polish-American Enterprise Fund was established and capitalized at $240m. The emergence of the fund was the direct result of an aid program extended to Central Europe by US President George H.W. Bush. In the same year, the Danish Fund for Central and Eastern Europe started its activity. In 1991, a small Society for Social and Economic Initiatives was established with the involvement of French capital, among others. In March 1992, the Care Small Business Assistance Corporation (USA), the Cooperation Fund, the Fund for the Development of Polish Agriculture, and the European Bank for Reconstruction and Development (EBRD) created Caresbac-Polska. Those initiatives made a foundation for the VC segment based on aid and governmental resources. A few years later, the segment of quasi-commercial funds based on public capitals was enriched by several new initiatives. In 1995, the Bialostocki and Lubelski Capital Funds were established within a Polish-British program, Regional Investment Funds in Lodz and Katowice were founded with the support of the PHARE/STRUDER program, and Caresbac helped establish the Northern Fund.

In the mid 1990s, along with the increasing credibility of Poland in the international arena, the interest on the part of strictly commercial investors grew as well. A new segment of large commercial funds begun to emerge in 1992, with the creation of the Polish Private Equity Funds I & II ($151m). In 1994, with capital of $65m, Poland Partners began its activity. The same year, the Pioneer Group started the Pioneer Poland Fund ($40m). The year also marked the emergence of such funds as the Poland Investment Fund (with the participation of the EBRD and the International Finance Corporation), Renaissance Capital, White Eagle Industries and the Poland Growth Fund. Thus, in 1994 the segment of large commercial funds increased by six funds and by more than $210m. At the same time there emerged a small bank segment of the private equity market, including the Central Poland Fund, PBG-Investment Fund, the Eastern Investment Company, the Pomorski Capital Fund, the First Polish Growth Fund, PBK-Investments and Hals. According to EVCA data, in the mid 1990's 12 companies conducted investment activities and managed a total capital of about $660m. The EBRD, IFC and foreign pension funds were their largest shareholders.

During the second half of the 1990s, the commercial segment of the market continued intensive growth. Having invested their entire capital, the private equity houses started new initiatives. The experience gained by Enterprise Investors resulted in establishing the Polish Enterprise Fund (in 1997) and the Polish Enterprise Fund IV (in 2000). Innova/98 (in 1998) and Innova/3 (in Piotr Tamowicz, PhD, Dariusz Stola, PhD The venture capital/private equity market in Poland 2000) followed the earlier success of Poland Partners; similarly emerged European Renaissance Capital II from Renaissance Partners. A particular tendency of the late 1990s was the emergence of funds focusing on the entire region of Central and Eastern Europe (CEE). They have substantial resources and management teams located in CEE's major capital cities. Key examples of such regional initiatives are the funds of AIG, Advent, Dresdner Kleinwort Capital, DBG and Raiffeisen. Poland also attracted representatives of supraregional funds specializing in specific industries (mostly the Internet, TMT, etc.) such as 3TS Venture Partners (with 3i participation), BMP/CEEV, Baring Communications, and Environmental Investment Partners.

Also in the second half of the 1990s the market expanded with new funds that emerged from the program of mass privatisation (the National Investment Funds - NIFs). Initially a few funds got involved in venture capital type activity. With time and as a result of the consolidation of several funds, the most active on the market remained NIF Magna Polonia, which additionally started the Nova Polonia Private Equity Fund, the group of NIFs consolidated by BRE Private Equity and NIF Jupiter (the merged III and XI NIFs).

The market at present

A decade of intensive growth enabled the development of solid institutional foundations of the private equity industry in Poland. There are about 30 VC/PE management firms, located mostly in Warsaw, that manage funds for Poland estimated at 12 billion PLN (approximately E3bn)* as of 2001. Since 1998 (when EVCA extended its annual industry survey to Central Europe) funds raised for Poland varied considerably, with more than close to E360m raised in the peak year 2000 and at least E1.2bn) in 1998-2001.** To have a fuller picture of the Polish private equity market, it is necessary to consider funds that are managed from other countries, focus on Central and Eastern Europe as a whole and target Poland as the largest CEE market. The total value of private equity funds raised to date, when viewed in this way, reaches E4.8bn.

The funds present in Poland can be divided into three groups. The largest and most active group consists of commercial, mostly independent funds, to which private institutional investors (primarily foreign) have contributed their capital. The second group is made of supraregional funds, raising capital on international markets as well, and investing in all of Central and Eastern Europe. Taking into consideration the relative size of the Polish economy, one can expect that a significant share of their resources will be allocated to Poland. The third group consists of small funds for entrepreneurship and regional development, established with foreign or domestic public aid. The first group for nearly ten years and the second one for over five years have showed vitality and keep growing. The relatively small size of the third group, which historically emerged as the first one, results from limited public assistance and causes a gap in the availability of equity for very small businesses.

The large majority of capital (more than 90 per cent) that fuels the Polish private equity market comes from abroad. This state has remained unchanged since the PE industry's beginning and is characteristic of all Central and Eastern European markets. From the institutional point of view, the main sources of capital for funds operating in Poland have been (foreign) pension funds, insurance companies, banks and corporate investors. Players such as ABN Amro, Deutsche Bank, 3i plc, ING or AIB have joined the group of investors that had been established earlier, which include large, well-known North American pension funds, insurance companies and other institutions. The EBRD and IFC have historically played an important role as funding sources and still play a role in the supply of capital. It is worth noting that the well-known pension fund for California public sector workers, CalPERS, is present in Poland since 2000 with a major commitment of $250m. The structure of capital supply in Poland differs from those observed in private equity funds in Western Europe primarily because most of the capital raised in the West is from domestic sources. West European sources of capital are also more diversified institutionally.

Following a few years of dynamic growth of the Polish PE industry, 2000 was a record year of investment activity. According to EVCA, at least 102 investments of E215m were realized in 92 companies. In 2001, in line with general economic slow down, the amount of investment decreased to E150m, with 68 investments in 57 companies. On average, over the last four years about E150-200m have been invested annually, and 60-80 companies have annually been added to the funds' portfolios. From 1990, the estimated value of PE investments completed in Poland is about E1.8bn) in close to 400 investee companies.

The sectoral distribution of investments is diversified, including manufacturing, trade, and service companies in ‘old' and ‘new' industries. In the last two years, interest has grown in particular in the telecommunications sector (inclusive of firms from other Central European countries), as well as services, information technology, consumer goods and other manufacturing sectors. Geographically, recent years witnessed an expansion of the investment by Polish PE firms to other countries of Central and Eastern Europe.

The distribution of investment is interesting when considered from the point of view of financing stages. The level of investment in companies in the start-up phase in 2001 was 15 per cent (PLN83m) in comparison to 18 per cent the previous year and only 8 per cent in 1999. The major part of investment has been in firms in the expansion phase (50 per cent in 2001 and 78 per cent in 2000). Although significant in the early years of the market's development, the importance of privatization has decreased as most attractive assets have already been privatized. Quite surprising is the minimal number of investments completed via management buyout (MBO/ MBI). In Europe as a whole, this constitutes about 40 per cent of all investments. The declared expectations of Polish PE managers and recent educational initiatives encouraging Polish managers to participate in such investments indicate that investors have noticed an unquestionable chance for the development of this segment of the market.

As for divestments, on average 30-40 companies annually have been divested in recent years at a value over approximately E80m, calculated according to investment costs). The level of divestments varied each year. According to the last EVCA survey, Polish funds divested from 38 companies at the level of E41m in 2001, in comparison to as much as E171m in 1999. Just as in Western Europe, the trade sale remains the most popular way of exiting, comprising 63 per cent of divestments in Poland last year and 52 per cent in 2000. There has been less success, much lower than average in Europe, in the sale of companies on the public market. One of the main reasons for this is the stagnation and low levels of liquidity on the Warsaw Stock Exchange.

Despite the recent cooling of the world economy and a slow down noted in the European private equity market, the prospects for the Polish private equity industry are highly encouraging. Besides those of a global character, several local factors can be distinguished that will shape the future of the industry in the coming years. First of all, further growth in the Polish economy is expected, especially along the process of its convergence with the EU economies and the increasing maturity of Polish markets. The prospect of Poland's accession to the EU, expected in 2004, plays an important role in perceiving Poland as a low-risk place for foreign investment. Already today it has an influence on investors who show their interest, as can be seen in emerging private equity initiatives that are oriented towards Central European EU accession candidates, and especially Poland.

Domestically, the key issue will be cooperation with financial institutions that are the main sponsors of VC/PE funds in other countries. A rapid increase in capital accumulated in the new Polish retirement system (which by 2010 will gather over E55bn as well as with insurance companies and banks is expected to supplement the current, mostly foreign sources of financing. Within the sector itself, the accumulated professional experience of investment managers is the final factor worth noting. Only a few years ago the amount of this experience was markedly smaller. Since that time a sizeable group has developed, consisting of professionals well experienced in private equity investing and knowledgeable in the specific attributes of the Polish economy and relations with Polish entrepreneurs. These factors confirm that private equity in Poland is poised for further development and is likely to represent an increasing proportion of annual Polish GDP, moving in line with the role of private equity in Western Europe and the US.

* At the exchange rate of 4.0 PLN. ** At historical exchange rate of 3.7 PLN.

Main sources: P. Tamowicz “Fundusze inwestycyjne typu venture capital”, IBnGR 1995; P. Tamowicz, “Analiza rynku venture capital w Polsce”, IBnGR 2001; industry survey results published annually by EVCA in 1999-2002; data gathered and estimates made by the PPEA.

Copyright © 2003 PPEA

Piotr Tamowicz, PhD, is an economist, fellow at the Institute for Research on Market Economy in Gdansk. Dariusz Stola, PhD, is the director of the PPEA and fellow at the Institute of Political Studies in Warsaw.

Polish Private Equity Association (PPEA) gathers private equity/venture capital investors active in Poland. Associate Membership is also available for other persons, companies and institutions interested in development of the private equity/venture capital industry in Poland. For further information please visit www.ppea.org.pl.