Author: Ivan Haluza
Source: Trend, 22. 4. 2010, p. 34-36
HEADLINE: We sold companies because cash affords us greater safety, says the owner of investment group Arca Capital.
Pavol Krúpa
He made his first solid money in sales of stocks, insurance brokerage or brokerage of building savings. Six years ago, he founded the private equity group Arca Capital. He bought up a number of food and machine engineering companies and also moved into real estate projects. He was another player in the big financial groups (TREND 18 and 41/2008). He himself characterized this period as a harvest. However, once the crisis arrived, he sold off many companies. Arca Capital is now immeasurably slimmer. He claims that he opted for safety with cash on account for the companies sold. Allegedly, also as a result of this, he has returned to bigger business.
Trend: How did the crisis reduce your assets, which previously were worth roughly 130 million euros and you were placed within the forty wealthiest Slovaks?
Pavol Krúpa: Anyone who claims that the crisis hasn’t affected him either doesn’t realize the reality of the situation or is extremely fortunate. But we are still holding on to our assets. The big change is in the approach to their valuation. Before the crisis, the analysts assessed the value of companies in terms of their future revenues. Today, during the crisis, we have come to understand that everything was seriously overheated. Nowadays, receiving a binding offer from someone who is really interested in them is the factor that determines the price of assets. The price of assets remains relative. I still feel myself to be a relatively successful businessman.
Trend: Financially healthy companies are waiting until the end of the crisis before proceeding with the sale of their factories or estates. But, during the crisis, you have sold a Czech company kasa.cz from the internet trade sector, and also two Czech food companies, Marila Balírny and Natura. Was servicing your debt at risk and did you need money in a hurry?
Pavol Krúpa: We haven’t sold any companies under pressure. Quite the opposite: even despite the crisis, they were successful sales. We received decent offers for them, and that’s why we sold them.
Trend: Did you get back the money you invested in them? You really didn’t come off a loser?
Pavol Krúpa: We sold them at a profit. All the sales followed a standard process, either through a selection procedure by addressing our strategic partners or by direct sale after a rigorous evaluation and negotiation. Strategic investors entered into all of them. Marila, producing coffee and cookies, was bought by Polish Mokate and the starch-producer Natura by a strong Czech pasta group, Europasta. In addition, internet trade or food sales are not sectors which were significantly affected by the crisis. These companies were in a good state and the price matched that.
Trend: But some of them were in your hands for only a year or two. If you had held them for four or five years, as is standard practice by players from the private equity field, you could have made more.
Pavol Krúpa: No. We sold in the optimal period. We also wanted to keep kasa.cz longer and combine it with similar companies on the eastern markets. But when we found that we were unable to buy similar companies there at appropriate prices, we preferred to sell the Czech internet shop to another internet shop, which we wanted to buy previously. The price was good and I don’t look back with hindsight that maybe later it could have been even better.
Trend: Nevertheless, what lay behind the sale of a large part of your assets? Isn’t it the fact that you invested a lot of money mostly in Ukraine in purchasing land, but that building activities there are on hold because of the crisis, and so there’s a shortage of money for payments of the loans?
Pavol Krúpa: I repeat again: We received interesting offers for our companies and we had no reason to wait. The only truth is that the crisis brought uncertainty into the business. And – yes – I chose certainty so that I can sell something at a profit. Now I would rather have a cash reserve on my accounts. I chose the path of last out of the crisis without nervousness and then I will use the money for new acquisitions.
Trend: But the truth is that your projects in the Ukraine have slowed down. How much exactly did you invest there in semi-finished projects?
Pavol Krúpa: It involves a few tens of millions of euros. But I am not worried about these investments. The Ukrainian market has a great potential. Out of caution, we indeed didn’t start to build apartments or logistics centers on our estates right off, as we initially planned. But we can still evaluate them. We have adjusted to the crisis and, for example, on our estates near Kiev in the Zastudňa locality, we are not going to build family houses on our own, we are only fitting them out with infrastructure networks. We will sell them as estates for building purposes. There is less risk attached to that. We haven’t even started yet and out of 145 estates we already have persons interested in fifteen of them.
Trend: You are holding yourselves back. Because, in this way, you will make less.
Pavol Krúpa: Yes. But I know I will make a profit for certain. Once again, I am betting on certainty. In our next two Ukrainian localities, Brovary and Mytnitsa, we are not going to build logistics centers in the end. It will be safer if we build an outlet complex in the first one and a centre for broader retail and services in the other. I am behaving sensibly. If the demand has altered in the crisis, I will change the supply.
Trend: Are you still as excited about Ukraine as when you started doing business there a few years ago?
Pavol Krúpa: I still like to spend a lot of time in the Ukraine. We have a background there which we have built up over a long time. We are cooperating with the former mayor of Kiev, Ivan Saliji. Contacts like that are very valuable. I know we will gain from our presence there yet. For example, now we have agreed in Charkov that we will develop the company, Charkovmetrostroj, in which we own a 38 percent block of shares, together with one of the strongest Ukrainian construction companies, Južspecstroj. That company owns a 50 percent share in Charkovmetrostroj. We have agreed on our cooperation, for example, in construction of the Charkov subway, into which roughly 80 million euros should flow out of the state budget over the next three years. Our new partner brings construction experience and we will attract European capital.
Trend: And what about your other Ukrainian companies – electro-technical company Chezara or the Nikolajevsk dairy works?
Pavol Krúpa: For Chezara, we have also obtained a partner and we want to develop it. The important thing is that the partner is a Russian company, because more than a half of Chezara’s flight and space production is aimed at Russia. We have already sold the dairy works. We bought a block of shares in it on the free market just as an investment opportunity and sold it to the French Lactalis. When we came across a decent offer, we sold it fast. Besides that, we also want to open up investment banking services in Ukraine. There are already a number of people contacting me, who are interested in how to get into an interesting business there. We are already in negotiations about the entry of a Ukrainian stock-trader.
Trend: Before the crisis, you also had a lot of plans for Slovakia and the Czech Republic. A tourist complex in central Slovakia, or a power plant in the Czech Republic.
Pavol Krúpa: In the Czech Republic, we wanted to buy a power plant owned by oils producer, Setuza. However, we eventually concluded that this was risky, because this energy source was closely bound up with its energy flow to this one company. But we still want to invest in energy. In biomass. We are also planning to build a new Slovak recreational-tourism centre in Liptov. Again, with the help of eurofunds.
Trend: Are you still trying to gain control of the Slovak coffee and tea producer, Baliarne obchodu Poprad?
Pavol Krúpa: Our interest in the company persists. But the owner’s price expectations are still too high. So far, the crisis has not brought what was expected – interesting companies at low prices.
Trend: How is your Czech biotechnological company Bio-skin getting on? Have you moved its artificial skin from the development laboratories towards mass production?
Pavol Krúpa: We got out of that project. We sold our share in Bio-skin in a management buy-out. Now, we are only there in the position of a subject from whom they can take loans. The artificial skin is developed and they are looking for sales opportunities.
Trend: Did the crisis take from you the appetite for investments in such innovative projects?
Pavol Krúpa: The crisis has helped us to look at businesses like that more rationally. We are not swarming over such projects any more. This period is not tilted positively towards it.
Trend: You are also talking about future plans, but the reality from last year is really selling off companies or reworking of the Ukrainian projects. Hasn’t the last year been mainly about the preservation of Arca?
Pavol Krúpa: It’s not about preservation. It’s a realistic assessment of the situation which pertained during the crisis. We have adapted.
Trend: But basically you have stayed just as a developer and you are no longer a private equity group.
Pavol Krúpa: I don’t agree. Real estate is certainly important for us and we have half of our resources invested in it. But we also have other enterprises and we are also still pursuing private equity. In Marila Balírny, we have retained production of the mineral waters, Ondrášovka a Šaratica. We want to develop them further. We have invested in a new filling machine and in enhancement of the spring’s richness. We separated ourselves from Natura before the sale and we are developing the production of additives for the dairy and meat production on our own. After reinforcing both food productions, we will find prospective investors for both of them. We also own the share in Charkovmetrostroj already mentioned and in Geodézia in Bratislava. And we are preparing another acquisition, about which I will not be more specific at the moment.
Trend: But you have disproportionately less than you did a year ago. Couldn’t you go the same way as J&T, which resolved its problems in the real estate business by putting its industry companies into a joint venture with the Czech group PPF? You didn’t speculate about a merger so you wouldn’t have had to sell whole companies?
Pavol Krúpa: We only have partners in individual projects. We are not seeking partners to join Arca. One specific thing is that J&T has, in the main, put energy companies into the joint venture with PPF. And investments in them are always more reasonable if the investor spends a longer time there. We had other companies and we knew how to sell them at a profit even faster.
Trend: Can you get bank loans?
Pavol Krúpa: For new acquisitions or for the operation of projects already commenced, we are using revenues from the sales of companies and also money from the group’s issues of obligations and bills of exchange. But the subsidiaries, Ondrášovka or Natura Food Additives, are also using resources from the bank.
Trend: Before the crisis, you also started the investment fund Arca Capital CEE. How many resources did your investors entrust to you?
Pavol Krúpa: This year we are planning to obtain CZK 200 to 400 million. The target position will depend on the market development, but our ambition is for the fund to be at CZK one and a half to three billion within the next three years. At the moment the fund stands at CZK one hundred million. The audit of the fund’s resources is not yet completed, but for the last year we are expecting a return at the level of six to seven per cent. The fund mainly invests into our projects – accordingly, we were able to make money for our investors even during the crisis.
Trend: Money also gets lent between entrepreneurs. Did the crisis create greater nervousness? Is it necessary to pay back the loans faster?
Pavol Krúpa: The crisis has shown up the quality of relationships. It is true that good business makes good friends, but friendship and business need to be separated from each other. When the crisis started, everyone – and perfectly correctly – was defending their own position. Some more aggressively and others less so. And it was precisely these movements that brought about either the strengthening of relationships, or the tension. But everybody takes it with a degree of detachment –that’s business.
Trend: In the past, you were buying a machine engineering company together with Milan Fiľo and a spa with Zoroslav Kollár. Are you still working in this way along with somebody today?
Pavol Krúpa: We have settled the relationships with our partners successfully. And we are opening up new financial partnerships, either directly or through our fund of qualified investors. We also have trade partnerships. For example, we are talking with J&T about trying to get tourists from the Ukraine into their tourist centers in the Tatras. We are already in preliminary negotiations with three Ukrainian travel agencies.
Trend: How is your second company Salve Group doing in its business of insurance brokerage and brokerage of other financial products? It apparently got tough in this business during the crisis as well.
Pavol Krúpa: The market for closed insurance is declining. But in this case we are glad about the crisis. We believe that – even if it’s not happening yet – it will have the result that only the biggest players will remain in the financial consulting market. Salve is one of them. We have significant operations in Slovakia, Romania and Ukraine, where we are actually already in second place in the market. Domestically we are third. And in Romania, at the start of their pension reform, we had the largest number of brokers: fifteen thousand. Now we are rebuilding that network for life insurance sales.
Trend: Don’t you have disputes now with your partner Peter Krištofovič about you wanting to go more into private equity?
Pavol Krúpa: A long time ago we decided that each of us would further develop the things which are of more interest to him and invest more into them. And the other would remain his junior partner. That’s why Peter owns a fifth of the shares of my Arca and I own a fifth of his Salve. We complement each other and are glad that we have managed to diversify our undertaking like that.
Trend: Allegedly, at the beginning of your career as a financial consultant, you concluded one of your first contracts on building savings with today’s Prime Minister, Robert Fico.
Pavol Krúpa: It was a cold contact. Insomuch that, without any prior contact, I rang the bell in his flat in Dlhé diely, Bratislava just by chance. But I concluded the contract with his wife. And at the same time I also concluded a contract in a similar manner, for example, with Fedor Flašík.
Trend: Is Robert Fico still your client?
Pavol Krúpa: Salve of course does not divulge such information. Thus, even if the Prime Minister were our client, I wouldn’t tell you. And, if you were thinking of some lobbying, we are not today making the sort of deals where we could use friendships with politicians in any way.
Pavol Krúpa (38) is a graduate of the Faculty of Business Management of the Economics University in Bratislava. He started out as a small share trader and through the consulting company All Finance Services he offered insurance and shares funds. Later, he founded the financial group Arca Capital. It took over several companies from the food, IT, biotechnology, machine engineering and energy sectors. It also started real estate projects. Over the last year it has sold a number of companies. One fifth of Arca belongs to co-owner Peter Krištofovič.
