Author: (bel)
Source: REVUE PRIEMYSLU, 10.2008, www.revuepriemyslu.sk

NEW INVESTMENTS – Money for further development of your company may be provided by a private equity investor in exchange for a share of the core capital of the company. In other words, the investor will become your business partner.

Are you the owner of a successful company and would like to expand your business abroad or purchase new production facilities, but you are struggling with finances? If you can’t borrow in a bank, there is an alternative method to acquire sufficient capital – the involvement of a private equity investor.
Investor brings know-how as well
Many companies established in the early 1990s, which are now starting to prosper, may soon lack the capital they require for further expansion. There is also a growing number of employees and industries in which companies operate. Founders and owners of such companies are starting to experience problems with their management – they are moving away from the model of the family business. This is the point at which a private investor may be able to help. It can provide not only the necessary resources, but also professional management with proven experience that can manage the company in a more effective manner. The investor can improve the management of processes and set an optimal capital structure in the company. For example, measured modification of production may lead to cost savings.
Overview and experience
Thanks to their knowledge of tenders in Slovak, as well as foreign markets, private investors can provide better insight into customer preferences, which can improve the marketability of products and services. They also have experience with marketing and can suggest improvements in terms of the company’s approach to customers. If the business owner plans to use new capital to support exports, the investor may be able to help with its knowledge of foreign markets, if it is within focus of its other projects. “Apart from Slovakia and the Czech Republic, we also operate in Ukraine. We are engaged in several development projects, therefore we have experience with local business environments and we have established very valuable business relations,” says Pavol Krupa, a major shareholder of Arca Capital Group, which focuses on private equity projects.
Changes in company management
Such changes are proposed by the investor in order to ensure the best possible appreciation of invested capital. However, the arrival of a financial investor can result in some changes to the company’s level of independence. An extreme but not unusual case of intervention may be the requirement to sell some non-pivotal parts of the company or terminate the manufacture of certain goods. For example, after the entry of Arca Capital as an investor, Czech Precision Forge terminated production of small forged products because there was strong competition in this segment and the products returned a low amount of added value. Instead, the company expanded their product portfolio with products for new markets (aviation and automotive industry) and treatment of new raw materials (aluminium, copper).
Capital for development and innovation
With an inflow of capital from a private equity investor, a business owner can implement projects and changes for which they would not have previously had the finances. They can build a new production line, hire more employees, expand to new markets or purchase a rival company. An example of such development is the entrance of Arca Capital to KASA.cz, an online store. Thanks to the new capital, the board was able to establish a new branch in Hungary. As well, the expansion of a logistics centre in Kutna Hora is taking place because the need for additional storage capacity has risen due to growing demand from Slovakia and Hungary. Innovation of logistic systems in the form of bar code readers (which causes a reduction of faults when sending ordered goods) and investments in hardware (to strengthen the servers on which the company operates) represent another contribution to this company. Thanks to the investor, the company’s administration has moved over to an internal accounting system.
Potential wanted
“Our objective is to find unique ideas characterized by high growth potential but lacking the financial resources they require for implementation,” says Pavol Krupa from Arca Capital. He adds, “At the same time, we are looking for companies with experienced management, a clear vision of their company’s direction supported by a superior business plan. This type of management is conducive for the success of the whole company.”
Medium-sized companies that are planning to go public and are therefore in need of growth and an increase in their value should consider private equity investors.
Specialisations
Resources from private equity investors may also be obtained by start-up businesses with a good concept, not just existing companies. The investor may bring not only money but also suggestions concerning the management processes in the company or beneficial business contacts.
“Regarding areas, a great deal depends on the specific investor and its specialisation. Our group focuses on companies operating in the food and IT industries,” says Krupa. The amount of the investment varies from five million to several hundred million Slovak korunas. Some companies, such as Arca Capital, focus on small and medium-sized companies. Others, such as Penta or PPF, focus on larger projects. Foreign PE funds look for investments with a minimum value of €15 million, which is 4.5 billion Slovak korunas.
Stock exchange listing
This is not very common at present. The obvious question is how the investor will gain a return on the investment it makes in the company. Of the various forms of exits, the most suitable seems to be sale of shares to the original owners (buy-back) or sale to a strategic investor (trade sale). Sometimes the company will be purchased by another financial investor. Recently, the number of forms of exit, where the company enters the stock market, has increased. This, however, applies to projects for which the price ranges in the billions, and at least in the hundreds of millions of Slovak korunas. For a medium-sized company, the stock exchange is not suitable. An alternative situation may be, for example, in Poland. There the financial market is developing in another direction and the stock exchange may be entered into by smaller firms compared to Slovakia, as well as by means of the new market NewConnect, which focuses on start-up companies.
Make the first step.
If you decide that the involvement of a private equity investor is the right thing for your company, you would then choose the investment company that you will address with your offer. There are several of them in the Slovak market and each has a specific focus. Study their websites and find out about projects they are already involved in. Research not only the area but also the amount of investment that you would expect from them. You should also be interested in the region they specialise in, in case you want to use the investor’s resources to support exports. “You can address the financial investor at any time, but there is a rule that luck favours the ready,” says Karol Stefulik, project manager of Arca Capital Group. Even before the first contact, prepare a brief presentation of a new business plan containing a description of the concept of business activity, market opportunities, production processes, marketing and sales activities. You should also introduce the company’s management, the intended form of project financing and a financial plan for at least three years in advance. Continual proportion definitely stands here – the more information the investor has at the beginning, the more effective will be its progress within the investment process.