Author: František Mašek
Source: www.finmag.cz, 2.10.2008

Current events on the financial and other markets may be causing traumas but they are also offering attractive investment opportunities. The closed-end investment fund CEE from Arca Capital represents one of these opportunities. This is a qualified investor fund, designed for institutional and other experienced investors who are fully aware of what they are doing and are willing to accept minimum entry to the investment fund set at five million crowns.

Czech Republic, Slovakia and Ukraine
CEE in the title of the fund clearly indicates that it is focused on Central and Eastern Europe, where it specialises in locating private equity projects and also projects in the field of real estate. Its target is investment in small and medium-sized enterprises. nOne advantage of the fund could be that, up to now, the sole shareholder, Arca Capital, also operates as a private equity capital company in its own right. It is trying, therefore, to make the most of all skinds of market opportunities and to achieve attractive investment returns, generally over the long-term.
Arca currently focuses on the Czech Republic, Slovak Republic and Ukraine. According to its chief, Pavol Krúpa, the group should, subsequently, – he was talking about a five year period – be enlarged by including other countries from the region. As stated by Pavel Makovec, a member of the executive board of the fund, the Arca product, when compared to Komerčná banka or ČSOB which use similar funds within their own financial groups (their advantage is five percent taxation), is also designed for other investors.
The goal of the fund is to create a substantial portfolio which is both sectorally and territorially diverse. According to Makovec, those companies in whose activities Arca Capital has a part, as, for example, on-line shop Kasa.cz, grocery producer Natura or Marila Balírny may also participate. Those who buy shares in the fund become its shareholders.
A larger amount of money invested here could thus enable the owner to co-determine fund investment policy. Nevertheless, the people in Arca are not concerned about losing control of the fund. The fund regulations contain built-in protection against a hostile takeover. In accordance with the present legislation, any changes in the fund management must first be approved by the controller, i.e. ČNB.

Also for individuals
Czech legislation classifies as qualified investors institutional ones, such as private financial groups, banks, trust companies, pension funds or corporations and institutions. Natural persons are also eligible to invest in the fund, with the minimum investment of five million crowns. “However, they will have to declare in writing that they regard themselves as qualified investors, have experience in similar kinds of investment and are aware of the risks associated with such investments. Unlike other countries, Czech law makes no attempt to regulate investment by imposing tests to be completed by investors to measure their knowledge,” stated Makovec.
The intended fund is aimed at making the most of attractive market opportunities, but aggressive strategies are not planned. Makovec did not specify any details. It is up to shareholders whether the fund profit would be reinvested or paid out to investors after a certain time in the form of dividends.
The fund will be self-administered, so investors will not pay any administration fees or even any admission or departure fee. It is designed for ten years. Up to the end of the year, it will be possible to enter it at the nominal value, and thereafter for the current market value (private capital value per share) taking the planned capital accumulation into account. The total fund value should reach a level of three to five billion crowns. Pre-term entry is possible only in cases where shares are bought from the investor–shareholder by another person. However, according to Makovec, the transaction must be approved by the fund management. If it does not agree, the fund should re-purchase the shares at the current market value.
Makovec refuses to be drawn on what average annual return the fund could achieve. He believes that the number could be in double digits.
The profitability of some specific Arca projects is said to attain 25-45 % per annum. This is a high ratio if we take into consideration the estimates which calculate that the average private capital fund profitability in Europe since 1980 has been around 10.8%. The ratio of similar Central-European funds is said to be at the level of about fifteen percent. The fund opens with a capital of 50 million crowns, which is the legally determined minimum that qualified investor funds need to attain within a period of one year, otherwise they are dissolved by ČNB.This is also the case with some qualified investor funds, for example Akra Investiční společnosti and other trust companies.
It is the first private capital fund focused on progressive companies which has the attributes of a qualified investor fund and in which shares can be bought by such investors.
This is a remarkable move by Arca Capital, which is best known to the public for its purchase of shares in Moravia Energo from the former Czech Prime Minister, Stanislav Gross, which were later sold to billionaire Tomáš Chrenko. This type of fund is not on offer to the general public; it was presented to the press as a product of interest.
It is therefore targeted at specific customers. Smaller investors with a higher risk aversion may regret that no such opportunity is also available to them.