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Jacek Fracek, journalist at Business Insider Polska: Since 2020, Innova has conducted only one transaction in Poland per year. Previously, there were usually two. Is it increasingly difficult to find a large company that will provide positive exit opportunities from investments in industries in which Innova is interested?
Innova Capital carries out transactions not only in Poland, so these statistics are not entirely consistent with reality. We try to complete at least three transactions per year, taking into account, of course, transactions in the entire CEE region (CEE). In 2023 alone, we completed three new investments – two companies from Romania and one from Poland.
We must remember that we do not only make acquisitions or exit transactions as a fund, but we also try to consolidate the operating segments of our portfolio companies. We also classify these activities as transactions because the processes associated with them are almost identical to those in classic cases of asset acquisition or sale.
See also: War and inflation led to a freeze in transactions on the private equity market. The expert depends on the melting of ice
There is no shortage of transactions in the market, but we must also remember that the market is subject to cyclical fluctuations. The last few years have been an extraordinary period, linked first to the Covid-19 pandemic and then to the Russian invasion of Ukraine, which had a clear impact on investment sentiment. As a fund, we operate in the Central and Eastern European region and this is the natural environment for our activities, but the events of recent years have certainly had an impact on investors from the USA or Western European countries, who have entered a period of a certain pause. In general, we adhere to the principle that you should try to build up and exit your portfolio at a consistent pace, although external factors will always affect this.
Does a change in government affect the market?
Judging by the market reaction and exchange rate movements on the Polish currency, we can conclude that the level of investor optimism has increased, and therefore we can expect this trend to continue, despite the challenges ahead. In our industry, the predictability and stability of legal and financial solutions are extremely important.
The transcript continues below the video
As a rule, we should have a fairly positive set of factors for the near future – the experience of many years of investing in Poland shows that the economy is developing and the markets are growing somewhat “in spite of” politics. This is largely due to the capabilities and skills of entrepreneurs and corporate boards, who have overcome many challenges in recent years and will benefit from this experience in the future.
The experience of many years of investing in Poland shows that the economy is developing and the markets are growing to some extent “in spite of” politics
Is family business and succession, i.e. the transfer of the family business to successors, a new strategic direction for Innova Capital's activities, like the deal with R-Gol?
We are convinced that it is worth providing support not only to Polish companies, but also to companies in the entire Central and Eastern European region, supporting them in the subsequent stages of development. This investment area looks very attractive, especially due to the large number of family businesses in Poland, many of which have been established over the past 30 years.
The topic of succession has become more important because companies are not always properly prepared for this process in the context of their family structure, which results from various reasons. Therefore, companies must develop several paths to plan for the future, and cooperation with a private equity fund is one of the available options.
See also: The owner of Żabka changes his plans. Uncertainty in the market
Over the past few years we have executed several deals in which we invested in family businesses. An example of this is the recent investment in R-Gol, a specialist football equipment distributor. In this case, it is not just a matter of generational succession, because in this company we are dealing with a relatively young ownership and management team that needs support in international development. Therefore, they were looking for a partner who, in addition to financing, could offer the right expertise and competencies.
Another deal with a similar structure concerns the cosmetics brand Bielenda, whose founder has decided to retire from the business, but the company is still run by members of her family along with our fund. The company is doing very well, as evidenced by its recent acquisition of the Tołpa brand.
Is it already a market trend that private family businesses are looking for capital investors? Or perhaps funds are looking more for new investment opportunities?
It seems that both companies Family and money are looking for such transactions. Companies are relatively often faced with the challenge of planning the next ten to fifteen years of development, and some of them come to the conclusion that it will be easier for them to grow if they have a financial and substantive partner. So both sides look out for each other, and as a fund we love such transactions. However, it is also important that the two parties are not doomed to each other – what is important here is the correct matching.
Is the investment exit perspective in Innova's case always the same, i.e. always a specific number of years, or perhaps a group of years? Are there other factors that determine this – what are they?
We typically calibrate our investments to periods of around five years – and we believe this perspective is appropriate. In consultation with company owners, we analyze business options, although there are always many factors that influence our decisions. These include aspects such as market sentiment, valuation levels, investor interest, or a potential market halt.
See also: Behind the scenes fighting to take over VeloBank. It would be a Polish-American conflict
In private transactions, the level of stock exchange valuations is of great importance, because it allows checking whether the proposed valuations are consistent with market levels. We must also remember that public markets can also be a way to exit an investment, for example through an initial public offering, although this mechanism is also subject to cyclical changes – there were a lot of such transactions, but there were also periods of a few From the exporters. It is worth noting that a strong public market helps implement “exits.”
What are the minimum transaction values concluded by Inova Capital?
The minimum amounts depend on the fund we have at our disposal at a given time. We want to allocate our new fund, Innova/7, worth up to €350 million, to around 10-12 investments. However, this is a relatively flexible coefficient, up and down, although we also apply strict limits that do not allow us to invest more than a certain percentage of the fund value in a single company. Therefore, we expect the real values of our investments to be between EUR 25-40 million, and in the event of potentially larger investments, the option to participate in transactions with our investors is also available.
What industries is Innova Capital interested in?
We are a so-called general fund, that is, a fund that seeks to diversify its investment portfolio, also with respect to industries. This approach greatly helps us manage risks, which has been confirmed during the pandemic and the ongoing war. Our Innova/6 fund has handled disruption well because it is very well diversified. We are trying to follow the same path with the Innova/7 box.
While we favor specific sectors, focusing primarily on enterprise services, financial services, industrial companies, consumer goods and services, and healthcare, we have a particular focus on technology, which cuts across almost all industries and business models. Our goal is to maintain a diversified portfolio, which allows us to effectively reduce potential risks.
What is currently happening in the local capital investment market, especially in private equity?
It can be said that the market is relatively good and there is continuous activity, also on the supply side, which is confirmed by reports of new deals in the media. The geopolitical situation is one of the factors of uncertainty and risk, which leads to a slowdown in the market, but the behavior of the Wall Street Stock Exchange shows that stock market indices are at a similar or even higher level than they were before the war. Importantly, there was also a significant strengthening of our currency following the fall elections.
The bottom line is that investment prospects are favorable, and inflation should stabilize and then fall, which will affect the cost of bank debt. The purchasing power of Polish consumers is also constantly growing, which should make the market more favorable for subsequent transactions.
What awaits us in the market in 2024?
There is some gradual optimism in the market in the context of macroeconomic indicators, which of course does not exclude concerns, especially of a geopolitical nature. However, companies that have successfully dealt with many challenges in recent years, reviewed their operations and changed their market strategies, and thus acquired completely new skills, will certainly be better equipped to seize new opportunities.
Interviewed by: Jacek Fracek, journalist at Business Insider Polska
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