Special characteristics of work in Private Equity, a role of the crisis, future tendencies… – we ask about that the companies from the branch.
The specificity of acquisitions in Poland
Polish private equity market is very competitive. 5 types of investors simultaneously take part in the majority of the transactions in Poland. First of all – equity funds, present in most tenders, and almost all the leading players in Europe are active in Poland. The scale of the market attracts strong strategic investors. Also the participation of the individual investors has been observed within the last two years. Especially state-owned companies count in the privatizations. Warsaw Stock Exchange is another alternative. Therefore, flexibility and local approach in the development of the transaction are the key success factors. Given the difficulties in obtaining a loan and uncertain conditions prevailing on stock markets, the success relies on the possibility of financing the acquisition using own funds”.
Despite the economic slowdown the outlook for private equity investments is rated as excellent. In the Polish market, still there is a large number of entities, which are interested in such a form of capital acquisition, while on the other hand, they have enormous growth potential. In addition, the uncertainty in the public equity markets increases the attractiveness of the private markets. In times of crisis, investors are primarily interested in capital protection, which means that they want to have an active influence on the creation of assets under management. Among other things, this is why private equity funds, which until recently were considered as increased risk investments, are so popular among investors. This data is based on the European Private Equity and Venture Capital Association – in 2011, private equity funds invested over EUR 680 m in Polish companies and 57 companies benefited from this form of financing.
Private equity, as a long-term asset class with absolute rate of return should be active regardless of hstrong economic turmoil, opens up new investment opportunities in industries or companies that the during “peaceful” times were not available or not interested in selling. On the other hand, the crisis usually results in a strong reduction of debt financing, as well as the expectation gap between buyers and sellers, which translates into the ability to close transactions. The crisis for private equity should not therefore be considered as an obstacle or an excuse to cease the activity. Consequently, the supporting and hindering factors counteract each other.
Sectors that will play an important role in the private equity industry.
*European Private Equity Outlook 2012, Roland Berger, February 2012
The specific character of work in PE branch
Private equity funds are the important participants of the economic market in Poland. They provide financing for companies and businesses that invest or assist in obtaining such financing, support their development (also through the introduction of the external experts), implement modern management models, strengthen their competitive position. In the era of turmoil and crisis in the financial markets, the investments of the private equity funds in the private market transactions remain the significant drive of the economy. Private equity investments are very dynamic, and the timing of the investments is often determined by the internal requirements and regulations of the given fund, forcing the parties to finalize the transactions within short and strict deadlines. This clearly affects the expectations towards the availability and efficiency in relation to advisers (including legal or financial advisers). This, in turn, makes private equity funds are considered to be one of the more demanding clients, which also allow working on very interesting, complex and high-profile transactions.
The importance of due diligence to successful Private Equity firms
The global economic downturn, which started in 2007, has yet to abate and one of the things it exposed was the harsh reality of flawed financial practices. These same practices would once have been considered acceptable in many financial firms, and the private equity industry certainly felt the pain.When credit tightened as a result of more conservative financial policies introduced across many countries in the global economy, numerous private equity firms found it more difficult to use credit leverage to close deals. As credit dried up, deal flow decreased and portfolio performance shrunk, which meant investors’ earnings also dropped. When comparing the attributes of the private equity firms that were not successful during the most recent recession with those who managed to grow, several obvious business mistakes become apparent. Perhaps one of the most obvious mistakes was the failure to prepare for and complete effective due diligence on companies being added to portfolios.Failure to prepare for or complete rigorous due diligence on portfolio companies certainly stung some private equity firms during the global downturn. A lack of due diligence with existing portfolio companies also meant that many of the businesses added to private equity portfolios during strong growth periods proved to be more economically sensitive once the recession hit. The due diligence, which had not been performed on these companies, would have uncovered many of these sensitivities.
This failure to prepare typically fell into one of two areas: Companies were added from economically sensitive industries, which were then heavily impacted by the recession, or companies failed to negotiate and secure flexible contracts for raw material and component prices when they changed. Many portfolio companies could not pass along corresponding cost increases when material prices went up or could not pass along cost savings as prices fell due to rigid contract agreements.
When dealing with rapidly changing market conditions, private equity firms cannot afford to overlook due diligence, it’s imperative to their health and ultimate success, but they also can’t afford to miss an opportunity to gain the winning edge when a golden opportunity arises.
The winners in this volatile market are the ones that keep critical information at their fingertips, using document repositories and virtual data rooms to maintain confidential documentation for ongoing due diligence activities, and they are therefore the firms that are ready to move the moment an opportunity arises. These same firms are the ones who understand the value and importance of thorough due diligence on a potential portfolio company. Now, more than ever, preparing for transactions and for due diligence processes will help secure success and the ability to weather any future economic storms.