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May 12 2010 | 10:24am ET
Founded in 1994, Slovakia’s Penta Investments began its rapid expansion in 1997 with the takeover of VÚB Kupón, the largest investment fund in the country. It parlayed stakes in Slovak blue chips – banks, insurers, steelmakers – into more money for more investments. In 2008, Penta had consolidated revenues of €1.9 billion (US$2.5 billion) and investments across a broad range of sectors in more than 10 countries.
FINalternatives' Mary Campbell spoke with Managing Partner Jaroslav Haščák this week about the fund, which hopes to become one of the largest mid-sized investment funds in Central Europe by 2013.
Penta Investments has five shareholders, the original founders, but no other investors, is that right?
Correct, yeah, it’s kind of an evergreen fund, so we do not raise funds, just the holding company and we are recycling it. We are not approaching third parties.
Is that situation ever likely to change?
Not at least until the end of 2012. We’ve got a lot of possibilities, in terms of exits and new investments and we appreciate our flexibility and independence in deciding about new investments and our portfolio.
Penta has invested in a broad range of companies across sectors like healthcare, manufacturing, entertainment, telecommunications and more. How do you choose the companies you invest in?
When we look at potential new investments, of course we do the homework – this top-down analyzing – and we are looking at the sector, we are looking at the value drivers. But the key differentiating point is whether there is something we could improve, as we say, with our own hands. So we have to find something with the company which is really do-able from Penta’s perspective...We never rely on the trends related to the particular sector, whether there will be out-performing growth in the sector; we always rely on something which is just in our own hands – our own ability to move things forward. So this is very important. We either have to find something in the costs part of the company...or in the sales, or in the consolidation. Before we make the investment, we need to know quite precisely what we are intending to do with the company – something which is not dependent on forces outside our control.
...We invest in various sectors, and even sectors which are down in the cycle. In terms of the size of the company we invest in, our criteria for size is between €100 million to €150 million ($130 million-$190 million) of enterprise value, which is considered to be, say, mid-sized in Central and Eastern Europe. And in terms of what kind of a company we are looking for, prevailing, I’d say, is the consolidation story – so we are buying the platform and then, within, let’s say, two, three, four or five years we are adding to it and building a regional player from a very small platform. So this [accounts] for most of the businesses we have now in our portfolio. And the second biggest type of deal is the restructuring or turnaround story, but this is not our primary focus.
When you do decide to attempt a turnaround, what does it involve?
It differs substantially – it depends on what type of a company, it depends on what type of industry, etc, etc. But from this perspective, we are really very hands on, in many cases we are working along with our top management, or we are even taking, for a limited period of time, a position in the top management and we focus on strategy, on operations, on human resources, on every important daily aspect of a company's performance. So we are really trying to do our best to help the company on the cost side, on the sales side, in positioning, or in strategy.
Take the example of the aluminum smelter ZSNP in Slovakia. Basically, we acquired the company, which was at that time close to bankruptcy. It consisted of the holding company called ZSNP, and it was an aluminum smelter but besides that there were other companies which were processing the aluminum and making some semi-products from it. We decided to reduce the number of employees by, let’s say, 50% in just one half year and we sold 50% of non-core assets to strategic players. We did a lot of internal restructuring and appointed a completely new management as well. It finally resulted in black figures for the company, we helped to found the industry park which employs 1,500 more people than before our entrance. It is a really long story but it’s typical of what we do in turnarounds.
You’ve also been involved in some start-ups, can you tell me something about that?
Around 2003, we found the acquisitions to be overestimated in terms of share price, so we started to invest in start-ups. We had seven start-ups in our portfolio, but in general, with start-ups, it’s quite difficult, because we found that four years – which is our typical investment horizon – is not enough for building up a sizeable company in a particular industry. So now, we do not exclude it, but we want to be more selective in the case of start-ups.
Penta is currently very involved in the health sector, particularly health insurance. Was this a sector in which you felt there was something you could do to ‘move things forward?’
Yes, exactly, the health sector is a special sector, by definition in Central Europe – and you asked how much of the inefficiency could be still attributed to the years of socialism in Central Europe and the health sector is probably one of the worst. I mean, generally speaking, this applies not just to health insurance but to hospitals, to outpatient care, to medical labs, to other sub-sectors – there’s between 10% to 30% inefficiency and waste.
[The reason] why we have invested in the health sector [is] the global trend is good. The demography and the elderly population will give it huge support. We estimate that in comparison to GDP growth the health sector will grow twofold and probably threefold in some particular areas. So a very good global trend. And mostly, in this part of the world, most of the health care sector is still run by the state, so 80% is still in state hands, so there is huge inefficiency, and taking into consideration the way public finances will develop, and the sovereign debt crisis, etc, I think the only way to improve it is to attract private capital to all sub-sectors in health care including health insurance. That’s why, four years ago, we started to invest in the health care sector. And every two or three months we’re having strategic discussions about how we are going to improve the operations of our particular portfolio companies operating in the health care sector.
We have invested in the health care sector in Slovakia, Czech Republic, and Poland. And we are looking in Romania, we are looking in Hungary, but so far we have invested in just these three countries.
Do you think being based in the region gives you an advantage when you’re competing against foreign investors?
Definitely, we are local insiders. From this perspective, we consider ourselves to be the local insider in the Czech Republic, in Slovakia, in Poland, in Hungary – we know these countries, we know the markets, we know how to deal with the authorities, we understand the culture of the customer...so we have a huge advantage compared to, say, London-based private equity companies or those companies that don’t have local offices here.
How have things changed for you since 2004, when Slovakia (and the Czech Republic, Hungary, and Poland) entered the EU?
It’s become better...actually, it’s a little bit more complicated, but to make a long story short, at least for us, local insiders as I mentioned, this Central European region provides us with a very good balance of growth – which, in our estimation for next 15 years would be somewhere between 2.5% up to 3.5% which is, let’s say, two times more than in Western part of the world.
So on the one hand, you have quite decent growth, on the other hand I think that the stability of the region, the fact that, for instance, here in Slovakia we entered the euro a year ago – but not just the currency stability, I mean the legislation situation and [the] entrepreneurial environment has improved substantially and there is a very good balance between growth and the risk related to this growth, so that’s why I think it’s very good to be here. As I say, we understand this region and the forces behind it, and it makes our long-term strategy in terms of IRR [internal rate of return] requirement quite well balanced.