THE ROLE OF VENTURE CAPITAL AND PRIVATE EQUITY IN THE HUNGARIAN ECONOMY
As regards the annual volume of venture capital and private equity investments in terms of percentage of annual GDP, during the past 20 years Hungary has been in a reputable position not only within the CEE region but also among the EU member states. During this period, venture capital and private equity funds invested close to 4 billion US Dollars into more than 400 Hungarian enterprises. However, so-called buyout transactions have accounted for about two thirds of the total volume of those investments, which were aimed at the acquisition of shares in mature companies that have been operating profitably for several years. The volume of investments in early and expansive stage companies was significantly lower. Only about 30% of the total volume of investments was directed at companies in the expansive stage and less than 5% at early stage companies. This is also reflected by the fact that over the last two decades slightly more than 10% of the total volume of venture capital and private equity investments came from funds focusing on early stage companies. The remaining close to 90% was invested by private equity funds focusing on more mature companies with greater economic strength. As for the number of transactions, companies in the expansive stage were targeted by the largest number of venture capital and private equity investments: such investments accounted for almost 60% of Hungarian transactions. Nearly a third of transactions involved early stage companies. Buy-out deals represented approximately 10% of transactions by number.
The seeming discrepancy between transaction numbers and volume is due to the fact that – naturally – the earlier the stage an enterprise is in, the smaller the amount necessary for it to get to the next stage.
In terms of investments into early and expansive stage (and especially early stage) companies, Hungary has one of the lowest volumes in Europe. The number of Hungarian companies that have received venture capital or private equity funding is less than 0.2 per one hundred. It is interesting to note that a substantial percentage of the amounts invested in early stage businesses originates from investors with a Hungarian governmental
background. Transactions made by investors with a Hungarian governmental background account for about 50% of the total number of venture capital and
private equity transactions, while in terms of volume they represent 17.5%.
The situation has been improved by the appearance of investments by venture capital funds utilizing (mainly) EU funding through the JEREMIE program, giving an impetus mainly to early stage businesses by providing alternative financing sources in a market where the availability of debt financing is limited.
According to the data provided by Magyar Vállalkozásfinanszírozási Zrt. (MV Zrt.), the funding intermediary of the JEREMIE program, until the end of 2011 HUF 12,2 billion worth of investments were decided upon by fund managers, and agreements were entered into with 44 companies, meaning that the average equity invested per company was HUF 277 million. Following the launch of the program, almost one year had to pass before investments could commence, but beginning with 2011 the amount of equity invested has risen steadily. This is in great part due to the fact that fund managers needed this time to establish the network necessary for finding good projects. However, the funds available under the JEREMIE program are limited. So far 8 fund managers were able to receive HUF 31.5 billion worth of funds through the MV Zrt., and were able to collect a total of HUF 13 billion on top of that in additional investments. In the next planned JEREMIE program it will be possible to apply for a further HUF 28.5 billion as repayable EU grants through MV Zrt., which, together with private investments, could total HUF 41 billion in new funds.
Increased venture capital and private equity investments are also likely to result in the creation of additional jobs within the Hungarian venture capital and private equity industry itself, which would in turn also contribute to the growth of the Hungarian economy.
Three areas seems to be relevant where Hungarian government could help in strengthening the role of venture capital and private equity in the economy
- tax issues;
- business incubation programs; and
- the institutional regulation of Hungarian venture capital funds and fund- managers.
This blog post is an extract of the Hungarian Venture Capital and Private Equity Association’s (HVCA) Venture Capital and Private Equity Industry Position Paper
You can read the full paper here