The Private Equity market in Bulgaria

Article by Kaloyan Kirilov for b2b Magazine

private equity market in bulgariaBulgaria is a small country and our market usually stays away from the light of the Private Equity funds. The whole industry is very new to Bulgaria and it started at the end of 90s of 20th century with the first players being ECM (fund supported by EBRD), Bulgarian-American Enterprise Fund and the Greek Global Finance. The industry picked up in the period of 2003-2009 when many new PE funds entered the Bulgarian market either through real transactions or by setting up operating offices in Bulgaria. The Bulgarian economy was growing and the companies needed additional capital and alternatives from the bank financing. During that period the average GDP growth of Bulgaria was 5-6% annually, the foreign direct investments reached 20-25% of the GDP and all investors were bullish on the economy. The PE Fund managers didn’t want to fall behind their direct competitors. These three trends were the main reason why the PE funds took the Bulgarian market seriously as a place for investments despite of the small consumer market and the comparatively small transactions which were taking place. As a result the following funds had offices in Bulgaria at that time:

  • Global Finance
  • GED
  • SigmaBleyzer
  • Bedminster Capital
  • BAF
  • SEAF
  • Bancroft
  • Equest
  • Middle Europe Investments
  • NBGI Private Equity

There were also some anchor deals by bigger funds which didn’t have offices here but managed to make some investments. Perhaps the most successful is the investment of AIG in the consumer finance firm Jet Finance. When AIG was entering the company, the company valuation was about 10 mill euros and they were not so happy with that fact but because of the above three trends they said to themselves: “Why not?” When they sold it at the end of 2007 to BNP Paribas for 170 mill euros everybody was happy. Advent International and Enterprise Investors made and investment in BTC; Advent International bought a majority stake in the tiles producer Kai Group; Warburg Pincus bought the cable operator Eurocom; Mezzanine Management made several deals in Bulgaria, etc.

In 2009 everything started to change with the beginning of the crisis. The PE funds managers became more cautious in selecting their investments and more conservative in their valuations. Most of the Bulgarian companies had some problems with the financing and the drop in their sales, which worsened their financials and many of them were not attractive anymore to the PE Funds. As a result, the fund managers couldn’t find enough deals and their pipeline was not so strong. Because of that they were forced to close their offices in Bulgaria and at the moment only two PE Funds have operating offices in Bulgaria:

  1. Access Capital, which have one deal in Bulgaria
  2. Oriens Management which has haved office for four years but haven’t made an investment yet.

Of course if a person talks to some investors, M&A professionals, lawyers, etc at various forums and events, he will hear from many fund managers how interested they are in the Bulgarian market and how eager they are to do some deals here. However, the facts don’t support these statements. Bulgaria offers some great investment opportunities and great companies and we had several investments made during the last four years but almost all of them were bigger companies and the investments were made mainly by PE Funds, which don’t have local offices. This shows us that they don’t find the Bulgarian market as a key one. For example, Advent International bought the mineral water producer Devin, CVC bought the veterinary medicine producer Biovet and together with NBGI bought the confectionery producer Prestige-96, ADM capital together with EBRD bought a stake in Prista Oil, EQT bought the cable operator Blizoo, etc. The interesting moment here is why the trend after the financial crisis reversed? What happened? Is it the financial crisis, which is the problem? We believe that the problems, which make it hard for the PE funds to make more deals in Bulgaria can be grouped in two sets: related to the Bulgarian firms, related to the PE funds. Let’s discuss the two groups in details:

1. Problems related to the Bulgarian entrepreneurs:

  • Some Bulgarian companies lack the financial transparency in their financial statements. This make it hard for the fund managers to make an exact valuation of the firm and very often there is big difference between the official financial statements and what the entrepreneurs claims in their management reports
  • Some entrepreneurs believe that if they are approached by a PE fund this means that their company is very special and they have unrealistic expectations for valuations. Normal saying is: “The fund came to me. I didn’t ask him. So he has to pay what I want or there is no deal”
  • A significant part of the companies don’t have written business plans, forecasted financials, clear strategy what to do and where to be in three years. Everything is in the head of the entrepreneur
  • Many owners believe that a financial partner cannot add much value to their firm because how come a financial guy will know anything about running an injection molding factory or a retail chain.
  • The good Bulgarian companies have access to bank financing at very good rates (4%-5% annually).

2. Problems related to the PE funds

  • The biggest problem is the size. It is normal when you have 500 mill euros fund to want to invest at least 15-20 mill euros equity per transaction. However, Bulgaria is a small country and if a fund sticks to this cut off number then he is left with a pool of 50-100 companies in Bulgaria, which meet this criterion (not including the multinationals in Bulgaria). In other words, the pool becomes extremely small.
  • The fund managers are used to work with multinational firms with strong corporate governance. They expect to go to a Bulgarian company and to receive written business plan, forecasted statements, written strategy, data rooms, etc. However this doesn’t happen in many cases and they have to be persistent in order to close the deal. Local help from intermediaries also helps.
  • The fund managers would love to have a very good profitable company where they participate in the growth. They want to come once per month on a board meeting, see how everything is good, and go home. Very few Bulgarian companies are like this. Most entrepreneurs are self made businessmen and they need real help and work from their partner.

It is clear that Bulgaria is not an island and the companies here compete with all other CEE companies for the PE money and the fund managers prefer to do deals where they don’t have to invest so much resources and time in a deal (Most funds have teams of less than 10 people) but this is the current situation on the Bulgarian market. Either you have to accept and act according to it or just you don’t do deals here.

What is next?

The business community in Bulgaria has very high expectations for the three funds, which will start any moment in Bulgaria under the JEREMIE program of EIF. We will have a VC Fund, a PE growth fund, and a Mezzanine fund. All of them will be small (less than 100 mill euros funds) and all of them will have to make investments just in Bulgaria. Because of the small funds they will be able to make investments of 1-5 mill euros per company where the pool of potential targets is much bigger. Under the same program, the government already started two accelerated/seed funds, whose investments we hope to turn into profitable companies and later on to feed up the PE funds with projects. We also hope that within the next 2-3 years many of the Bulgarian entrepreneurs will realize that they have to change the way they run their businesses and not run them as craftsmen. This will attract more PE funds back to Bulgaria because there will be more interesting companies to choose from.

Synergy Group is a leading Bulgarian M&A advisory firm, which was founded in 2005. Last year the company opened its offices in Turkey and in China.

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