BR INTERVIEW. Polish CVI ready to invest EUR 200 million in Romanian firms but struggles to find attractive businesses

Sorin Melenciuc 22/05/2019 | 11:53

Polish investment group Credit Value Investments (CVI) has a dedicated budget of EUR 200 million for Romanian companies operating in fast-growing sectors such as FMCG or real estate, but has invested in just 3 companies so far as it struggles to find “investable” and attractive businesses on the local market.

Ciprian Nicolae, responsible for CVI’s private debt presence in CEE, said in an interview with Business Review that he does not think it will be possible to invest the entire dedicated budget as few local businesses are eligible for financing due to small size, lack of transparency or other factors.

“In an ideal case scenario, we would like to conduct at least 10 transactions per year in Romania and we would like to reach this goal in the next 2 years,” Ciprian Nicolae told BR.

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 The full interview with Ciprian Nicolae:

 You have already invested in major companies in Romania. What are the main requirements for a Romanian company to be considered attractive for a CVI investment?

We have so far invested in 3 major companies in Romania – Impact SA and One United Properties, both from the residential real estate sector, and Aaylex Group – the poultry producer behind the CocoRico brand.

When we analyze companies in order to determine if they are ‘investable’ and attractive for us, the first criterion we apply is always quantitative and covers the size of the business (minimum a few millions of euros in turnover) as well as the size of financing required – at least EUR 2-3 million debt.

Our sweet spot is between EUR 5-20 million per deal but because of the structure of the Romanian market, we have agreed to adjust our strategy in order to be able to also meet the needs of smaller SMEs and thus our investments can even start at EUR 2 million.

The second criterion is more qualitative and relates to the transparency of the entrepreneur and the attractiveness of the business overall. Taking into consideration the higher risk already adherent to debt financing, our screening process is always a thorough one, which requires a large level of openness and transparency from the entrepreneurs themselves.

This is why to us it is very important that the entrepreneur be open to building a partnership with us. Lack of transparency, delays in providing information, concealing significant information, changing terms of the deals after they are negotiated – these are all deal breakers for us and we see them as the biggest barriers or hinderances to the investor-entrepreneur relationship and, as a result, to receiving the needed capital.

I always like to underline this – we have the same goals as entrepreneurs – we want to help them grow and maximize their business potential as only then do we both benefit.

We are open to provide financing for all kinds of goals – working capital, capital expenditure and investments, acquisitions, buyouts, refinancing of existing debt or even payment of additional dividends, but we always require a sound business plan from our partners that shows how can it support the company’s growth prospects.

Once we go past the first two criteria, we analyze the business model drivers, look for opportunities, analyze the competition and of course carry out advanced financial analysis that looks at profitability, cost, balance sheet structure, liquidity, cash flow and financial metrics and rating – we take them all into consideration prior to making an official decision on whether the company meets our investment criteria.

Here the criteria usually vary from company to company, or at least from one industry to another, but overall our goal is to invest in companies that have growth prospects and that, with our financing, can speed up their development.

Now, to put all these criteria in numbers – according to CITR’s study from Q1 2018 on Romanian business environment, we estimate that currently around 3 percent or approximately 20,000 enterprises in Romania qualify for our financing, which is a relatively low number and that is before we start to apply other conditions – such as rentability, transparency, attractiveness of the sector as well as the purpose for obtaining capital, which means that in reality the pool of companies that we can consider investing is even smaller.

Nonetheless, we are extremely positive about the economic potential of Romania and we believe that many companies that are too small for our financing will reach their full potential within a few years and we will be eligible to finance them.

For this specific reason we are consider our presence on the Romanian market as rather having a medium- to long-term objectives, which means at this point we focus on educating and informing the market about our financing solution and we believe that these relationships that we build today will fructify in the future.

Why do you consider FMCG, manufacturing and real estate as the most attractive sectors in Romania for your investment? Are there other attractive sectors for you?

This focus is dictated by the Romania’s economic growth, which in the past years was largely driven by the household consumption but, at the same time, we are open to analyzing companies coming from all possible sectors.

With FMCG, we like the sector because the consumption in Romania is growing as a result of growing salaries and it is not expected to stop.

I would say this is the most attractive sector of the Romanian economy overall, and we are not the only investor interested in this sector in Romania – we have seen many transactions in this area in the past decade, be it foreign competitors taking over local businesses or international funds taking strategic control of such companies.

On the other hand, we like real estate because originally our focus has been on this sector also in other markets, including Poland. Developers are in need of access to large capital, which in many cases cannot be fully provided by the banks.

We see a very dynamic development of this sector in Romania, with the increase being primarily driven by the strong demand for new apartments and housing in the capital and other medium-sized cities in Romania, paired with a progressive income increase, resulting in higher consumption.

Of course, each company is different, and we cannot generalize this discussion because we can have attractive sector but not performing or under-performing business, and because of that, we will not take it into consideration.

But overall, our preference for certain sectors comes firstly from the economic cycle in the given country, thus our focus on consumption-driven sectors in Romania. Additionally, we like to invest in sectors which we understand.

Our investment team counts 15 experts and analysts, having a wide array of interest but we are more drawn to some sectors than others. So, as an example, because of this and also the knowledge we have from previous deals, we would rather invest in consumer goods, trade, construction or medical sectors rather than renewable energy, simply because we lack sufficient experience in the latter.

How would you characterize the business environment in Romania compared to other countries in the region (including Poland)?

We entered Romania as it is the second largest market in the CEE region and we believe it will follow the trajectory of Poland since it is a very fast-growing economy, with much potential. It Is also the second largest market, right after Poland, in the CEE, and because of this immense potential, we very much like Romania.

The biggest difference, for sure, between Polish and Romanian business environment is the fact that in Romania traditional bank financing remains the most popular means of financing businesses, regardless of the fact that it offers limited leverage and flexibility, a long and strict investment process and is generally not available for financing small and medium-sized M&A tickets.

Romanian entrepreneurs are very highly dependent from the bank financing and rarely consider equity financing or alternatives of the debt financing, such as through the instrument that we offer – this I would say is the biggest difference between the Romanian and Polish market.

We can also see this difference very clearly when looking at the difference between the capital markets and the number of companies listed on the Warsaw Stock Exchange’s Main and Alternative markets, versus the Bucharest Stock Exchange and AeRO market.

Other than that, of course the size of the market, the diversity of the issuers listed, the overall interest in capital markets from both entrepreneurs and investors, are the biggest differences between Romania and Poland.

I have nonetheless seen however a raising interest in the recent years in capital markets financing in Romania, which is a good sign, showing that the market is developing and reaching a certain degree of maturity.

You have announced a total investment budget of EUR 200 million for Romania. How much time you estimate it will take to invest the whole amount?

We already had a dedicated budget for EUR 200 million for 2018 but because of several reasons, we did not manage to spend it all.

This is why, while I really wish to invest all this money in Romania realistically, I do not think it will be possible. In an ideal case scenario, we would like to realize at least 10 transactions in Romania per year and we would like to reach this goal in the next 2 years.

One of the biggest challenges we see in Romania is the speed at which the deals are progressing. We are capable, and we have done it already in the past, of closing deals as soon as within few weeks (4-8 weeks) but this is assuming the company is focused on the process, has some key documentation already in place at the beginning of negotiation and the contact person is responding swiftly to our questions and requests for information.

In Romania many times we see the company needs the capital, but when it comes to providing information, the process extends unnecessarily over very long periods of time, which does not help.

This is also one of the reasons why some of the deals we initiated in Romania last year are still pending. In any kind of transaction that involves obtaining significant amounts of capital, once the negotiations on terms are over, the deal is heavily dependent on the company seeking financing and how fast, or slow, it moves.

Regardless of how much we would like to provide the capital, at the end of the day, it is fully dependent on the entrepreneur and the management, rather than us.

Are you already in talks with local companies for other investments?

Yes, like I mentioned above, we are in many ongoing discussions with Romanian entrepreneurs. Last year we received many requests for financing coming from Romania but only managed to close one, with Aaylex Group and we hope that some of the discussions from last year will materialize this year.

I cannot provide you actual names, but I can tell you that they are companies from the sectors that we like and seek – real estate, consumer goods, trade, and construction.

To provide you a bigger picture, at the regional (CEE) level, we have analyzed 918 investment opportunities in the whole region and closed a total of 85 transactions, 74 in Poland and 11 abroad, in the Baltics, Romania, Bulgaria and Czech Republic.

Out of these 900 opportunities, a quarter of the deals from 2018 are currently on hold and 82 deals (9 percent) are still open as they are being analyzed by our investment teams.

In terms of what follows after providing the capital – we remain close to the company, like any debt investor would. We receive financial reports on quarterly or half yearly basis, we discuss the results delivered as well as challenges that the companies face at given point.

In some cases, we join the Board of Directors, at the invitation of the company, which we usually appreciate especially if we strive to build a long-lasting relationship with the management.

I believe that at the end of the day, seeking an external investor other than a bank can be beneficial for the company not only because of the capital access, but also because of added value that the direct contact and discussions with significant investors can bring. I do not mean here overlooking the day-to-day business, but rather getting engaged in significant decisions, that can have a fundamental impact on the business.

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