Companies need financial resources to develop on the medium and long term and to consolidate their market position in order to come out of the recession in a better position than their competitors. Specialists told Business Review about the major trends, difficulties and challenges on the local market and outlined the current state of private equity funds, bank loans and European funds.
Private equity funds faced tough period…
Private equity funds and venture capitalists made few investments in Romania in 2011. According to Cristian Nacu, partner at Enterprise Investors (EI), the total value of investments was less then EUR 100 million last year. “The reason is that many of the companies that could have been attractive targets for potential acquisitions had modest evolutions between 2009 and 2011 because of the economic crisis. The majority of them posted a decrease in turnover and/or profitability and that diminished their attractiveness,” says Nacu. He adds that entrepreneurs who run businesses that prospered last year expected to obtain very high prices for their companies.
For example, Oresa acquired RTC Proffice, the leader on the office supply market. The transaction was completed in November when Oresa took over all the shares in the company and injected several million euros to recapitalize it, reduce bank debt and fund the growth of working capital and new marketing initiatives. “We bought the company from the group founded by the Romanian entrepreneur Radu Octavian. It was a complex negotiation process involving eight banks and several Radu Holding group companies with which Proffice will continue to have commercial relations either as suppliers or as clients,” says Cornel Marian, managing director at Oresa Ventures Romania. Oresa also made an add-on acquisition in Somaco group, its building materials company, buying a division from G&D Prefabricate. According to Marian, Advent, GED and the PE fund that is a shareholder in Medlife also made some add-on acquisition to consolidate the positions of the companies in which they had invested previously.
As for the future, Nacu says that this year is not likely to be significantly different from 2011, considering Romania’s economic conditions. “I think that there are enough dangers imperiling the stability of many markets. The majority of these threats are not necessarily related to Romania but they can certainly affect it. The Romanian economy depends very much on the other European economies,” says Nacu. Elsewhere, Marian of Oresa says that the most active funds will probably remain those with a well established presence in the market and a team with good experience in Romania. “Oresa has been here for over 15 years and I think that Advent and EI are also in a good position. There are another two-three teams that are looking for investments, including some newcomers who are active in Poland and in the region, and I hope they will start to make investments as well,” says Marian.
Turning to the way the current economic crisis has influenced the activity of private equity firms, the Oresa representative says that the first thing the fund he runs did in the last quarter of 2008 and 2009 was to focus on its existing portfolio of companies – Fabryo, Somaco, Kiwi Finance and Trinity – and ensure that it was ready to provide the support needed during the economic recession, in terms of capital but also management and strategic support. “Then we started to see how we could use the opportunities created by crisis – we invested more in Fabryo and expanded its presence in retail, product range and also brand support. In 2010 we invested two-three times more in sales and marketing than Fabryo’s main competitors. At Somaco we put a new production line into our factory in Roman, which makes water system prefabricate concrete elements. We also bought G&D Teius and expanded in Transylvania. We provided the necessary help to Kiwi Finance, not only to survive in the tough financial services sector but to improve its position. It is now expanding again in the country by developing its franchise network,” says Marian. Oresa continues to be interested in building materials, business services and financial services.
…while corporate finance posted positive performance
2011 brought evolution on the corporate finance segment, propelled mainly by the increasing trust of entrepreneurs following the positive results of the local economy. In such a context, the corporate loans dynamic was influenced especially by exports and industry. “Although credits in EUR were cheaper, the balance of loans granted to private companies increased mainly because of financing in RON. As for OTP Bank Romania, the balance of credits to medium and large companies posted moderate growth, with the processing and extraction industries and agriculture being the targeted activities for financing,” say representatives of OTP Bank.
Elsewhere, ING Bank Romania officials comment that the first eight months of 2011 were characterized by an increase in both the demand and supply of credits and a partial recovery of optimism and companies’ investment or development plans. “This trend first slowed down and then stopped, especially in the last quarter of 2011, due to the problems, discussions and uncertainty affecting the Euro zone. But now it is about to be reversed,” they predict. They add that judging by the signals they have from the market so far, demand for loans will slowly increase this year, albeit less so than in 2011, while the supply will decrease.
“The major trend in 2012 will be an increase in credit granted in RON to the detriment of EUR loans, as a result of the cut in financing from mother banks. Meanwhile, the cost of RON loans will depend significantly on the sums that lenders manage to attract from the market,” say representatives of OTP. “Corporate lending will continue to post an increase and banks will focus on lending to manufacturing companies and those that implement projects involving European co-financing. Also the weight of agricultural loans will increase. Because of the higher potential for profitability, lenders will target the development of exporters and importers, and generally show interest in the financing of international trade.”
While until 2008 bank loans were granted liberally, and in 2009 almost seized up entirely, specialists describe 2011 and 2012 as years when lenders have wanted to approve loans, depending on the quality of their customers. “Banks are taking two main approaches to corporate financing. The large ones are trying a mass approach in analyzing companies, while the small and medium ones prefer the customized approach to their customers and are therefore more flexible,” say OTP representatives.
Low absorption of EU funds still problematic
One of the most significant problems that Romania faces at present is its low absorption of structural funds. But according to Florin Banateanu, director advisory at KPMG, this had been to some extent expected since the start of the program, because of the lack of experience both of the authorities responsible for the implementation of the operational programs and of the potential beneficiaries in planning the investments, understanding the demands of financing institutions and implementing the project according to the financing contract. “As an illustration, those programs that were a repeat of pre-accession programs to which Romania had access until January 1, 2007 – the Program for Rural Development financed through the European Fund for Agriculture and Rural Development and the Regional Operational Program – posted a higher absorption rate than the average absorption rate of European funds in Romania,” says Banateanu. According to him, these two programs benefited from the coordination of the same authorities as the corresponding pre-accession programs SAPARD and PHARE-CES did, and addressed the same type of beneficiaries.
In the KPMG director’s opinion, the rate of absorption of EU funds can be increased through the very careful monitoring of the implementation of projects, assistance offered to the project beneficiaries and the adoption of measures to clarify the program documentation. But he warns that changing the administrative structure of financed programs from EU funds at present would lead to significant confusion and delays. So what can the local authorities do to manage European funds better? Real involvement in helping the beneficiaries to implement the projects developed through European funds could be a major step. “In addition they have to continue to analyze the absorption on each priority axis in order to identify over time the possibilities for relocating funds, according to the demand, within each program,” says Banateanu.
Banateanu says the risk of European funds being withdrawn can be reduced by making efficient the processes of evaluation, checking and monitoring along with the inspection of implemented projects and assisting the beneficiaries in implementing them. “It is time for authorities to decide to become a help and not a hindrance in implementing projects, but without making compromises in terms of keeping the applicable regulations,” says Banateanu.