IE CERS HAS
Judit Karsai
ARE CEE STATES SUCCESSFUL AS
VENTURE CAPITALISTS?
Paper prepared for the 1st International Conference: The Role of
State in Varieties of Capitalism (SVOC2015)
– Achievements and challenges for Central and Eastern Europe and
the emerging markets
26-27 November, 2015
Central European University, Budapest
Financial support: Hungarian Science Research Fund (OTKA) grant number K105581
Content
•
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•
•
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Concerns of Government Venture Capital (GVC)
Structure of the Venture Capital (VC) market
Government as a source of VC fundraising
The JEREMIE initiative as a GVC scheme
Determining aspects of GVC schemes in the West
Experiences of GVC programs in the CEE region
Conclusions
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Conserns of GVC programs
• Main concerns:
– Skepticism regarding the ability of GVC investors to
pick winners (lack of skill, distortions by political
interest)
– Might not be effective in monitoring, nurturing,
mentoring investee companies
– May displace private investment, leading to crowdingout effects (cheap GVC discourages private investors,
replacement rather than engagement of private VCs)
• Global empirical evidence is mixed: the design of
GVC programs is important for their effect
– Focus of GVC investments shifted from direct to
indirect investing models
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Structure of the private Venture Capital (VC)
market
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Structure of the Government
Venture Capital (GVC) market
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The JEREMIE initiative as a GVC scheme in Europe
in the 2007-2013 budget period
• Joint European Resources for Micro and Medium
Enterprises (JEREMIE)
• Member States can invest part of their Structural Funds
into recoverable financial engineering instruments (loan,
garantee, VC)
• First opportunity for CEE countries to use community
funding to develop their VC sectors
• Compatibility with complex EU regulation (Structural Funds,
financial engineering instruments, Risk Capital Guidelines)
• Fund managers are selected in competitive tenders by
Holding Funds, their remuneration tied to performance
• Preferential treatment of participating private VC investors,
whose share is minimum 30% in joint funds (or in individual
investments of co-investment funds) in assisted areas
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VC funds raised by type of investor in Europe,
2008-2014 (%)
Source: BCG-IESE (2015): A Rise in Good Deals, but an Investor Drought
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VC funds raised by type of investor
in Central and Eastern Europe (CEE) 2009-2013 (%)
Source: EVCA
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VC funds financed in the CEE region from JEREMIE
funds for the 2007-2013 period (million EUR)
Country
Number of
funds
Capital
managed
Public funds
Private funds
Bulgaria
2
21
21
0
Croatia
0
0
0
0
Czech Republic
0
0
0
0
Estonia
0
0
0
0
Hungary
28
443
310
133
Latvia
3
39
27
12
Lithuania
5
70
53
17
Poland
16
380
190
190
Romania
1
18
10
8
Slovakia
2
47
35
12
Slovenia
7
69
34
35
TOTAL CEE
64
1087
680
407
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VC funds raised in the CEE region, 2007-2013
Type of raised funds
Volume
(million EUR)
Ratio
(%)
Venture Capital funds raised in CEE
1590
100
Total Private Equity funds raised in CEE
(Venture Capital and Buy-out funds)
9602
Total Private Equity funds raised in CEE
from Government sources
1206
Venture Capital funds raised in CEE
from JEREMIE government sources*
680
43
1087
68
Venture Capital funds raised in CEE
from JEREMIE government and private
sources*
* author’s calculation
Source: EVCA
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Determining aspects of GVC programs’ design
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Time frame of the program
Investment restrictions
Size of GVC funds
Selection of private VC fund managers
Incentives of private VC fund investors
Publicity of GVC programs
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Experiences of GVC programs in the CEE region (1)
• Time horizon of the GVC programs (2007-2013) short,
slowness of notification and tendering put funds under
pressure to invest urgently
• Rigid investment restrictions decrease the success of
investments, GVC fund managers try to circumvent them
• Average size of hybrid funds too small for efficient and selfsustaining operation, to exploit the economies of scale
• Public procurement rules unsuitable for tendering GVC
fund managers, missing expertise, non-transparent
selection (change of scoring systems and the panel of
judges), government ties could have meant an advantage
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Experiences of GVC programs in the CEE region (2)
• Incentives for private investors excessively increase the
interest of wealthy private individuals because of
upside reward and loss mitigation (missing small scale
institutional investors, restrictive asset regulations)
• Lack of publicity of programs does not allow for an
objective assessment of the results. Demand–side
measures to facilitate the soundness of investment
offers started late (establishment of incubation and
accelerator organisations)
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Conclusions
• Government equity schemes in the CEE region have all
the +/- features that characterised similar programs in
the West: the region did not avoid earlier mistakes
• Problems caused by EU regulation are supplemented
by the corrupt traditions of the region (slowly changing
cultural-institutional conditions)
• The gratest risk of GVC schemes (the crowding-out
effect on private investors) was missing in the CEE
region due to the lack of private investors
• Significant increase in the equity supply, new range of
private investors, missing demand side measures
• Outcome of the portfolio companies’ development can
be assessed after 4-5 years, public data are missing for
evaluation
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Thank you!
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Investment restrictions of Hungarian JEREMIE VC program
Tender round
I.
I.
II.
II.
III.
IV.
Fund Type
Co-inv.
Joint
Joint
(seed)
Joint
(growth)
Joint
(growth)
Joint
(growth)
Number of Funds
1
7
4
6
8
2
Managed Capital
(B HUF)
7.1
40.9
8.56
32.1
34.2
8.6
Private investor
ratio (%)
0
30
30
30
30
30
Form of investment
(equity/loan) (%)
75/25
75/25
75/25
75/25
75/25
75/25
Age of Company
(year)
<5
<5
<3
<5
<5
<5
Size of Company
Revenue (B HUF)
< 1.5
< 1.5
< 0.2
<5
<5
<5
Max. Inv. Size per
12 months (M EUR)
1.5 (x 3)
1.5 (x 3)
0.15 (x 2)
2.5
2.5
2.5
HQ of Company
(territory)
Central
Hungary
Out of
Out of
Central H. Central H.
Out of
Central H.
Out of
Central H.
Out of
Central H.
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