The Austrian Private Equity and Venture Capital Organisation (AVCO) is Austria’s national association for the private equity industry and corporate finance service providers, and its members are involved in private equity from venture capital to buy-outs. AVCO represents more than 80% of the Austrian private equity industry. KITE Invest spoke with the Managing Director of AVCO, Mr. Jürgen Marchart, about the fall and rise of private equity in Austria and how the future is looking optimistic.
KITE Invest: How would you compare the Austrian private equity industry to its regional counterparts?
Jürgen Marchart: The Austrian private equity industry in comparison, and to summarize, is young and small. The industry has only existed since the mid 1990’s and the volume is subcritical. The situation concerning the volume became more critical since the start of the financial crisis, where we had decreasing figures in fundraising, investing and exits volume.
KITE Invest: Between 2012 and 2013 fundraising by Austrian private equities saw a significant decrease from €173 million to €20 million. Could you please shed light on why in 2013 there was such a low fundraising amount, not only in comparison with 2012 but the past 10-15 years?
JM: Unfortunately, we are seeing a continued decrease of this fundraising figure. In 2013 it was more or less zero, because €20 million fundraising volume is more than subcritical. At this time in 2013 there were several reasons that accumulated resulting in this less than appealing situation.
Starting off with the lack of framework conditions in Austria, which means that we have had no international competitive and attractive private equity law in place since the end of 2013. The old regulation was a de facto vacuum because it was not applied in any single case. Now there is a real vacuum concerning these legal framework conditions – meaning tax and structural framework conditions.
Second, the European regulation, the Alternative Investment Fund Managers Directive (AIFMD), was implemented in Austria on very short notice and in a very restrictive way, more restrictive than would have been necessary. As a result we have a strong restrictions on the side of private individual commitments, and these private individuals are more or less one of the last investor groups in Austria that remained after the financial crisis.
This then ties into the third reason that brings us back to the start of the financial crisis in 2009, when we saw a significant increase in the requests and commitments by institutional investors, which was most significant in the bank sector – previously the main investor type in Austria. Between 2008 and 2009 we saw the bank sector of institutional investors disappear from the total investing amount volume of 60% to 0%. This was and still is a big problem, and now we have the situation with institutional investors in Austria that are seeking for risk profit profile that the asset class of private equity cannot offer them.
KITE Invest: Taking these three factors into account and starting with the framework aspect, what is the outlook of the Austrian government changing the legal framework?
JM: The forecast is quite optimistic because within the working-program of the present Government this topic is mentioned and is to be addressed during this period; there are already discussions in place. However, the positive signal is that the Government is aware of this problem and the discussions are ongoing.
KITE: In terms of the fundraising situation, what are the prospects like for the near future?
JM: Simply put the fundraising must increase. I think that this is mainly dependent on the framework conditions. The faster the framework conditions in Austria are internationally competitive and attractive, the faster this indicator will increase again. This will need time though. For instance, for 2014 – we don’t have the figures yet – but I would guess that the figures plateaued or were slightly less compared to 2013.
KITE: Would you say that the sectors that private equity and venture capital firms are investing in have altered at all due to the issues we have been discussing?
JM: No, as far as we can see from the figures the sectors themselves haven’t changed from the past. More or less the top five sectors are more or less the top five sectors every year, because this reflects the structure of the Austrian SME landscape. To simplify, the SMEs are in place and the investments are done. Although the sector ranking does shift due to even just a single investment because any major investment affects the rankings.
We do see that concerning the phase of investment there is a shift towards early-stage investments. The buyout phase is disappearing more or less and we are seeing an increase of early-stage investments, in relation to the total volume, because the main investors are the public, the Government.
KITE: Due to this increased interest in early-stage investments is AVCO working more with entrepreneurs and business angel groups and networks?
JM: There is a strong early stage community that has really developed in the last two years, and of course, there are never enough business angels, but we see that this sector is organizing itself. AVCO is also offering services too, in order to match companies with capital providers from our structure.
KITE: Is this increased involvement with different groups what is referred to as the “AVCO Reloaded” and could you highlight these new services?
JM: AVCO began this process a little bit more than two years ago, making a new structure for AVCO. First, we enlarged our membership area, meaning that we now have enterprises that are seeking for capital amongst our members too. This leads to a new service of AVCO where we match companies seeking capital with capital providers, funds, and service providers.
KITE: What final message would you like to deliver about the Austrian private equity industry to the investor community worldwide?
JM: Austrian private equity is here to stay. It is set up in a professional way after years of development, but it is endangered now. This could be solved by the implementation of international competitive and attractive framework conditions at a national level and at a European level, which are the two major points of where there is room for improvement.