By the end of August, the Polish Government will have tabled a bill for the creation of a state-owned fund call the Krajowy Fundusz Kapitaowy (KFK) or the National Capital Fund. The vehicle’s purpose will not be a profit-making one; instead it will exist purely to foster an entrepreneurial spirit by assisting small and medium-sized businesses.
It should take around two months for the Polish Parliament to pass it and a further six to eight months before it is up and running. The fund will be supervised by the state-owned Bank Gospodarstwa Krajowego (BGK), and it will receive monies from the state budget and the EU every year. The State will invest E5.2m in KFK in 2005 and a further E13.6m every year until 2009. Tom Allchorne reports.
The size of KFK depends on the negotiation between the Polish Government and the European Commission, as the Government wants to finance a large part of the fund from the structural funds (ERDF). They assume the budget of KFK will be close to E300m or more over eight years. This budget is to be spent both on the investments and grants to cover part of the management costs.
KFK will invest in a variety of local capital (primarily venture) funds, companies and financial institutions which aim to invest in SMEs. This will be done by way of public tender whereby those parties needing investment will be asked to bid for the money, a process which is expected to take around three months.
In order to qualify, the bidders will have to meet three conditions. Firstly, they will have to earn over half their income in Poland. Secondly, the portfolio company will not be involved in the financial services or the trading of arms, tobacco, spirits or real estate. Thirdly, the company will have to create jobs and more generally contribute to regional development.
The reasoning behind the KFK is that the Government believes there is an equity gap in Poland at present. On the one hand, there is the poor creditworthiness of SMEs, meaning they are often denied bank loans. On the other hand, there is a reluctance of VC funds to invest in smaller companies. Either by putting money into funds which will in turn invest in small, hi-tech companies, or putting the money in themselves, the Government hopes the KFK will eliminate this equity gap and encourage greater investment in Polish SMEs.
Will it? There are similar funds in other countries, specifically France, Greece and Israel. CDC PME, the French equivalent of KFK, has been investing for 10 years and has more than €1bn under management. CDC PME generally invests between 10% and 20% of the total invested capital in a company or a fund, and invests over E25m of seed capital every year. The fund also invests in foreign companies and funds.
Just three such funds in existence is not a ringing endorsement of the idea. “I wonder if it’s workable,” says Pawel Szalamacha at Clifford Chance. “The Government proposes to fill the equity gap with public money, but if the investment is not attracting private money, why should public cash be used? Hopefully the fund will be well-regulated.”
Horse before the cart?
The last comment is an important one. KFK is intending only to invest in deal sizes of no more than E1m yet there is no limit on the amount of PE exposure the fund is allowed. It is estimated that E566m will be invested in SMEs by the fund, creating around 500,000 jobs. At present there is no provision which would see a limit on the amount of money invested or the number of shares purchased in a portfolio company.
KFK’s aim of investing in local venture capital funds is a perplexing one. According to Barbara Nowakowska, executive director at the Polish Private Equity Association, there aren’t any private equity funds in Poland if applying a strict definition, i.e, possessing a proper tax-transparent structure. Even if this is ignored (she says there are about 10), opportunities for KFK seem limited. At the moment, the Polish private equity market is still trying to decide whether the Polish Investment Funds Act is going to make any difference – see EVCJ July/August 2004, p44. Bill Watson at Baring Private Equity says: “KFK is important but what we as fund managers are more interested in is the pension fund law rather than a quasi-government vehicle.”