Private equity: Negative attitude
Hungarian companies are wary of private equity investors. Some 0.07% of GDP was the level of private equity investments in 2010.
While private equity investors are actively seeking investment targets in Hungary, local business owners are suspicious about this financing option, as they fear that investors might want to take over the management of their businesses or even the entire company.
Based on a recent study by Ernst & Young, private equity-owned businesses in Europe outperform public companies. Private equity investors currently have $125 billion to spend in Europe alone.
“There are potential target companies in Hungary, but when we start negotiating, they get scared because they misunderstand the intentions of financial investors,” Ernst &Young partner Balázs Tüske said. Investors also shy away from the transparency required by the inevitable evaluation process. Tüske hopes that investments made by the Jeremie funds in the form of startup capital will create a good deal flow in the next two to three years.
Private equity has been present in Hungary for several years, with an activity rate that has been above the regional average in the past, Tüske said. However, the level of private equity investments, at only 0.07% of GDP in 2010, has not yet returned to its pre-crisis levels in Hungary.
According to the 2011 Global Venture Capital and Private Equity Country Attractiveness Index, Hungary was ranked 40th on a list 80 countries. Although Hungary has moved up as an attractive business environment based on its past performance, it still has room to improve, Tüske noted.
In taxation, Hungary was ranked 12th; however, it would not be healthy to base a country’s strategy to attract investors on just a favorable tax system, the partner pointed out, adding that the ranking was made before the recent changes to Hungary’s tax system.
Hungary has to develop in all the other areas, including economic activity, depth of capital markets, investor protection, corporate governance, human and social environment as well as entrepreneurial culture and deal opportunities. The Hungarian Venture Capital Association is working together with advisors to prepare a position paper highlighting key areas for improvement.
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