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Striking parallels between vibrant venture capital sectors in Romania and Ireland Back  
The telecoms sector is at the heart of both countries’ dynamic markets, writes Viorel Udma.
Open any financial newspaper and look for information about Central and Eastern European countries. You will find at most two articles about Hungary, Poland or Czech Republic. Nothing about Romania and Bulgaria. So, perhaps, you are entitled to say that nothing is happening there. But think again.

During the last two years prime names in venture capital industry opened their offices in Bucharest: Baring Private Equity Partners, followed shortly by Advent International and American International Group (AIG). Not to mention an array of smaller but by no means less dynamic regional players: Greek companies (Commercial Capital, Global Finance, Danube Fund), Austrian (EPIC-European Privatization and Investment Corporation), and Turkish companies.

What is driving all those venture capitalist to increase their involvement in Romania? As in the rest of the world, the expectancy of high returns, and the knowledge that venture capital investments exited to date in Romania have provided two to three digit rates of return.

Recent VC deals

Most of these new funds have the same preferred target. The largest two Romanian cable TV operators were bought in the first months of 2000 by venture capitalists - AIG paid $30 million for 25% of Astral TV and a consortium led by Austria’s EPIC bought in RCS Romanian Cable Systems for an undisclosed amount. Neither of the investments was made for growth opportunities in the cable TV sector - Romania has already a 45.9% penetration, sixth in Europe, exceeded only by the three Benelux countries, by Sweden, and Finland. They were made for the position these companies occupy, enabling them to benefit from the deregulation of the national telecom market in 2003.

Telecoms developments

There is no surprise that both main mobile telephony operators, one led by France Telecom and the other by Canada’s Telesystem Wireless International and Vodafone, have among their shareholders venture capitalists. The two GSM companies, Mobil Rom and Mobifon, claim to have each close to one million subscribers, that puts the mobile penetration in Romania (considering also the 450 MHz analogue provider Telemobil) close to 10 per cent. This lucrative market is already attracting additional competition: Cosmorom, the fourth mobile telecommunication provider, owned by the national monopoly Romtelecom, is scheduled to start operating its 1800 MHz license in May 2000.

Differences in VC style

There is, though, a significant difference between venture capital investments in Romania and elsewhere: venture capital funds will not shy away from buying listed blue chip companies. Arctic SA, the leading producer of white consumer goods, is held by a consortium formed by European Bank for Reconstruction and Development (EBRD) and France’s Societe Generale Romania Fund; Policolor, one of the largest East European paint producers, and Rolast, the technical rubber company, are controlled by Romanian American Enterprise Fund (RAEF) and Romanian Investment Fund (RIF). Under its venture capitalists direction, Policolor completed the first crossborder acquisition, buying the largest Bulgarian competitor, Orgachim.

The same RAEF-RIF consortium controls the small but dynamic bank Banca Romaneasca. Other financial services companies have also venture capital investors: RALFI has as shareholder RAEF’s Small Business Investment Fund (SBIF), while Motoractive, an automotive leasing company, is an investment of Holland’s OresaVentures and RAEF.

Advertising is an industry attracting a lot of attention lately. Advent International bought and consolidated outdoor advertising companies into Euromedia Group, and RAEF’s SBIF holds a stake in the advertising large-prints producer A&M International.

Other industries considered elsewhere too mature to be of interest are top of the list for venture capitalists in Romania. For example, in food processing field, Baring Private Equity Partners invested in Topway, a margerine and vegetable oil producer, Advent International in a group of breweries, RAEF’s SBIF in Sorilact, a dairy producer, to name only a few of the deals.

Striking similarity with Ireland

Compared to the Irish venture capital industry, Romania’s is strikingly similar: same tendency to exit by trade sales, same size of the national funds (tens of million euro), same bipolar focus: traditional industries (restructuring and consolidations) and ‘new economy’. Although Romania is six times larger than Ireland in terms of population, the pool of funds available for venture capital in the two countries is the same size, about E300-400 million.

Two main differences are, however, obvious: first, while the Irish venture capital funds raise a good part of the money domestically, in Romania alomost the totality of funds are of international origin. Second, due to a lack of a wide pool of professional managers, Romanian venture capitalists tend to be more active in managing the companies they invest in.

People and exit risks

This shortage of qualified management and the practical impossibility to exit an investment via an IPO on the tiny local stock market (capitalization is less than 4% of the GDP) are the two main risks of direct investments in Romania. Venture capitalists found ways to mitigate at least the first risk: they employ experienced expatriate managers for their investee companies and, at the same time, empower young promising local talents. It is not at all unusual to meet top managers of large companies in their late 20s or early 30s.

It is by no means east to invest in Romania and not all investments will continue to fetch the returns past ventures did. It takes deep knowledge of the local market, regulation and customs to succeed. Having a team in place and being able to react fast are just two of the sine-qua-non conditions to do well. But at least as long as Romanians, as all their Latin relatives, will continue to love talking, telecom investments have little chance to turn unprofitable.

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