Winning over the institutions

Private equity fundraising in Austria reached its pinnacle in 2000, when €235 million was committed to private equity firms in the country, according to figures from the EVCA. With the effects of the downturn kicking in, 2001 saw a sharp fall in the total to €138 million, while 2002 saw the aggregate climb back 29 percent to €177 million.

Market participants comment that Austrian institutions have been hard to persuade of the asset class's merits, although statistics show that banks and insurance companies accounted for 57 percent of all funds raised by private equity firms in Austria in 2002.

Vijai Gill of mid-market private equity firm Go Equity believes the attitude of Austrian institutions has been one of the industry's ?big problems?. He says: ?They are new to private equity, are at the beginning of the learning curve and are having a difficult time understanding the asset class. Our latest fund is almost 75 percent non-Austrian money and if we raised a fund today there would probably be less of an Austrian element than that.?

Go Equity was forced to close its current fund, Go Equity II, on €54 million in October 2002, only just over half the original €100 million target. In January 2004, it achieved its first exit from the fund when selling Innovation & Technology, the extruded flat cable producer, to automotive supplier Magna for what it described as a ?very satisfactory? return.

Gill highlights a problem with timing: a number of institutions went in by allocating funds to private equity during the good times, only to lose their nerve when the downturn arrived. ?New Austrian investors unfortunately came into private equity when markets peaked a few years ago, and they then wanted to get out after a couple of years when things turned sour. It is now not easy to win back support from new institutional sources,? says Gill. ?Investing in private equity is a long-term business, and if they wish to take this asset class seriously, they should look at their more experienced peers around Europe and learn from them.?

Dependent on banks
Like their counterparts around Europe, Austrian banks such as BA-CA and Erste Bank must wrestle with the consequences of the proposed new banking rules known as Basle II, which would force them to hold more money in reserve for every euro invested in private equity and which is forecast to lead to banks' withdrawal from the industry.

In Austria the problem is exacerbated by its relative dependence on banking capital. In Europe as a whole, just 25.7 percent of total capital raised by private equity funds between 1998 and 2002 came from banks, a figure nearly matched by pension funds, which contributed 23.1 percent. In Austria, banks accounted for 40.7 percent in 2002 and pension funds just 2.6 percent (the pension fund industry is fledgling – having been held back by Austria's generous social security system – and some of the plans that do exist are debarred constitutionally from investing in unquoted companies).

A recent report from the EVCA entitled ?Benchmarking European Tax & Legal Environments? contained clues as to why some institutions might be reluctant to invest in domestic Austrian funds. The report aimed to identify ?where tax and legal measures can be improved to develop a truly European private equity and venture capital environment?. Embarrassingly for its market participants, the study ranked Austria last of the 15 EU countries surveyed (see table). Among characteristics of the Austrian private equity market viewed as ?unfavourable? were restrictions on pension fund investment in private equity; heavy-handed merger regulation; and both company and capital gains tax rates (though it should be noted that since the survey, plans have been announced to cut corporation tax from 34 percent to 25 percent from 2005).

Another major criticism is over the lack of tax transparency and also various restrictions associated with the Austrian fund structure, known as the Mittelstandsfinanzierungsgesellschaften (MFAG). The restrictions include rules that only 30 percent of funds raised can be invested in foreign companies, no investment is allowed in the financial services or power sectors and funds are only allowed to take a maximum 49 percent stake in target companies. But Thomas Jud, managing director of the Austrian Private Equity and Venture Capital Organisation (AVCO) says his organisation is in discussions with the Austrian Federal Ministry of Financial Affairs about changes that would allow the MFAG to much more closely resemble the UK limited partnership structure by 2005. It is also worth noting that new Austrian funds raised at the current time will invariably be registered in overseas jurisdictions, particularly if they are seeking international investors.

While there are undoubtedly structural issues, there are some promising developments on the institutional front. Catering for risk-averse institutions attempting to ease their way tentatively into the asset class is the primary role of the Austria Wirtschaftsservice (AWS), a financing subsidiary of the federal government that provides project financing to Austrian companies by securing against economic risk. It has encouraged institutions to enter private equity by guaranteeing a specified percentage of the capital they invest in a fund in exchange for a fee. ?The guarantee means that if the fund fails to return the money invested, the AWS will make up the difference,? says Franz Krejs, managing partner of Horizonte Venture Management. He adds: ?It means that institutions know they don't have to write off investments, although the fee charged does eat into the return.?

EU countries' tax and regulatory environment: possible scores range from 1.0 (most favourable possible) to 3.0 (least favourable possible)

EU member states
Country Total Score
UK 1.20
Ireland 1.58
Luxembourg 1.67
Netherlands 1.79
Italy 1.96
Greece 1.96
Total average 2.04
France 2.09
Sweden 2.09
Belgium 2.14
Spain 2.17
Finland 2.25
Portugal 2.32
Germany 2.41
Denmark 2.48
Austria 2.53