Robert Smyth in Budapest -
Budapest-based Primus Capital's latest fund totalling HUF6.2bn (about €22m) is casting its net beyond the Hungarian capital, with two or three more investments likely to be made by the end of the summer.
"The pipeline looks really good," says Zoltan Bruckner, managing director of Primus Capital. "The disappearance of bank funding dried up the market for start-ups and more mature companies require re-financing."
The Primus III Venture Capital Fund has just made its first investment in ComForce, an Esztergom, northern-Hungary-based company dealing with marketing and telecommunication services. Primus has also signed a term sheet with another firm that deals with medical equipment manufacturing. The investment in the two companies totals HUF570m.
For its part, ComForce will receive HUF170m in capital investment. The funds will be mainly used by ComForce to expand its client base, enhance the company structure, implement technical developments and to expand into foreign markets. Primus has also issued a third term sheet to another innovative product manufacturer and distributor company. "We're looking to invest in companies that have regionally competitive services or globally competitive products. It's not sufficient to be only competitive locally and, besides, the region has taken a battering," says Bruckner.
Bigger and more diverse
The Primus III Venture Capital Fund, which was approved by Hungary's financial regulator on March 31, greatly surpasses Primus' first fund of $1m and its second fund of nearly €3m. Primus III should be able to make investments into 10-12 companies, with three or four investments anticipated in the first year of the fund's life. The average investment will be €1.5m per company per year, with that amount able to be invested into one company three times. "Like Primus' earlier funds, Primus III will also target early-stage technology companies or technology-enabled services companies, but its scope will be more diverse, with a larger volume of capital to deploy per investment," says Bruckner.
He says that certain types of mature companies could be considered (though they must be lees than five years in operation), but it's not a turnaround fund. "We would like to go into companies where the management is already right. We're looking at more stable companies that have weathered the storm or those that are just starting out," says Bruckner. "Also companies that may have a need for expansion and product development, and may have put projects on hold for the past two years could come into consideration."
Primus expects to take minority share and have a seat on the board of directors or the supervisory board of the investee company. "We'd like to help the company acquire know-how and set up distribution channels far beyond Hungary. Regional markets are not in good shape, and although the natural connections with regional markets are closer and tighter, I believe that once the funding is in place, the focus will be on accessing wider markets," explains Bruckner. He believes that management know-how in Hungary, and especially beyond the capital, is quite limited, and lot of hands-on management will be required, especially given that heads of companies often not formally trained.
Some HUF4.34bn of the fund's HUF6.2bn total comes from the European Investment Bank-backed New Hungary Venture Capital Programme, which altogether has made HUF45bn available for small and medium-sized enterprises (SMEs) in Hungary. "Through this programme, the Hungarian government is investing in SMEs through intermediaries whose investment standards are those of the private sector," explains Bruckner, adding that 15% of that contribution comes from Hungarian taxpayers.
The remainder of Primus III comes from institutional and individual investors, and family and trust funds from Hungary and the US. "Over a short investment period of within three and a half years, there's going to be more capital going into the SME sector than at any time previously. It's going to be a high impact and enormously visible programme," predicts Bruckner. "There's a market gap here in funding of early stage SMEs. This gap has always been huge when compared with Western Europe and the US, and has been further widened by the disappearance of bank funding related to the crisis."
The rate of return is anticipated to be above 20% for the whole term of the Primus III fund, and that of individual investments of approximately 30% or higher. Some 5% of the fund is set aside for costs associated with, for example, carrying out due diligence.
Primus' earlier funds have invested in enterprise content management system developer SenseNet, which has expanded its business beyond Hungary to as far away as the Dominican Republic, growing its revenues from HUF165m to HUF400m in the past four years. Another investment, video content analytics specialist Intelio, has also expanded internationally, nearly doubling its revenue from 2008 to 2009 to close to HUF200m and is predicting another doubling of its revenues this year.
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