Robert Smyth in Budapest -
He may have missed out on being named Ernst & Young's "World Entrepreneur Of 2008" to Dr Jean-Paul Clozel, founder of the pioneering biotechnology company Actelion Pharmaceuticals, but in Monte Carlo where the event was hosted on June 1, Gyorgy Jaksity, Hungary's entrepreneur of 2007, was nonetheless described by the judging panel as "simply brilliant." However, a year in business, like a week in politics, is a long time.
Having built up Concorde Securities, a brokerage-cum-investment bank he jointly founded in 1993, into a thriving company that posted record revenues in 2006, Jaksity now finds Concorde facing tumbling turnover in its core area of trading for international institutions on the struggling Budapest Stock Exchange (BSE), the bourse for which he earlier served as chairman.
However, Jaksity and Concorde's other founders, Gabor Borda and Norbert Streitmann, saw this coming and have been taking steps to reposition the brokerage. "We've been preparing to shift our business from being mainly a broker for international institutions to being predominantly an asset manager and investment advisor for local institutions and local private clients," Jaksity explains. "Out of an investment bank with a small private bank, we're becoming a big private bank with a small investment bank."
The three owner-managers each possess 33.3% of the company's shares, as well as minority shares in its subsidiary companies, and make up the three-member management board of Concorde, which has remained unchanged since its founding. Jaksity is responsible for strategic issues, as well as managing the firm's research and corporate advisory activities.
Nevertheless, Concorde finds itself in the midst of a difficult transition period. "Our most profitable and biggest business line is decreasing dramatically. In the first two months of this year, volumes went down by 20-25% on the Budapest Stock Exchange." However, the decline in turnover on the BSE has led to a bigger interest from Concorde's local investors to invest outside on foreign markets. "We're still predominantly focused on the BSE, but increase in turnover comes from foreign markets. As we gather steam and magnitude, it will pay for more international marketing to attract customers from outside Hungary which is an issue for the next five years."
Record revenues in 2006 were followed by a 25% decrease in 2007 and look set to be followed by another 25% this year with profits dropping at an even faster rate. Concorde's assets under management stood at around $1bn at the end of 2007, with another $600m-700m in retail assets, some 90% of which originate from local sources. A "dramatic increase" in assets under management bodes well for the future, but the painful part is in the middle transition phase, which is coinciding with a looming recession. Concorde employs 140 people, all of whom Jaksity intends to keep on as his team seeks to weather the crisis.
While most of 2007's profit decline came from taxes related to the Hungarian government's austerity package, these fiscal measures that have lowered government expenditure and brought in higher revenues are finally making an impact. "Technically the worst is past, deficits are coming down but as long as the political climate is as such, and society has preference for getting things for free and not paying taxes, the picture will re-emerge," he says.
Jaksity isn't completely down on the government, though. Concorde is currently involved in advising the government over the next wave of privatization, including the preparation of the state motorway company for an IPO, which is likely to be the first one to be sold. The motorway services operator might become a concession operator that operates the infrastructure and gets the fees, implies Jaksity. "It could become a very attractive asset investment for capital market investors."
Other than the state motorways project, Concorde generally doesn't work on huge transactions alone, but work with international investment banks who can provide sectoral and global expertise while Concorde brings "local flavour and knowledge" to the table. While there's "a lot going on" in the field of M&A, the lack of really big deals makes it very difficult for an advisor to make profits. "A fee of 1% or 2% on $10m deal doesn't make you a living."
An ongoing problem for the BSE and for those who trade on it is that there are small number of companies that can generate a sizeable turnover. With the government now planning to privatize some of the bigger state companies, Jaksity welcomes the move but cautions that it won't be enough to change the fortunes of the struggling exchange, though it may increase the capitalization by roughly 10%. The underlying problem with the BSE for Jaksity is in Hungary's economic policy, which he feels lacks any form of coherence from one government to the next, thus devaluing the whole economy and its assets. This, in turn, makes it unattractive for a company to get a listing on the exchange.
Regarding the much vaunted idea of a regional alliance with other stock exchanges, Jaksity feels little has happened despite the idea having been discussed for over a decade. "It's just not been happening, apart from the link between Vienna and Budapest, but even that hasn't produced any sizeable benefits for either of the two exchanges, or the shareholders."
Meanwhile, the Warsaw Stock Exchange has adopted the attitude that it will be bigger than the other two combined and should be the one acquiring the other two. Further, the Prague Stock Exchange is keeping itself to itself. "The economic benefits for common trading are not really there," opines Jaksity. "We're already trading on all the world's markets, not to mention the region's and most other brokers in Budapest can do the same or something close to that."
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