Investors’ and financiers’ interest in energy investments, especially on sustainable criteria, is constantly growing. Patria Bank will increase its exposure to the energy segment, and the new ETF Energie Patria – Tradeville attracted the interest of investors shortly after its launch, luring in almost two thousand investors and an asset of 6.5 million lei in about three months from listing. At the same time, in Romania, M&A activity increased in 2022 by 10%, told Energynomics Horia Manda, managing partner, Axxess Capital, asset management company that manages Patria Bank, 84% owned through the private equity fund Emerging Europe Accession Fund (EEAF).
What are the most important trends in the M&A sector and private equity acquisitions in the region?
Macroeconomic conditions have significantly influenced M&A market developments at global, European and regional level, but with somewhat different trends, which consider the particular circumstances of each geography.
If in developed markets the M&A activity (volume and number of transactions) decreased, with percentages between 30% and 40%, with similar developments even at the CEE level, in Romania (according to the study published by Ernst & Young: “Romanian M&A Market Review 2022”) M&A activity increased in 2022 by 10% compared to 2021, reaching record volumes and a record number of transactions.
As regards the activity of private equity (“PE”) and venture capital (“VC”), it has certain particularities that determine its evolution, such as the degree of maturity of the private equity market (measured by the number of fund managers and investment funds investing in that market) and the investment attractiveness of that market.
Thus, at the level of the PE sector in Europe, we observe other developments, according to the latest study carried out by Invest Europe (the European Association of Private Equity, Venture Capital and Infrastructure Funds), “Investing in Europe: private equity activity in 2022”, the fundraising activity increased by 30%, reaching EUR 170 billion, the highest level recorded historically (but being the positive result of a typical period of 1-2 years, as long as the fundraising lasts, and benefiting from the favorable liquidity context of the period 2020-2022), investment activity reached a level of EUR 130 billion, down 10% vs. 2021 – against the background of available liquidity in the PE market and the opportunity to make acquisitions at more favorable price conditions, and divestment activity decreased by 27% vs. 2021 amid declining market multiples and reduced overall buying interest.
The same cannot be said about the VC segment, where transaction developments are tracked quarterly, where after Q4 2021, the trends of the last 5 quarters have shown a continuous decrease in investment volume globally (according to “Venture Pulse” global report published by KPMG); for example, Q1 2023 had a volume almost 4 times lower than that of Q4 2021 (historical maximum level).
As we showed in the report published by ROPEA (Romanian Association of Private Equity and Venture Capital) together with Deloitte, through “Romanian Private Equity and Venture Capital Study”, the first detailed report on the private equity and venture capital market in Romania for 2021 and H1 2022, the VC segment experienced accelerated dynamics in Romania in the last 5 years, especially against the background of the intensification of fundraising activity, supported by both international financial institutions and individual investors. Both the number and the volume of transactions reported by VCs are superior to the PE segment, exceeding EUR 100 million.
Which sectors are developing the most?
The sectors that have attracted the highest percentages of PE/VC investors at European level are ICT (33%), Consumer goods & services (18%), Business products & Services (17.5%), Biotech & healthcare (13%).
We see interest in similar sectors in the local market as well. According to the Romanian Private Equity and Venture Capital Study, financial & insurance services, ICT and Biotech are the most attractive sectors for investment.
How has the greenfield investment segment evolved?
The funds closest to this profile are VC funds, which really invest in various very entrepreneurial companies with high growth potential, in various development phases of their business model – from seed to start-up or later stage.
Here, as I mentioned above, unfortunately at the global level the Venture Capital market has suffered a lot in the last 5 quarters, both through the decrease of multiples, the number of transactions and the total valuation of investment rounds, as well as due to the total closure of capital markets for listings (IPOs). In the local market, however, things are not so dramatic, considering the entrepreneurial environment, the intensity of which has increased in the last 3-5 years, as well as the increase in the number of teams managing Venture Capital funds. Although the chance of seeing new unicorns in the next period decreases, VC funds are still very active.
What was the estimated regional and local evolution of the invested volume, exit periods and returns (IRR) in the last period? How do you expect them to evolve further (short-mid-long term), and from the perspective of the increase in European co-financing?
Even though CEE is trying to catch up to Western Europe, it only makes up 2% of all PE and VC activity in Europe, which is a very small amount. In Europe, investments make up 0.62% of GDP (0.81% in 2021), but in Central and Eastern Europe, they range from 0.2% of GDP in the Czech Republic to 10 times less in Romania. One of the main causes of the low level of investments in Romania is also the lowest level in Europe in fundraising activity in recent years. As ROPEA showed in the report on the PE market, the market is still in the maturing phase, lacking volume, especially due to the poor diversification of investor categories and the lack of some classes of local investors such as pension funds, financial institutions, companies.
How much has increased access to sustainability and energy efficient investments in the acquisition or launch of new companies?
I believe that ESG elements have long been present in the PE industry, especially with the focus on governance, environmental protection and energy efficient investments. However, in the last 5 years there has been a greater concentration of attention paid to these parameters, an evolution primarily determined by a much greater emphasis that institutional financial investors place on these elements.
What are the main KPIs of Patria Bank for 2023? What are the main milestones in the development of Patria Bank in recent years and what are the growth prospects?
Patria Bank embarked on a path of sustainable growth towards a normalized profitability, aligned with the parameters of the banking system, to which the shareholders aspired after the merger with Banca Comercială Carpatica. The results of the processes of organic growth and consolidation of the financial position were already shown in 2021 and 2022, when the bank improved its level of profitability, in conditions of constant increases in the loan portfolio and clients, also having prudential indicators at a comfortable level and in line with the average of the banking system.
Thus, the bank reported in 2022 a level of return on equity (ROE) of 6%, targeting for 2023 an increase of up to approximately 9%, the improvement of the Loans/Deposits ratio from 68% in 2022 to 74% in 2023, under the conditions of the reduction of the exposure rate on non-performing loans. We expect this growth to continue, strengthening the bank’s market position in key segments, namely that of SMEs, medium and small companies (micro-companies), as well as maintaining a focus on certain economic sectors on which we consider performing (energy, agriculture). We continue to see a number of opportunities in the market in the segment of corporate clients, both SMEs and small companies, who have limited access to financial services, segments in which the bank has a number of competitive advantages given its product portfolio and internal processes.
How have loans to green, sustainable investments or to the energy sector in general evolved?
Patria Bank had a level of 5% of the volume of newly granted loans allocated to the energy sector, and we aim for 2023 an increase in its weight, as well as a diversification with energy efficiency products for individuals.
What were the main reasons why it was decided to launch an energy-focused ETF now, and what are the expectations for the evolution of this ETF and the sector as a whole?
The first Exchange Traded Fund managed by SAI Patria Asset Management, ETF BET Patria – Tradeville, has developed very well in recent years: the fund’s assets have grown from 17 million lei in April 2021 (when we took over the management of the fund) to 47 million lei at the end of 2021 and at 72 million lei at the end of 2022. Interest in this instrument is normal, given that the assets of ETF-type funds are measured in trillions of dollars globally.
Under these conditions, we proposed to develop this product in Romania and to expand the range of ETFs managed by us. After the first such product, which tracks the BET index and provides exposure to the most important companies listed on the stock exchange’s main market, the next step was naturally the launch of the first sectorial ETF on the BSE. The energy sector was and remains a strategic sector for the national economy, but also a very important one for stock market investors. The Bucharest Stock Exchange counts among its issuers some of the most important Romanian companies in the field of energy and associated utilities – companies important for the functioning of the national economy, sought after by local and foreign investors, and which also offer high dividend yields (the importance of the sector is also highlighted by the BVB index dedicated to it, BET-NG).
Thus, last year we decided to launch ETF Energie Patria – Tradeville. The fund attracted the interest of investors shortly after its launch, attracting almost two thousand investors and an asset of 6.5 million lei in about three months after listing. We believe that this interest will continue, supported by the importance of the energy sector and Romanian companies in this sector.
How do you see the evolution of 2023 for the business environment in Romania?
According to the economic fundamentals, Romania has a stable macroeconomic environment, although it presents a series of elements of fragility, derived from the double deficit, the still high level of inflation, the low percentage of the employed workforce. The GDP evolution in recent years and the prospects for 2023 and the medium term are still positive considering Romania’s geo-strategic position, the level and profile of natural resources and the size of potential markets; the economic environment is in a continuous process of maturation, of “catching-up” compared to the level of the more developed countries in the CEE and the average recorded at the European level, and overcoming this gap will depend a lot on the level of investments available to finance this economic growth. I am not very optimistic about the government’s ability to use all the resources available through the PNRR; the growth of the last 20 years, financed mainly by foreign direct investments, will have to be supported in the following periods also by local, public and private capital. However, I believe that there are a number of premises that will ensure a continuation of the favorable dynamics of the economy, without having a decrease in the M&A area, where the interest of strategic investors is still manifested.
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This interview first appeared in the printed edition of Energynomics Magazine, issued in June 2023.
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