During the past two decades over 3 billion US Dollars were invested in more than 400 Hungarian enterprises. However, venture capital and private equity has not reached its full potential in Hungary yet, since only 0.2% of the enterprises have benefited from funding through these sources.
According to the Hungarian Venture Capital and Private Equity Association’s (HVCA) report joint efforts of the venture capital and private equity industry and the Hungarian government, the access of Hungarian enterprises to venture capital and private equity funding could be significantly increased. This in turn could significantly contribute to economic growth, increasing employment and improving Hungary’s competitiveness.
As regards the annual volume of venture capital and private equity investments in terms of percentage of annual GDP, during the past 20 years Hungary has been in a reputable position not only within the CEE region but also among the EU member states. During this period, venture capital and private equity funds invested close to 4 billion US Dollars into more than 400 Hungarian enterprises. However, so-called buyout transactions have accounted for about two thirds of the total volume of those investments, which were aimed at the acquisition of shares in mature companies that have been operating profitably for several years.
The volume of investments in early and expansive stage companies was significantly lower. Only about 30% of the total volume of investments was directed at companies in the expansive stage and less than 5% at early stage companies. This is also reflected by the fact that over the last two decades slightly more than 10% of the total volume of venture capital and private equity investments came from funds focusing on early stage companies.
The remaining close to 90% was invested by private equity funds focusing on more mature companies with greater economic strength. As for the number of transactions, companies in the expansive stage were targeted by the largest number of venture capital and private equity investments: such investments accounted for almost 60% of Hungarian transactions. Nearly a third of transactions involved early stage companies. Buy-out deals represented approximately 10% of transactions by number.
The seeming discrepancy between transaction numbers and volume is due to the fact that – naturally – the earlier the stage an enterprise is in, the smaller the amount necessary for it to get to the next stage.
In terms of investments into early and expansive stage (and especially early stage) companies, Hungary has one of the lowest volumes in Europe. The number of Hungarian companies that have received venture capital or private equity funding is less than 0.2 per one hundred. It is interesting to note that a substantial percentage of the amounts invested in early stage businesses originates from investors with a Hungarian governmental background. Transactions made by investors with a Hungarian governmental background account for about 50% of the total number of venture capital and private equity transactions, while in terms of volume they represent 17.5%.
The situation has been improved by the appearance of investments by venture capital funds utilizing (mainly) EU funding through the JEREMIE program, giving an impetus mainly to early stage businesses by providing alternative financing sources in a market where the availability of debt financing is limited. According to the data provided by Magyar Vállalkozásfinanszírozási Zrt. (MV Zrt.), the funding intermediary of the JEREMIE program, until the end of 2011 HUF 12.2 billion worth of investments were decided upon by fund managers, and agreements were entered into with 44 companies, meaning that the average equity invested per company was HUF 277 million. In the next planned JEREMIE program it will be possible to apply for a further HUF 28.5 billion as repayable EU grants through MV Zrt., which, together with private investments, could total HUF 41 billion in new funds.
Increased venture capital and private equity investments are also likely to result in the creation of additional jobs within the Hungarian venture capital and private equity industry itself, which would in turn also contribute to the growth of the Hungarian economy.
