Sylwia Ziemacka talked to Rafał Lis, founder and managing partner at CVI, a leading private debt investor in the CEE region.
The history of the Polish investment fund market dates back to the early 1990s, but the breakout year for the market was 1997 when the Investment Fund Act came into force. How has the investment fund industry in Poland changed over the past 30 years? What can be considered a success and what remains to be done?
It’s quite a broad question. A lot has happened over these 30 years. The beginnings were quite fascinating and dynamic. There were bull markets on the equity side and people were also becoming interested in investment funds.
There was only one investment fund at that time, a very popular one. But I think the idea in Poland of pooling money and investing on behalf of a number of investors started then. And that was a good education.
As you said, there was a small revolution in 1997. There was new legislation and then investment funds companies started to operate. There was another milestone, the so-called Belka tax. And because of the new taxation system there were some privileges for investment funds and we observed multiplication of the size of the market between 2002 and 2007.
And then we had another crash, a disaster for equity markets and also unfortunately a lot of people realized that it’s quite risky to invest, especially through mixed or equity funds. But then the market started to recover again.
And I think it is at this stage again right now.
So I would say that over 30 years we have seen a lot of changes and quite dynamic growth for some time. But we have also experienced a number of more challenging situations. I am really glad that we have a well-developed investment funds market with more than a thousand funds.
We have a very wide product offering for clients in Poland. We can easily find interesting investment propositions across asset classes, both on the equity and fixed income sides of the market. However, I think the biggest disappointment is that the investment funds market does not play a more significant role in the economy.
The allocation of savings among individual investors in investment funds is quite tiny, a few times lower than in the US, which traditionally has a very big capital market, but also to Western European countries. It could be treated as a disappointment or an opportunity.
But why do you think it’s like this in Poland? Is it an issue of education, of trust, of awareness?
Everything plays a role. I think that we could do much more to popularize investment funds as a tool for retirement savings. There will be a growing need to fund pensions from other sources than the public system. So from this perspective, an education is a missing part. On the other hand, unfortunately, regulations didn’t help.
The tax bill in 2002 was something that was really helpful. But since then I would say that most of the other actions initiated by the regulators or by the government have not been very helpful.
Apart from regulatory issues, of course, sentiment on the stock exchange influenced it a lot. And usually if we observe something like two or three years of very good performance on the stock exchange, it helps. Unfortunately the Warsaw Stock Exchange has not been one of the best performing markets during the last ten years or so.
So interest in investment funds has been a little limited. But, again, I think that is an opportunity. So from this perspective, the economic performance of Poland has been very, very good during the last 30 years. Quite the success story.
We didn’t observe the same success on the capital markets as on the stock exchange or on the investment funds market. But I think that there will be a lot of opportunities in the future. For example, private markets could be a way to overcome limited attractiveness of the local stock exchange and financing companies directly. It is a way we could offer financing to the thousands of corporations in Poland, not only the largest ones listed on the stock exchange and leverage on their success and dynamic growth.
Actually, it is not only the Polish case. We could observe similar trends in other markets in Western Europe, even in the US, where small and medium sized companies are actually the backbone of the economy and are financed by private markets funds.
From this perspective, it is a great opportunity to finance great projects in Poland or across the region and also at the same time to provide very attractive returns to investors.
On average, we receive around 1,000 inquiries per year for financing. We are able to finance over 100 projects per year. So I think we are creating change and are able to finance something that otherwise would not happen.
I am sure that almost all or all our investors are pretty happy with the returns we deliver.
Is it any particular sector or any aim of the funding that is most needed? I’m also talking about ESG and the fact that we are a little bit in the transition period in many aspects. And the second question also on the side of investors, could you provide any more specific idea of who is your average investor?
As for companies, we are sector agnostic. Our mission is that we try to fund every good project. So if we think that something good is fitting our investment strategy we try to find financing for such companies and projects.
In Poland we have done a lot of real estate financing and probably 40% of our activity is linked to some extent with real estate both commercial and residential.
I would say that the green transformation is something that is probably a little bit too capital intensive for us. Our average ticket is something like €5 million up to €10 million.
Within this range the competition is very limited, we see foreign funds, but rather invested in much bigger projects. We coud finance cross-border transactions, which is difficult for the Polish banks. Also, M&A and especially cross-border M&A is something we like and do quite often. And it is growing.
Regarding investors in our funds, we started with fund raising among local individual investors, mainly affluent and high net worth individuals, which created our original investor base.
And still regarding Poland, we are focusing on the affluent segment. The minimum is €40,000.
In 2018 we started with the fund focused on international institutional investors. Finally, we closed these funds last year with €132 million, and were able to attract a few widely recognized investors like EBRD, EIF, but also PFR, some pension funds and insurance companies from the region and a few family offices.
So it was a first case that we were not focused on local investors, but trying to go beyond.
The fund is already 75% invested and we have just started marketing of the subsequent fund. This time we hope to attract even more investors from Western Europe and other continents and be able to finance Polish mid-caps through private debt on the bigger scale.
What’s their perception of Poland? We know that we are an economic success story, so this should be the driver. In 2018 we also had this upgrade from being an emerging market to a developed one, which should also have some impact, right?
The problem is that for foreign investors it is just one of many potential investment locations and they have to spend an enormous amount of time and resources to enter a new market. When they ask how much more they could earn in comparison to Germany or France or the UK, the premium is not enormously big.. And that is often not too tempting for them.
I fully agree that Poland is an interesting place from the economic perspective and nobody is trying to challenge that. The best argument will be the consequently delivered premium returns which should change the perception and finally attract sizable investments to the Polish private debt market.
So my last question is about the future. There are so many uncertainties on the market and events that happened even recently that were not expected but over a five-10 year perspective how do you see the growth of the industry?
I am optimistic. Independent financial advisors, wealth management companies or non-banking brokerage houses will be able to grab a much bigger market share of individuals’ savings, because they can offer much more interesting products to local investors. And so there will be a sort of movement from private banking to independent wealth management companies and family offices, which should also influence capital flows towards alternatives, like private debt. Hopefully, within 10-years private markets investments, like private debt will no longer be treated as an alternative category, they should be core part of the investment market.