There is no clear definition of private equity capital in Poland. The terms “private equity” and “venture capital” are often used interchangeably. The concept of private equity capital is the broader term and will therefore be used in this section in refer- ence to the activity of both private equity and venture capital funds, the latter being a broad subcategory of private equity firms.
Private equity investments are generally made by private equity firms in the equity or debt of companies that are not publicly traded on a stock exchange. The aim is to achieve profits in the form of capital appreciation in the medium or long term. Private equity firms can be classified into three main groups depending on their invest- ment strategy: private equity firms that invest in mature companies; venture capital firms that focus on investment in early-stage companies; and business angels investing in early-stage companies as well as providing them with seed funding. These firms differ mainly depending on what stage in the life of a company they focus on. Another important difference is the scale of investment. In practice, the differences between private equity and venture capital investors are often difficult to determine. Private equity firms often invest in both mature and early-stage companies. Therefore the term “private equity investment” is widely used because it applies to investment in all stages of a company’s development. This section follows this approach.
In an economy, private equity firms act as financial intermediaries that allocate capital entrusted by investors in non-listed companies with above-average growth potential. Such investment is expected to generate above-average returns for inves-
tors. The European Private Equity and Venture Capital Association (2000) identifies five basic groups of investors: private investors; large companies; banks; pension funds and insurance companies; and public institutions (local and central). National government agencies play the greatest role among these investors in Poland today. This is due to the financial crisis of 2008 and a significant decline in the amount of funds raised by private equity firms since 2008. Table 10.2 shows the structure and types of institutional investors who invested in private equity firms in 2007 and 2013 respectively.
Table 10.2. The amount of funds raised by private equity firms by type of investor in 2007 and 2013 (€ thousand)
Type of investor 2007 2013
Banks 12,000 0
Capital markets 8,750 0
Corporate investors 0 6,500
Endowments and foundations 100,000 300
Family offices 0 2,680
Funds of funds 36,000 61,560
Government agencies 40,220 108,810
Insurance companies 0 6,570
Other asset mangers 2,560 2,860
Pension funds 0 23,700
Private individuals 8,410 15,000
Sovereign wealth funds 0 1,270
Unclassified 615,849 32,000
Total 823,780 261,250
Source: EVCA (2014).
Funds of funds are another important type of institutional investor, although they invested only half of what government agencies did in 2013. Banks, which used to be important institutional investors, have made no new investments in private equity firms in the past two years, while the role of individual investors in Poland has increased sig- nificantly. In 2013, individual investors were responsible for 5.7% of new investments, although that is a minor role compared with that of individual investors in developed countries. This may be due to the small number of wealthy individuals ready to take risks. So far not a single university has invested in private equity firms, an indication that many Polish academic institutions are not interested in going commercial with their research results.
Private equity capital is primarily allocated in innovative small and medium-sized enterprises (Private Equity Council, 2008). For these companies, such investment is often the only way to finance their development. The high risk related to their opera- tions makes it difficult for them to obtain bank loans or other outside funding. Moreo- ver, private equity investment is often related to active governance, often accompanied by the transfer of expertise and human capital to these companies. From the beginning of their involvement, private equity investors have an exit strategy to enable them to cash in their profits. The most common investment horizon for private equity firms is five years, a period that may be extended depending on the company’s development and the market situation. Companies benefiting from private equity capital are usually prepared to go ahead with an IPO, which is often the simplest way to exit from an investment. By going public, the company advances to the next phase of its develop- ment, while private capital firms contribute to the development of the capital market. The positive impact of private equity firms on the economy has been demonstrated by Taylor, Brooks, and Hodge (2002). The researchers found that private equity firms invested $ 273.3 billion in 16,000 companies in the United States in 1970–2000. These companies generated 13.1% of the U. S. GDP and employed 5.9% of its total work force during this period. The study also showed that, thanks to private capital investments, new jobs were created that required higher qualifications and yielded above-average wages. Taylor, Brooks, and Hodge showed that companies infused with private equity capital had higher sales and exports, spent more on research and development, and paid higher taxes than companies using other sources of funding.
Similar findings were presented by Wasmer and Weil (2000), who studied 20 OECD countries in 2000. Their study showed that the role of private equity firms in the economy increased by 0.075% of GDP, accompanied by a 0.25% – or 2.5% in the long term – fall in unemployment. This explains why private equity firms are seen today as an important element of stimulating long-term economic growth. In addition, the literature shows that private equity firms help develop an economy based on knowl- edge and innovation (Sobańska and Sieradzan, 2004).