BUDAPEST, Hungary – The Hungarian-American Enterprise Fund (HAEF), an organization partially funded by the United States government at its inception about a decade ago, recently closed two new funds intended to spur the former communist nation’s venture capital market.
HAEF in late January closed the $5 million Hungarian Innovative Technologies Fund, a seed- and early-stage vehicle primarily focused on the country’s information technology and health sciences markets. The vehicle complements HAEF’s $50 million Hungarian Equity Partners, a vehicle concentrating on medium-size businesses in Hungary that closed in December 1998.
Hungary’s Western Ties
Of all the former Soviet satellites, Hungary made one of the fastest transitions to a market economy after the Cold War because of its cultural connection to the West, said HAEF Senior Vice President Francis Skrobiszewski. When the Berlin Wall came down, the country was quick to privatize its industries, reestablish trade ties with the West and welcome foreign investments. Hungary also was world-renowned for its technological advances in areas ranging from software to color television and even the ball point pen.
HAEF was formed in 1989 with the help of a $60 million appropriation from the U.S. Congress, a measure authorized by the Support for Eastern Europe Democracy (SEED) Act of 1989. The legislation was a part of President George Bush’s efforts to establish market economies in the former Eastern Bloc following the demise in the Soviet Union.
One of HAEF’s primary missions was to attract local private capital to invest alongside the U.S. government, which resulted in the early 1997 launch of Hungarian Equity Partners, a vehicle raised from limited partners such as Bank Vontobel’s fund-of-funds and the European Board of Restructuring and Development. While HAEF initially had made direct investments and loans to small businesses and entrepreneurs, it was forced to scale back its direct investments to making strictly later-stage, parallel commitments with Hungarian Equity Partners.
Going It Alone
Following Equity Partners’ first close in September 1997, HAEF’s management spun out to local Hungarian managers, now known as MAVA Investment Management Kft. HAEF has co-invested with Equity Partners in four of the fund’s five deals since its initial close, including meat product producer Gyulai Meat, machinery manufacturer Mezgep Szolnok, fruit juice, syrup and bottled water processor Szobi Szrp and telecommunications company Tel-Sys.
The creation of MAVA – a private Hungarian investment adviser, as well as manager of HAEF direct investments and Hungarian Equity Partners – signals that HAEF has achieved its goal as outlined under the SEED Act. HAEF helped develop the Hungarian private equity market, and once it has invested its remaining capital and harvested its existing portfolio companies, the organization will be phased out, probably sometime in the first decade of the twenty-first century, Mr. Skrobiszewski said. MAVA will be responsible for raising the next Equity Partners fund.
Reaching Untapped Markets
The smaller, seed-stage Hungarian Innovative Technologies Fund, slated to make investments between $25,000 and $500,000, is intended to reach the untapped early-stage Hungarian entrepreneurial community that HAEF abandoned when it ended its small business loan program in order to co-invest with Hungarian Equity Partners.
HAEF saw an opportunity in early 1998 to introduce a more traditional venture capital vehicle rather than opt to resurrect the small business loan program. “We saw there was a need for seed- and early-stage capital for innovative entrepreneurs,” Mr. Skrobiszewski said. Angel money in the market was virtually non-existent and HAEF’s revamped, later-stage focus left a void for smaller, less-developed companies.
Hungarian Innovative Technologies Fund, managed locally by Managing Director Laszl Hradszki and Deputy Managing Director Jzsef Berecz, and overseen by Mr. Skrobiszewski, raised $2.5 million from the U.S. Agency for International Development and matched the amount with HAEF’s own capital. What the fund lacks in size, Mr. Skrobiszewski noted, it makes up for in uniqueness because there are no other similar, early-stage vehicles in the market.
“We’re at the cutting edge,” he said. “I’d like to see it develop fuller and larger.”
Reflecting on the Hungarian venture market and prospects for additional private equity offshoots from HAEF, Mr. Skrobiszewski said, “Will there be problems? There will be ups and downs. But [Hungary] has made the transition. They’re over the hump.” -M.G.