Women in PE: Innova Capital's Pasecka on consolidation and succession opportunities amid macro challenges

In spite of the market uncertainty in Poland after the outbreak of the war in Ukraine, Innova was still able to hold the first close of its newest Innova/7 fund last year, Pasecka said. The general partner (GP) is now progressing with its second close, planned for the end of this month. A final close could happen at the end of the year. "Last year was very intense because we started fundraising in spring, and already in August, we had the first close for EUR 225 million," she said, adding that the fund aims to raise EUR 350m. "We may even exceed that," she noted.

“Fundraising with the war next door was particularly challenging,” she said. Although the firm’s track record and relationship with its investors worked in its favour, fundraising was still “one of the biggest challenges for us in 2022,” she said. Prior to this, it dealt with the pricing fluctuation of in raw materials and inflation in Poland, which stood at 15%. “We needed to keep a close eye on and review our procurement cycles, look for the savings and implement pricing initiatives in all our portfolio companies," she said.

One of Innova Capital's areas of focus now is signing new deals, Pasecka said. "We would like to keep pace with the investments. Usually, we target two to three deals per year. We are quite disciplined when it comes to the pace of signing new investments. That's our lesson learned from Innova/5 where the investing was delayed for a while due to the crisis," Pasecka said.

As part of Innova/7, the GP plans to acquire two to three targets from Poland and Romania this quarter. It also expects add-ons to existing portfolio companies, she said.

One of Innova's recent successes is the exit from Grupa Inelo, a driver time management app developer which it held in its sixth fund. "With that deal, and a couple of interim distributions from other assets, we would be close to 0.5 DPI (Distribution to Paid-In Capital ratio) at year-end. We are pretty happy with that," Pasecka said, adding that the return on Inelo investment was more than 3x, and the multiple was in high double-digits.

More exits on the table
The war also made exits more complicated initially, Pasecka said. "International strategic investors were hesitant at the beginning, but good companies with CEE reach have still attracted multiple approaches.” Inelo is one such example, she said. The company had a significant presence in the CEE region due to the bolt-on of Slovenian peer CVS Mobile last year, she added. The sponsor had several interested bidders for Inelo, she said, eventually selling it to London-listed Eurowag.

In spite of the turbulent market environment, Innova could look at further exits in the near term. For instance, cosmetics products company Bielenda could list on the Warsaw Stock Exchange next year, Pasecka said. "We would like to be ready for the IPO once the equity market sentiment recovers, but we definitely wouldn't exit the whole position of the fund," she noted.

Market consolidation in the sector in Poland and Romania is impacting Bielenda's growth potential, Pasecka said.

Innova's ambition regarding Bielenda is to build a larger organisation through internationalisation of its sales, export growth and foreign acquisitions, she said. Export already plays a significant role in their revenue stream, she added.

Market conditions in Poland are very favorable to cosmetics brands, Pasecka noted. There are few players active in the space, with Dr Irena Eris being one of them, she said.

In addition to cosmetics products, Innova is working on the consolidation of dentistry and laboratory businesses in the CEE region. Innova has already made acquisitions in Lithuania and Poland and, although it sees further potential add-on opportunities in the latter, it will also look at opportunities in the Baltics. It already has acquired 10 separate companies, she said. Alongside its M&A, the GP will also remain conscious of the need to integrate the add-ons commercially at the holding level, she added.

Poland-based isotonic drinks producer Oshee could be another exit candidate for next year, Pasecka said, although its prospects depend strongly on market conditions, she noted. The company could look at a trade sale or an IPO, she added.

Earlier in May, Innova Capital sold its minority stake in FLOKK, an office chair producer that majority owner Triton recently moved to a EUR 1.63bn continuation fund. With this exit, the GP is therefore about to wind up its EUR 381m Innova/5 fund, she said.

Focus on succession
Innova deploys around 70% of each fund in Poland, with the rest in the Central Eastern European region. Its goal is to build regional champions through consolidation. Given that Poland is one of the largest countries in the region, the companies that Innova invests in can capitalize on the GP’s expertise and money, extending their operations in CEE and becoming an attractive target for strategic buyers entering the region, she said.

Succession activities provide investment opportunities for Innova, Pasecka said. "Founders who set up their businesses after the communist times are often close to retirement age,” she noted. “Sometimes they do have a succession plan; sometimes they do not. Some want to cash out, but also allow their business to reach the next level. They do not have expertise in internationalisation or consolidation.” This is the point at which Innova can step in and support them, she said.

This dynamic is the reason why most of Innova's deals are succession deals, with many of them designated as "platform-plus", Pasecka said. This refers to any situation in which the GP acquires two companies at once, merging them to take advantage of synergies before considering subsequent add-ons.

Innova views sustainability as an important factor in the assessment of companies and aims to pass this onto the leadership teams at target companies, Pasecka said. "In the past, sustainability was an additional layer of their duties and costs. But now they see that their clients are asking questions like: ‘Have you measured your carbon footprint?’ ‘What are you doing about waste management?’ ‘What are your relations with stakeholders?’"

The origin story
When Pasecka hit the job market around 2002, there was a scarcity of private equity (PE) jobs in Poland. Since she had studied in Germany, she was able to join a German financial services company Feri Alternative Assets GmbH after graduation, following which she moved to consulting. In 2006, she decided to join Innova Capital, which, at the time, was a newly established firm.

"We went through the Lehman Brothers crisis, and I saw Innova’s first IPOs on the Warsaw Stock Exchange, such as Mercor or ACE," she said. This was an exciting period of time, she said, following which no two days in her career have been the same.

After four years at Innova, Pasecka moved to market peer MCI Capital [WSE:MCI], where she worked for a few years before returning to Innova again. MCI, which is publicly traded, provided Pasecka with a different experience in PE, she said, as it fundraised and used debt instruments more frequently, she said. "I came back in 2014 and since then, my role has expanded significantly," she said.

On her return to Innova, the key Polish employees of the fund decided to buy out the firm from international founders, Steven Buckley and Robert Conn. The succession was described in a Harvard Business School case, Pasecka recalled. When Innova called her and offered the CFO position with the prospect of becoming a partner soon after, she decided it would be a good move for her.

A developing role
In her current role, Pasecka works on areas including fundraising, where she cooperates with partner Krzysztof Kulig. Kulig taught her a lot about personal relations in business, both in Poland and abroad, she said. Pasecka describes her position as an operating partner role. She focuses on the fund's strategy, value creation, and good application of debt financing and cash flows. Together with Senior Partner Leszek Muzyczyszyn, she focuses on reporting, investing, and monitoring the value and strategy in the portfolio companies.

The CFO position that Pasecka holds evolved significantly over the years, she said, noting the increased institutionalisation and reporting to investors.

ESG has also become an important subject, she said. At present, overseeing ESG aspects is part of Pasecka's job, but Innova is now looking to hire an ESG director. "I strongly believe that five years from now, there will not be any international buyers interested in companies that don't have an established ESG strategy and carbon footprint reduction targets,” she said. When looking at potential targets, she is now considering factors including how the business might evolve over the course of the journey towards net-zero emissions and efforts to reduce the use of plastic.

Innova has had several occasions where it has not bought a company because of how it handled aspects of ESG, Pasecka said.

"One example is when we didn't want to team up with the founders as we disagreed with how they were leading their social policy,” Pasecka said. “We were afraid that this could impact their business as such, because there was a lot of bad news in the press." She cited another example of a company that had experienced rapid growth over the past few years, but its product was not sustainable long-term. With the limitations on the sourcing of materials, there was a significant limit to future growth, Pasecka said.

Asked for advice she would give emerging women leaders in the sector, Pasecka said: "Sit at the table. Take part in all discussions. Raise your hand." Self-promotion and marketing also play a role, she added.

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