Greek turmoil belies venture potential

After months of tough negotiations, Greece and its international creditors reached a new bailout agreement in July. Factored into this are two elements that should theoretically prove attractive to international investors: the country is to take decisive action to tackle non-performing loans, and privatise elements of its infrastructure. These initiatives should hypothetically lay the groundwork for the return of private equity investment in the country. Yet it could be some time before conditions are suitable for such activity.

Capital controls are bringing many Hellenic SMEs to their knees. While this suggests an opportunity for turnaround specialists and market consolidation, a lack of available debt renders leveraged buyouts all but impossible. Additionally, rules limiting the transfer of capital out of the country make international trading extremely challenging. The model used by private equity players in other struggling eurozone countries – namely backing assets that rely on exports – is therefore not viable in Greece.

Despite this, BC Partners' recent acquisition of Athens-based Pharmathen, reportedly giving the company an enterprise value of around €500m, provided some signs of activity. However, such a deal might not have been completed without BC Partners' Greek managing partner Nikos Stathopoulos, whose involvement, according to AHV Associates director of M&A Omiros Sarikas, enabled the GP to "understand the market and identify jewels in the sand".

The high-risk high-yield play
Despite its instability, Greece has reportedly seen interest from international investors – particularly US and Chinese players – for its real estate. Sarikas explains there are two types of investor currently looking to make such deals. Firstly, he points to those willing to make higher-risk deals in order to maximise returns. Secondly, he cites investors looking to take advantage of Greece's low barriers to entry to gain a foothold in Europe. "Greece has a very powerful diaspora in America," Sarikas says. "The US flourished because of its appetite for risk and ability to take a calculated bet. That has always been the case behind American entrepreneurship and the American dream. Therefore it is no surprise that funds such as Oaktree, Fortress and Third Point are looking at Greece."

On the whole, Sarikas feels Greece has plenty of potential for market consolidation; yet, before the country can see private equity investment, he believes there are certain additional factors it must address. A lack of protective regulatory frameworks means earn-out agreements cannot be enforced, rendering investments risky. Additionally, Sarikas believes the country's SMEs typically lack strong and professional management talent, as well as suffering from succession issues and a lack of financial discipline.

The answer to the country's issues, Sarikas suggests, might well lie in backing and supporting startups with venture capital funding. It is common in struggling economies with high levels of unemployment for talented and motivated workers to create their own opportunities out of necessity. Such companies will typically have younger management teams, uninhibited by succession issues. Furthermore, Sarikas sees evidence Greek companies as a whole are increasingly looking to introduce financial discipline and professional structures. It stands to reason that such structural shifts are easier to implement from a startup position.

The financial situation in Greece is far from inviting for private equity players, yet venture-capital-backed companies, by their very nature, need not rely on banks for debt financing. The service sector, in particular, also has relatively few production costs and is therefore less likely to be hit by capital controls. With the falling price of labour and a highly educated workforce, there is little reason why the country cannot compete with emerging markets when it comes to producing startups providing sophisticated services.

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