LP Profile: Polish Development Fund

The Polish Development Fund was set up in 2016 as part of the government's responsible investment plan. "PFR is a new initiative, created three years ago to coordinate various already existing programmes under one common strategy," explains Annemarie Dalka, head of PE fund investments at PFR. "This means it has more impact and is more efficient because the programmes complement each other."

Across all investment strategies, including private and public equities and real estate, PFR plans to deploy PLN 11.3bn (€2.6bn) by the end of 2021. A portion of this will be invested in the private equity and venture capital programme, which currently has an AUM of PLN 3.6bn (€830m). "PFR is a state-owned entity but there are different sources of funding," says Dalka. "For instance, we operate one of the largest VC fund-of-funds in this part of Europe, and capital for this activity was awarded by the European Commission."

Most recently, the private equity programme invested in Innova 6, the latest vehicle from Poland-based Innova Capital; the fund held a final close on €271m in September. Innova has a pan-regional investment mandate, but has historically completed the majority of its deals in Poland. The LP also backed V4C Poland Plus from Value4Capital this year, a GP focused purely on the Polish mid-market. "The PE fund-of-funds' geographic scope is broader. We are happy to look at regional funds, as long as the GP's investment strategy ensures the lesser of 50% of the portfolio or the amount equal to four times our commitment is invested in Poland," says Dalka. "Other development finance institutions use similar mechanisms, guaranteeing for instance a minimum investment into SMEs."

Shopping in the mid-market
Within this geographic limit, PFR targets the mid-market, or what counts as the mid-market in Poland, which would count as the lower-mid-market or small-cap space in the UK. "We focus on the mid-cap managers, as our research shows the largest financing gap in Poland exists in the SME space", says Dalka.

The number of fund investments made by PFR annually varies based on opportunity. "Our due diligence process is very thorough," says Dalka. "We focus on the GP's track record, trying to understand the manager's investment approach – conducting attribution analysis and assessing how disciplined the investment process is. We also do reference calls with both portfolio companies and former LPs, trying to establish the source of added value and whether this is a repeatable skill or a matter of timing or luck."

Like many other LPs, Dalka is concerned by fund size increases. This issue is particularly important in the segment of the market that PFR targets, because even a modest size increase could lead to strategy drift. Dalka explains: "We observed an unfavourable trend, where some managers were pushed to raise larger funds and, as a result, struggled to deploy the capital or were forced to operate outside their investment expertise."

Polish PE's future
PE in the CEE region, and in Poland specifically, has faced challenges in the past: "CEE-focused funds raised in the previous cycle held portfolio companies for a longer period of time," says Dalka. "This created a negative overall perception of the investment community, because LPs were not happy with the increased duration and time it took to get their investment back. This is one of the aspects we try to address and mitigate in our legal documentation."

Because of this, some funds in the region have struggled to raise in recent years. However, Dalka thinks new legislation could help alter this situation: "Poland recently introduced an auto-enrolment pension system (Pracownicze Plany Kapitałowe (PPK), translating to "employee capital plans"), similar to defined contribution in the UK in which employers are choosing an independent asset manager for their pension plans. The programme will increase capital invested in Poland across all asset classes, including alternatives like PE and real estate."

As well as freeing up more capital for PE fund investments, it could help create exit routes for GPs in the region, says Dalka. "This reform could also really move the needle in terms of increased liquidity on the Warsaw Stock Exchange, and provide another viable exit option for investors through an IPO."

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