"We still have dry powder and expect to see more opportunities later this year," says Mezzanine Management founder


Q&A with Franz Hoerhager, founder and head of Mezzanine Management, manager to the AMC funds which recently exited Zagreb-based contract research organisation Optimapharm. 

Hoerhager, who holds a Doctorate in Economics from the Vienna University of Economics and Business Administration, was a managing director at Bank Austria from 1992-1999. 

Having been an active investor in Central and Eastern Europe since 2000, here he gives his take on the current climate, doing due diligence remotely and the prospects within the healthcare sector in the CEE region.

With regards to the current pandemic, are you mostly experiencing turmoil in your existing portfolio at the moment, or are you also able to turn your gaze toward opportunities in the market?
At this time it is natural to have some affected companies, and our Polish pizza chain Dominium is an example of this. However some of our companies are finding increases in demand at this time, such as Akomex, our most recent investment. We backed this specialist in cardboard packaging for the pharmaceutical and food sector in February this year. We are also seeing Profi, a Polish pâté maker we backed in late 2019, performing well right now. 
Of course with our largest fund raised having closed in late 2018, we still have dry powder and expect to see more opportunities later this year as we gain clarity on the situation facing economies and businesses in different sectors across Central Europe. We expect to find attractive opportunities for partnership and are well capitalised to fund them. 

There’s an opportunity to be seized by debt funds now, due to the expectation of rapid growth in the volume of distressed loans over the next few months. Do you agree?

I can’t comment on the opportunity for funds looking to take advantage of distressed opportunities, but I know that there is less non-bank lending in Central Europe then in Western Europe, and this has long been an opportunity for us as a mezzanine growth capital provider. Over our 20-year history we’ve evolved to operate across a wider portion of the capital structure, and are now preparing to launch a debt fund because we feel the region is underserved here. 

If there’s a slump in fundraising, some smaller funds could close, paving the way for megafunds to continue their growth that has occurred over time. What’s your take on that?

This may prove true. Our solution is to grow our product range, not necessarily the individual fund size, as we are the number one place to go for capital for mid-size companies, and we do not want to lose this competitive advantage. 

What would you say are the main drivers of change in the private equity space, before the crisis and currently?

Valuations in Central Europe, like elsewhere, were creeping up, and that has been a combination of a lot of money and quality assets. I think there has long been discipline by established Central European GPs to seek out quality, ambitious teams and then find an interesting angle to help them to grow faster. While growth rates are higher in this region than in Western Europe, beta is not the primary driver for local GPs in the region; it’s about the alpha/value creation. 

Do you think it's possible to conduct PE business practices like due diligence remotely?

I think we need the personal contact aspect and to be able to truly understand the company and the people powering it that we are about to invest in. 

What did we learn from the financial crisis in 2008 and what can we learn from this crisis?

We learned that a lot of opportunities arise from difficulty; it’s important to remember that. Many agile companies, especially those with experienced financial backers supporting them with human and financial capital, can pivot to accommodate changes in demand/new products/verticals. There may also be scope for market consolidation as some companies struggle to adjust. 

Many funds are anticipating a decline in dealmaking, is this true also for the CEE region? 

I expect a pause but not a permanent decline. Lots of great deals were done in 2009 across all of Europe and this is because private equity invests across cycles as it’s about identifying ambition and talent, and this can take place at all times. I think conversations that commenced last year will continue. The deals may take longer to sign, but that’s an opportunity to continue to build a relationship and an angle for post-deal value creation. The deals we do see crossing the line this summer are likely to be those which have been in discussion for some time. We expect to announce a deal in the coming weeks which we have been working on for a while as we remain comfortable with the team and enthusiastic about the opportunity. 

What’s your outlook on private investments in the healthcare sector over the next few years?

Central European companies are capable of becoming global successes, and many have done so with private equity backing. We’re proud to have worked with Optimapharm, which grew impressively during our 18-month partnership. The Zagreb-based company made three add-on acquisitions in the Czech Republic, Switzerland and Austria and opened five new country offices to serve an ever-increasing customer base across the whole of Europe.
At the end of last year, we sold Amethyst, a Romanian radiotherapy business which had been focused on its home Romanian market when we initially backed it in 2014. During our five-year partnership it became one of Europe’s largest operators of radiotherapy clinics with an enhanced international footprint in five countries. We are also proud to have supported the creation of the largest provider of private healthcare services in Poland through our backing of Lux Med alongside Mid Europa Partners through strategic acquisitions. 

There are great prospects for Central European healthcare businesses, and our partnerships have proven that, in healthcare, you don’t have to be big to be successful.