"We want pension funds to become an active supporter of the private equity market"

Reporter: How does the private equity market in our country compare to that of comparable countries in Eastern and Western Europe? What are the challenges but also the opportunities?

Andrei Gemeneanu: The field of private equity is still at an early stage in Romania, an aspect reflected both by the number of active funds and by the share of investments of this type in GDP. Thus, our country is in last place both in our region, Central and Eastern Europe, and at the level of the entire continent, with a maximum of ten active funds. For comparison, there are approximately 650 private equity funds active in the UK market, while in the United States, the number is 3,300. Also, from the point of view of the share of private equity funds' investments in GDP, Romania is not better, being in the last place in Europe, with a percentage ten times lower than that of Poland and three times below the average of our region.

Looking at the positive side, all these data demonstrate the significant growth potential of the private equity market in Romania. It is also important to highlight the advance registered by it in the last six to eight years, having funds that invest in local companies and that contribute to the economic development of the country. On the other hand, the current state of the local private equity market makes more complex transactions difficult. This is due both to the relatively limited number of large companies available for acquisition, and to certain provisions normal for Western private equity funds, but with which Romanian entrepreneurs are not used. However, once the number of transactions and exits increases, these trends will change within a few years. For this to happen, it is important that institutional investors such as the European Investment Fund (EIF), the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC) continue to be active in the region and engage in supporting the private equity sector. An element with disruptive potential for the evolution of the private equity field is the active involvement of local pension funds, which at the European level represent the main investor, but which are missing from the Romanian market.

Reporter: The last few years have been marked by the pandemic, followed by high inflation and high interest rates. What impact did these events have on Morphosis Capital's activity?

Andrei Gemeneanu: One of the principles by which we are guided in our business activity is "never waste a good crisis". The difficult economic context of recent years, marked by many overlapping challenges, represented an opportunity for companies to demonstrate their resilience. Also, for stakeholders, these periods make the difference between companies that only benefit from a favorable general context and those built on sound foundations. While premiums will suffer from this turbulence, strong companies can not only maintain a steady pace, but can take advantage of the uncertain environment, which creates opportunities for growth and consolidation. For Morphosis, this period represented the context in which we made most of the investments from the first fund, so we were able to apply the aforementioned principle, which was a differentiator for the companies in our portfolio. The most eloquent example of this is that of Stay Fit Gym, which took the opportunity to consolidate a fragmented market, as is the case with gyms. In about two and a half years since we established the partnership with its founders, Stay Fit Gym has increased the number of centers from seven to thirty-seven and has become the fitness network with the largest city-level coverage in Romania.

Reporter: Morphosis Capital invests in companies in several fields, mainly health and wellness, but also technology and education. Why these sectors?

Andrei Gemeneanu: The choice of the areas in which we chose to invest is based on extensive analyzes that we carried out before the launch of the first fund and which we constantly update to check possible developments. For each of the sectors in which the companies in our portfolio operate, there is a significant potential for development, both through the lens of an insufficient presence at the national level, and due to the fragmentation of the markets or the growing demand for the services they offer. Also, these fields demonstrate a high degree of stability even in unfavorable economic contexts. This is due to the coverage of basic needs such as health and wellness, the adaptability and innovation of technology, and the importance of education. In addition to the economic side, our investments also have a strong ESG component. This manifests itself through the democratization of access to high-quality health and wellness services, through the expansion of companies in the Morphosis portfolio and in medium-sized cities in Romania. In addition, technology helps reduce environmental impact, while investment in education supports the development of human capital, which underpins the evolution of societies.

Reporter: What are the essential criteria you take into account when you decide to invest in a company? Why ?

Andrei Gemeneanu: Both for the first fund of Morphosis and for the second, we are looking for companies that bring to the market a competitive service or product, active in areas with growth potential on the local or even international market and that are profitable. We also want to partner with entrepreneurs who are motivated and determined to grow the business together. Last but not least, "human fit" or compatibility at the human level is a fundamental criterion for us. This is based on the fact that we do not acquire companies, but invest in partnerships with entrepreneurs, whose vision we are committed to following. In this sense, if an entrepreneur wants to make a full exit at that time, it means that he is not a suitable partner for us.

Reporter: How do you make the decision to exit a company? Can you elaborate?

Andrei Gemeneanu: For a private equity fund, there are two exit options - partial and full. Regarding the partial exits, for us, the motivation behind them is the increase of capital to continue the process of accelerated development of the companies. The first partial exit we made was in 2022, when we attracted another private equity fund, Integral Venture Partners, to join us in Medima Health, with which we continue to develop the network. At the time of our initial investment, Medima had only one clinic, currently reaching a network of seventeen clinics, and with this capital increase generated by the involvement of Integral Venture Partners, the goal is to reach twenty-five - thirty clinics. We applied the same thinking to EMI Group, which, in the two years leading up to the partnership with Innova Capital, completed two transactions and doubled its EBITDA. The additional capital will contribute to further acquisitions by EMI to consolidate in existing markets and enter new ones, with the first transaction already completed in 2023 through the takeover of KADRA.

In the case of the full exit, so far we have had only one - the sale of the Dr. Leahu Dental Clinics to Regina Maria. Dr. Leahu Dental Clinics have been part of our portfolio for two and a half years, below the usual four-to-five year period we envision. However, it was an opportune time for both the company and the investor, who had a strategic interest in the dental services area.

Looking ahead to other potential exits, our strategy is flexible, putting the interests of the company and the entrepreneur first, so that the growth potential of the organization is maximized in the medium and long term.

Reporter: How would you characterize the evolution of the entrepreneurial environment in our country over the last ten years?

Andrei Gemeneanu: The development of the entrepreneurial environment in Romania in the last ten years has coincided with the accelerated economic growth registered by our country during this period of time. In the last decade, we have seen the emergence of many new businesses, active in various industries, many of them successfully emerging from the pandemic period and the subsequent period characterized by numerous challenges, now having the potential to become important players in the coming years. They are developed by brave entrepreneurs who have the ambition to transform local companies into national and even international businesses. In this endeavor, they take advantage of the diversification of financing methods, being willing to give up part of their ownership in the company by attracting a new strategic partner or even listing on the capital market.

The involvement of private equity funds also contributed to the development of the entrepreneurial environment, a particularly visible influence in recent years. In this way, strong entrepreneurial companies were able to attract both capital and know-how from the funds to help them move to a new stage of evolution. Fortunately, we are seeing an increase in competitiveness in this field, today having a market where the entrepreneur can actually decide the path he wants to take to attract capital. Taking into account the current context, there are premises that the evolution of the entrepreneurial environment in Romania in the next ten years will significantly exceed that of the previous decade.

Reporter: What would be the main legislative changes that, from your point of view, would help the development of the private equity market in Romania?

Andrei Gemeneanu: At the legislative level, in 2011 a rule came into force that allowed private pension funds to have a maximum exposure of 10% of their assets in private equity investments. Meanwhile, in 2023, this ceiling was reduced to a threshold of no more than 5% for this type of investment. At a practical level, the effect of pension funds in the private equity market is insignificant because they are not actively involved in diversifying their portfolio by adding this type of investment. We want, in the coming years, pension funds to become an active supporter of the private equity market, as it happens in the West, where they represent the main investor in the industry, with a weight of 35-40% of the capital.

Reporter: What are Morphosis Capital's plans or goals for the next three to five years?

Andrei Gemeneanu: The coming years will represent a very dynamic period for Morphosis Capital. First of all, we will launch the second fund of Morphosis, for which we are targeting a size of approximately 90 million euros and which will be focused on similar investment directions as those of the first fund. Regarding the investment voucher, we target transactions with a value between seven and twelve million euros, which can increase up to fifteen - twenty million euros in the case of a co-investment. In addition, unlike the first fund, which was 100% focused on the Romanian market, the second fund has a strategy entitled Romania Plus, targeting a regional horizon, with a 70% investment weight in Romania, and the remaining 30 % on other markets in the region that are part of the European Union. During this five-year time frame, the entire capital raised would be invested.

Second, at the level of Morphosis Capital Fund I, most of our investments will mature in the coming years, so there will most likely be exits - partial or full, depending on the opportunities that will arise. At this time, we do not have any specific plans or ongoing discussions, but these transactions are part of the natural evolution of a private equity fund.

Reporter: Thank you!