Brno industrialist Fait sees opportunity in crisis: We have billions ready to invest and are looking for companies to be bought
Source: Hospodářské noviny
Date: 22 May 2020
Author: Luboš Kreč
Igor Fait is not shy about his wealth and success. In addition to real estate, he also invests in the renovation of functionalist landmarks in Brno and has a private gallery and collection of modern art worth hundreds of millions. He also loves expensive cars. "I recently treated myself and bought a Rolls-Royce Cullinan SUV," he says with a smile in his office overlooking Brno's exhibition centre. It was there that he started his career as an economist in the 1980s. Today, he is a financier and industrialist, and hundreds of Czech entrepreneurs and businessmen gladly entrust him to invest their money. They have put around 7 billion into his funds Jet 1 and Jet 2. Together with his team, Fait uses the funds to acquire companies facing difficulties or needing a financial injection in order to further their growth. And then, once they have recovered and been cleaned up, he sells them on at a profit. Although the coronavirus pandemic has impacted also the companies in his portfolio, he is already looking for new additions because he believes that for a true investor the crisis is above all an opportunity.
HN: For the past two years you have repeatedly warned that we should be preparing for an economic recession. And now it's here. What will happen next?
Unfortunately, I haven't yet really taken in how covid will impact the economy. And certainly I'm not alone in that regard. This crisis is caused by a disease, and that presents us with several scenarios. Once a treatment or vaccine will emerge, people will cease to be afraid, the coronavirus will no longer attract such media attention, and life will mostly return to how it was before the crisis. In such a scenario, it would disappear just as quickly as it appeared. The pessimistic variant is that no treatment will be found for quite some time and the disease will return in the autumn and again in the spring and so on. That would be a catastrophe.
HN: What is your thinking as an industrialist who has regularly rescued companies facing difficulties?
A real industrialist must know how to respond quickly to a situation and must always anticipate the worst scenario. The logical response is to rein in what you do with your money. You start saving where possible, to lay off employees that clearly will not be needed, to try to liquidate certain assets, for example, to sell non-essential real estate or even parts of your business, and to reduce the amount of working capital.
HN: And what if you already have cash on hand, what then?
It depends greatly on how much debt you have. If you're operating with a reasonable level of debt, you know that if you sell something it will help you for a certain time to cover your debt service. But if you have a high level of debt, then you are at risk that even if you mobilize all possible cash it still won't be enough.
HN: Is this the approach you've taken with your companies?
We've been fortunate that we – to use the business jargon – liquidated plenty of assets even before the crisis. That is, we sold several of our firms. It's not that we anticipated the pandemic, but we have a somewhat more sensitive view on risk than do other investment groups. Private equity funds abroad in particular leave companies in their portfolios as long as possible, so long as they are making them money, in order to gain as much as possible. We're a bit different in this regard, also because most of our investors are more conservative individuals who press us to behave more carefully. Therefore, I know that once one of our companies has grown to a certain size and I am no longer sure that it will continue to grow as strongly it's better to sell it.
HN: You have cleared out your portfolio.
That's true. In fact, we have kept only two larger firms – PBS Industry Group and the Austrian firm Hoeckle along with Strojírny Poldi. We also have two smaller companies, Payment4U and Fiberpreg. The indebtedness of our companies is low or even zero, so we didn't have to amass cash or make any large layoffs. So far we don't feel threatened. What's more, in Austria for example, where Hoeckle operates, there is a very favourable furlough regime and the government covers up to 90% of wages.
HN: So you haven't felt under pressure at all?
Not really. PBS Industry is devoted primarily to deliveries to the energy industry, where there have been some disruptions, but overall the company hasn't felt any fundamental impacts. A small part of its business, of course, works in the production of (fuel and hydraulic) vessels for construction machinery, and there we've felt the crisis. We have mainly German customers, and they have halted production. So we've had time to complete some prototypes, some people have taken holidays, and others are receiving support from the Czech state, which of course is not so generous as in Austria. But so far our firms are coming out of the crisis relatively well.
HN: Is the situation improving?
Hoeckle Poldi and PBS Industry, which are both connected to the automotive industry, are already picking up speed and have started bringing in new orders. Based on that, from what I see, we aren't expecting any significant gap versus our original projections, even though we do expect a decline for this year. We won't be changing our long-term business outlook, though.
HN: It sounds like you're optimistic.
Yes, you could say I'm modestly optimistic. Of course, it could happen that no treatment will be developed and in the autumn we'll see a second, severe wave, but I see the situation in a slightly more positive light. Moreover, I think that people especially in Europe and America are accustomed to a certain level of comfort that they won't want to give up. As soon as covid is no longer the main topic in the media, they'll quickly forget about it, return to their old ways, and consumption will gradually start to return. In any case, the economic recovery will not have a V shape; it will be more U-shaped.
HN: And when you look at the pandemic as an investor?
The same is true – we were fortunate to have sold many assets in time and what we kept was not burdened with debt. We therefore didn't have to take any extraordinary measures, and this year we will pay out to our investors in the Jet 1 fund the full initial investment. The only thing I see as a change is that everything is now done at a distance. But not even that has impacted us much, because we just didn't have any acquisition abroad already under way. You can't do acquisitions without meeting in person on the spot. You need to get a perception of the company and its management in person, you need to look at the factory, and you can't do these things via teleconference.
HN: How exactly did it happen that just quite recently you sold several firms at once?
We always reach a point where we have taken a company to a certain level and the next step must be, for example, to merge it with another. Or it could be necessary to then make a large investment in order to continue to grow substantially. For that you need four or five years, which we didn't have because the Jet 1 fund must sell all its assets in 2023 at latest. Risk also played a role there; these firms had made good earnings, but we were more concerned about a possible coming recession, so we decided to sell. And we did well in doing so.
HN: You protected yourselves against a coming recession.
Yes, it was our insurance against a crisis. If we now had a full portfolio, we wouldn't be in a good position. Every firm would have been impacted by the pandemic, and their productivity would have fallen. As a result, it would have been difficult to sell such firms at all.
HN: How much did you earn from the sales?
I won't say the exact amounts, but the return was high, both for firms in the fund and for those we held outside the fund. We achieved 5.6 times the invested amount on MSV Metal Studénka. In the cases of Less & Timber and Kordárna Plus, it was 6 times, and for Benet Automotive it was about double.
HN: You sold off Benet Automotive unusually quick – even by your standards – after just two years. It was reported that there were tensions after your takeover.
We bought Benet because we thought the sector was sexy. Carbon is the material of the future, and it fit into our portfolio. That was confirmed when we sold it. The Japanese offered us an amount we couldn't refuse. But I also have to admit that Benet was not an easy acquisition.
HN: Why not?
We acquired it from the company's founder, Pavel Zajíček, who unfortunately had not established any kind of structure in the company. Management was a sort of one-man show. So when we took over and started to introduce certain managerial processes which we were used to and that are common in companies of such size, problems arose. Benet was no little company; it had billions in sales. Several people didn't like the changes we made and handed in their notices, because all of a sudden we expected them to take responsibility and they could no longer hide behind the owner's orders. It was tense in terms of personnel, and we also felt that in terms of sales. And some of those who left then complained about how bad we were doing. But the story, you see, is much more complicated. It was a learning experience for us, and next time when we will buy a company from the founder or from a family who has controlled the firm for a long time, we will be more careful whether there are already managerial systems and processes in place.
HN: There will certainly be opportunities for you, right?
The crisis has caught us at a perfect time. In our second fund, Jet 2, we have invested only around 20%, so we still have over 3 billion crowns available. We are waiting for opportunities, and it need not be just abroad, where we've been looking in recent years. Many sectors are going through a crisis, including the automotive and aviation industries, and we can certainly find some firms in the Czech Republic with great potential but in whose case the crisis caught them not in the best condition. They are in debt and will have difficulty to survive, and those are the opportunities that interest us.
HN: So you are already looking around?
We're always looking. We are in contact with everyone who has anything to do with industry – that means consultants, banks, lawyers, insurers… We tell them that whenever someone sees an interesting opportunity, for example a company that needs to strengthen its cash flow, to let us know and that we'll gladly take a look at it. Everyone is waiting to see what will happen. Not us, we are already looking for opportunities. We are assessing who and what has been impacted by covid, we are looking for firms that are facing or may be facing problems but also have a good chance, with our help, to survive and then begin to grow again.
HN: Who do you have in your sights?
We had our eyes on several firms, but we continue to pursue only one. The others we gave up during the pandemic. But that one looks very promising, and we're near to closing a deal. It's in the energy sector, which was more moderately impacted by coronavirus. The owners with whom we're negotiating are very rational and have accepted that what will now play a greater role in acquisitions is a higher earn-out share, which means the amount that depends on future results.
HN: Is the current market situation helping? Isn't it overheated?
I'm sure of that. We just need to get through this time of uncertainty we're currently in as fast as possible. Right now, buying a company for big money means taking on risk. True, there are sectors that haven't been affected, but in the sectors where we operate there is a high degree of uncertainty. I wouldn't risk buying a company from the automotive industry for several times last year's EBITDA without a clearer outlook for this year as well as next year.
HN: You had big plans; you wanted to open another fund, Jet 3. Is that right?
Yes, that's true. We want to open a third fund in Luxemburg in 2021 or 2022, and most of the investors would be foreign institutions. If we could attract 7 billion crowns, that would be a success. We’ll start looking for money next year; it wouldn't make sense to start now. Typically we plan to target industries primarily in the Czech Republic and Slovakia, but this fund will be quite large and we wouldn't manage to invest the whole sum only domestically, so we will have to look abroad as well. We see many opportunities in Poland as well as in Germany.
HN: So everything is going according to plan?
There has been one change. We decided to capitalize on our experience and reputation and, much earlier than was originally planned, we are launching a fund concentrated on industrial real estate. In the autumn we will put together a billion crowns to start, primarily from our existing investors. The main office will be in Prague, so we will no longer be based just in Brno.
HN: Will it include only industrial real estate?
That's the question. The coronavirus has perhaps somewhat expanded certain exceptional opportunities, such as shopping centres. But the focus will be industrial real estate, and that won't change. We initiated this project before covid and we're already putting together a team. The current crisis has only accelerated certain things. The team would be glad to start making acquisitions even now, but first we must pull together the money. In any case, I think the good time for buying real estate purchases is just now approaching.
HN: Why did you decide to get into real estate?
Many of our investors have asked us in recent years why we don't want to get into real estate, and they've said they'd be happy to invest with us. And because we have experience with industrial firms, we are certainly able to evaluate the solvency of the lessees of such real estate and we understand their businesses better than do classical real estate companies. It's customary for investment funds around the world to have a real estate division and a private equity division. So we've decided to build a second leg of the business.
HN: By the way, how are your investment returns looking over the long term?
We've done a comparison with the S&P, because even Warren Buffett says that buying the S&P index is the best investment. And in fact, the S&P index has recorded a 12.9% annual return on average for the past decade, which is incredible. But we have outperformed the index considerably; we've surpassed it several times over.