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Czech Republic is becoming small for investments

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15 October 2020

Ekonom

text: Alžběta Vejvodová

photography: Tomáš Nosil

 

Igor Fait has spent his entire career in finance and investment. In the 1990s, he founded and managed for 3 years a brokerage company through which people could purchase stocks. He then sold the firm and the capital thusly obtained helped him to launch a new investment business. Now, his funds are helping wealthy Czechs to grow their money through buying and selling companies. At the heart of his business are industrial firms, often those that have lost their markets due to economic downturn or are lacking money for further growth.

In the face of the coronavirus crisis, Fait is so far being cautious about buying. He is waiting. He thinks that the right investment opportunities will not come until the spring of next year. At the moment, nothing is pressing businesspeople to sell their companies. They are being kept alive with government money. Fait is on the lookout for new opportunities in the automotive and energy industries and in retail. In addition to the Czech Republic, he also wants to buy abroad as well as to look for new investors there.

 

Last year, you repeatedly warned about impending economic crisis.  What made you think that the crisis was coming?

Given the long period of economic expansion, one could expect that some kind of slowing had to come. The signs of an approaching economic slowdown usually appear in the automotive industry before anywhere else.  Because we are deeply immersed in that industry, we sensed the slowing even before the coronavirus crisis came.

Shortly before the outbreak of the pandemic you nearly emptied your funds. Was this foresight, planned?

We were selling titles from the Jet 1 Fund. Jet 2 is still in its investment phase, so we are gathering money, we have invested a bit, and we are waiting for opportunity. But in the case of sales from the Jet 1 Fund, the reason mainly has to do with the style of our work, our long-term strategy. We work in such a way that we buy a company and have a specific intention regarding it – to make it healthy, reduce its costs, or on the contrary, boost its sales. As soon as we achieve our goal, we don’t hold the company any longer, because when you hold a company in your portfolio for too long you run the risk that an economic downturn will impact its business sooner or later. By selling it, we reduce the risk that something like this will happen. We monetize our efforts that we have invested into the company. In our funds, we have a limit on the time for how long we can develop the companies. Then we have to sell them.

How much did you earn on the sales?

With MSV Metal Studénka we achieved an annual return of 17.9%. Then we sold Benet Automotive, where we achieved 32.5% and we sold Less Group with a return of 94%. We still have left within the Jet 1 Fund the PBS Industry Group, Hoeckle Poldi Group, and Fiberpreg. These we need to sell by the end of 2023.

Some companies you kept in the portfolio are connected to the automotive industry, which was hit quite hard by the pandemic. These are Hoeckle and PBS Industry Group. Don’t you regret it?

PBS Industry is above all a company from the energy and mechanical engineering sector. Only about 20% of its business is in supplying the automotive industry. We don’t see this as a problem. We kept the Austrian Hoeckle mainly because it was not yet ready to be sold. We feel there is still growth potential there. As a result of the pandemic, its sales went down by about 20 to 30 per cent. Moreover, Austria is very generous in supporting firms affected by the coronavirus crisis – it offers financial support, kurzarbeit. So, in spite of the fact that our sales went down, profit before tax at Hoeckle and write-downs are in accordance with our original plan.

Nevertheless, the state support will end one day. Aren’t you afraid of what will come afterwards?

Austria has already advised that from March onward it no longer will be supporting kurzarbeit. Of course we are concerned about what will happen to the automotive market afterwards. On the other hand, we are engaged with premium car manufacturers, such as Porsche and Audi, where the downswing isn’t so deep. With the transition to electromobility, car producers could also start to outsource production of engines and especially the crankshafts supplied by Hoeckle. This could significantly fill our order book.

How much money can you invest now?

So far as the Jet 1 Fund is concerned, now in October we have a general meeting and we will decide about distribution of money up to the remainder of the acquisition price. In other words, investors already will get back everything they invested into the fund after its establishment in 2015. The fund cannot buy anything else, because its investment phase is already completed. As for the Jet 2 Fund, so far we have invested 1.2 billion crowns out of the total of 4 billion that we have at our disposal. So we have 2.8 billion crowns left. Unfortunately, we have only next year to invest because the investment period of Jet 2 ends by the close of 2021.

So why weren’t you purchasing more right after the first wave of the pandemic?

There is not much going on in the market now. When you want to buy, you first have to meet with the management of the given company, and this has not been possible since March. Then came the summer holidays when acquisition activity usually goes down. Now, there is a second wave of the pandemic, so everything has slowed down again. Nevertheless, we are working on about four potential targets. It’s in an investigation phase so far. We could say that we are in a waiting position. I think that the right investment opportunities will come next year in the spring. At the moment, a number of companies are still being supported by state money. So they are not in a position where their creditors would force them to sell. 

How do your shareholders – your investors – view the fact that you are not in a hurry to buy?

It’s not very pleasant for them. We call for money when there is an investment opportunity. This means that they need to keep their funds in liquid form, and that doesn’t generate any decent interest these days. Nevertheless, when they sign a loan agreement with us, they know already at the beginning exactly when does the investment period of our fund begin and when does it end and that we may call for money at any time during this period. What helps us, too, is that many of our investors are businesspeople or former businesspeople, so they very well understand the current situation. Often they themselves tell us to wait with investing because the right time hasn’t come yet.

Would you disclose which companies you are currently interested in?

We can’t disclose names, because we have signed confidentiality agreements. But in terms of sector they are industrial firms, partially from the energy sector, partially from the automotive industry. Not from that part of the sector focused on production of engines, however, but rather on production of parts that will be necessary also in the era of electromobility. It is interesting that none of our current targets are in the Czech Republic. Everything is in Poland and Germany.

What indicators do you use in identifying potential investment targets?

There are some sectors affected by the crisis more than others. We know that the coronavirus crisis has slowed down the automotive industry quite a bit and some retail companies as well. This is actually an ideal opportunity for us. We like companies that were impacted by the crisis but on the other hand have potential to get back to pre-crisis levels relatively quickly.

How does Tedom, which you bought partially last year and partially this summer, fit into this strategy? After all, this is an energy company that wasn’t touched at all by the crisis.

We don’t only buy companies in troubles. We also have firms that are doing well but still have great growth potential. Tedom is precisely that case. Partly it was that the owners had some disagreements among themselves and one of them just had had enough of it and wanted to sell his share. Also, he had achieved some success and wanted to cash in on it. At the same time, we see great potential in the fact that Tedom is focused on gas, which is a relatively clean and stable energy. It is the only medium capable of balancing out fluctuations in the network. If the sun will not be shining and the wind will not be blowing and German nuclear power plants will be closed, then there is nothing else to keep the electricity network alive. So we bet on gas. After all, the next acquisition of this year – 2JCP – also is a company linked to gas. It manufactures devices for gas turbines. This, too, was not a company in trouble.

Surely, there are prospects for growth, but that doesn’t mean this will be a matter of two or three years.

Tedom is a global company today. It operates across the whole world, and that’s fantastic. I see a great potential market for them in Poland, which is moving away from brown coal and there is a lot of support for gas. Meanwhile, Germany is closing its nuclear power plants. These will be big markets for us, but you’re right that it will be long-term work – four or five years at least. Tedom is for us a company where we see long-term potential. If we will be thinking about exiting Tedom, this will be probably at the end of Jet 2, which means in 2028.

Still, one of the key parts of your funds’ strategies are companies in trouble. If they are insolvent, such as Kordárna was a few years ago, how do you know from the outside that they still have a chance to be saved?

Most important is the product that the company manufactures. A number of companies get into trouble because they invested a lot into research and development of a product and then, when it was ready, the crisis showed up and so the product was selling less than expected. This doesn’t mean, however, that there is no potential. When such a company becomes insolvent, it is an enormous opportunity for us because we are buying an enterprise with excellent product. Even better is when the product is manufactured using new technologies which were financed by loan. These are unambiguous indications that we should come into such company. It means in fact that the company entered the crisis with long-term debts and that the banks, considering the conditions they offer, want the loans to be repaid. Such firms are interesting for us. Ideally, they also have good quality management.

When opening a new fund, do you have to look actively for new investors or do they come by themselves?

It’s a combination. Some of them come on their own. And we directly approach others if we get a tip that somebody has sold a firm or has uncommitted money and is looking where to invest it. We talk to them and if we fit with one another philosophically, then we invest together.

So there is no on-line investment through an application. You talk to each investor personally?

Yes. It never has happened that somebody would invest with us without talking to me or my partners. We are not a company approaching people in a retail manner and collecting money through brokers.

Some time ago, you made it known that you are planning a third fund. How far along are you with its preparations?

This will again be a fund focused on industrial companies. So we definitely cannot open the Jet 3 Fund before the investment period of the Jet 2 Fund is completed. That is at the end of 2021. But we plan to start with marketing and capital gathering already in autumn 2021. We plan to bring in 8 billion crowns. The goal is to have the capital ready by summer 2022. The three-year investment period would then start in summer 2022.

You want to set up the new fund in Luxembourg. Why precisely there?

This is the most likely option, although we are still thinking of the Netherlands as well. The reason is that a number of investors will be from abroad. They are accustomed to working with the legislation that is used in these particular countries. In that way, they don’t have to learn about Czech law.

What prospects have investments on the Czech market from this point of view? Are there enough interesting opportunities also for big foreign investors or are you heading more and more across the border?

The firms into which we are going to invest must be large. We don’t want to have hundreds of small companies. In Jet 2, we have now set a minimum threshold of around 1 billion crowns in sales for an acquired company. In Jet 3, this number probably will be even larger. The Czech market unfortunately does not offer many opportunities of this size. Although the Czech Republic and Slovakia will always remain key markets for us because we want to actively manage and influence the companies in our portfolio, we need also to look elsewhere. We must also come to grips with Poland or Germany, but we won’t invest in countries further away, such as in America or elsewhere in the world.

You had indicated earlier that you also could open a real estate fund. Has that already been worked out more concretely?

Yes, we are getting started and capital subscription will begin in November. We have already approached some investors in advance and many of them are interested in the real estate fund.  However, this is not the kind of real estate fund that is common here in the Czech Republic. We want to approach businesspeople and persuade them to sell us the real estate within which they manufacture.

Why should they do that?

The main reason is that when you are in business you need to concentrate on other things than taking care of the real estate within which you operate. Your main business is production of crankshafts, for instance, and you have a top-class production technology. You have to make sure that you work as efficiently as possible. On the contrary, the main business of the person who takes care of the real estate is to make sure that it is 100% functional so that the tenant will not leave, that it does not get rained into, and that it is best utilized from an economic perspective. These are two different worlds. Moreover, when selling a firm, its value usually consists in economic indicators such as profit or free cash. Selling the real estate separately is much more advantageous than selling it as part of your main business. In Germany or Austria, by the way, it is very common that companies have their businesses in leased spaces.

But this isn’t very common here in the Czech Republic so far.

That’s exactly why we think that this is an opportunity. We want to explain to businesspeople that leasing is much more advantageous. But this is not only about businesspeople – it’s also about the banks that finance them. That’s because Czech banks are today accustomed to having a pledge on everything, including real estate, and that is something our model takes away from them. So in many cases it will also be about cooperation and negotiation with a bank.

What is the best use of real estate in your opinion? Will you add new firms into premises of the original owner to improve efficiency of its use?

Here we again are proceeding on the basis of our experience. For instance, MSV Metal Studénka had enormous premises, but its own business was in only two halls. Next to them, much land and even some halls stood unused. From the premises of one company you may create facilities where there will be more companies. Therefore, we will look for premises such as those of MSV Metal Studénka. This is the best opportunity for us. And there are quite many such opportunities. We already are negotiating about 30 sales.

This real estate fund will also have its registered office abroad?

No, it will have its seat in Prague. It will be made up of a specialized team of people who have worked in the real estate sector for a long time.

How are the investment decisions actually made in Jet Investment?

A very important part of our business consists in the project directors. Their task is to search for opportunities. They are managers who usually have worked previously in mergers and acquisitions departments of auditing firms. They evaluate an investment opportunity, and they have to know if development is possible. Then they present it to a committee and the committee either approves it or does not. If approved, the project director attends to the investment going forward. He manages it until sold and receives a proper bonus for it.

You founded your first brokerage firm in 1993. How difficult was it at that time when investing was just getting started in the Czech Republic?

That was just excellent. It was something new – people were interested and wanted to trade with securities. At that time I think more people were trading than today. Now it is concentrated in a few bigger investors. So it was quite a nice period for brokerage firms.

You sold your brokerage firm very soon – roughly after 3 years. Why?

The Brno Broker Group, which I founded, was a classic securities dealer. There were 50 brokers, they had their investors on the phone, and they were buying stocks for them. When I was selling BBG, it was at a time when there were terribly many similar companies. They began to consolidate, and some of them started to buy other ones. But I didn’t have money to buy another broker at that time. So I took advantage of the opportunity and sold it to someone who was interested and probably bought more such brokerage firms. BBG then became a part of J&T Bank.

You operate also the Fait Gallery, reconstructed the functionalist Zeman Café, and collect modern art. Are these also investments or rather hobbies?

Art is primarily a hobby for me, but it grew to such extent that I have also a part of my personal investments in it to diversify a bit and so I wouldn’t have money only in my funds. Architecture is a hobby. Brno is famous for the interwar period when many functionalist villas were built here. When I support their reconstructions, I’m doing something for Brno.

How are the investment decisions actually made?

Generally, I don’t collect anything older than the Czech modern. The year 1900 is the limit; I don’t collect older art. But my taste has been developing as well. Earlier, I liked classical figure works, then I shifted to cubism, abstraction, surrealism, and constructivism. From the investment point of view, I let myself be influenced a lot also by the specialists from my gallery. They are people who study art, are dedicated to it, and have more time for it than I do. I take their recommendations greatly to heart, but at the same time a picture that I should pay money for must also speak to me. It is some intersection of their recommendations and my subjective feeling about the picture. Personal taste plays a huge role.

Is there a case of a work that came to you on a recommendation?

The pictures of Milan Grygar for instance – he is a constructivist. We had a big exhibition of his works in our gallery, and they said something to me. So I bought a few of his works. The same with Jan Kubíček. This direction was very much influenced by the dealers, and I think they were right. When I’m looking at current auction results, really, cubism and constructivism are very interesting from the investment point of view. At the same time, I think that these pictures have their place decoratively in modern buildings.

How much have you invested into art?

More than 200 million crowns.

What do you personally like about constructivism?

Simplicity, idea. How to put figures together, that speaks to me.

And what about functionalism?

Likewise. Clean lines, minimalism.

But that is very different from this Art Nouveau villa where we are sitting now. How did it happen that this is the seat of your company?

This villa was built by the factory owner Žaloudek, who manufactured machines for the meat industry. It dates back to around 1880. It is one of the few Art Nouveau villas in Brno with such well-preserved interior. Most of them were devastated by the Nazis or communists. 

 

Igor Fait (55)

In the 1990s, Igor Fait worked in managerial positions at Brněnské veletrhy a výstavy (Brno Trade Fairs). Among other things, he founded there an in-house bank. After that, he started his own business. He established a brokerage firm called Brno Broker Group, which he soon sold and began offering investments into industrial enterprises to wealthy businesspeople in the Czech Republic. Now he is expanding abroad. Igor Fait is also a patron of the arts. In Brno, he established a gallery and supports restorations of functionalist buildings, such as the Zeman Café.

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