Venture capital and pension system Gábor Dávid Kiss
ANNOTATION This study deals with the possible link between pension funds, venture capital and innovation to manage the challenge of aging. Institutional capacities of Hungarian second pillar is engrossed by the reallocation of it's bond and stock portfolio - therefore "exotic" investments as selected investment into the real economy by means of venture funds is uninterested. Innovative SME-s have low share on venture capital market of Visegrad countries. This is in connection with the neofordist or knowledge user profile of the subnational regions of these countries.
KEY WORDS second pillar, pension portfolio, innovation, FDI, venture capital
INTRODUCTION Share of economic inactive cohorts is rising due to the improvements of life expectations and ageing in developed countries on the long run – while transitional V4 countries have to face with similar results in present days caused by transitional unemployment1. Therefore both the supply and the demand side is affected of the GDP production, because structural changes in consumption are could be influenced by these processes2. Pension systems and real economies are pressured by transitional unemployment and ageing based reduction of economic active population. The possible aim of establishment of World Bank’s multipillar pension scheme could be the compensation of demographic deficit by the expected positive returns on the capital market34. The weakest point of this logic is the central assumption of continuous economic growth which is indicated by capital markets – under structural changes of demographic and consumption structures. While strong correlation could be possible between capital market returns and economic growth on the long run (at least 18 years5), productivity and adaptability are the main the premises of continuous economic growth under these circumstances67. Acceleration of innovation and new technologies could be the key in this case, which could be supported by pension fund’s investments into venture capital funds8. Venture capital could be the missing link between the long term investor pension funds and the innovative enterprises. 1
Kiss, G. D., Dudás L. 2009. Faces of Ageing and Fundamental Background of Pension Investments – in East Central Europe, Russia and Scandinavia. In: Procházka, David - Korda, Jan (ed.): The 10th Annual Doctoral Conference of the Faculty of Finance and Accounting, University of Economics, Prague – Collection of Papers 2009. Vysoká škola ekonomická v Praze, Nakladatelství Oeconomica, ISBN 978-80-245-1522-9, pp. 77-86. 2 Botos K. 2009 Az idısödés gazdasági hatásai – egy stratégiai jellegő kutatás vázlata. In: Botos Katalin (szerk.): Idısödés és globalizáció – Nemzetközi pénzügyi egyensúlytalanság. Tarsoly Kiadó, Budapest, 1-8. oldal 3 Schmidt-Hebbel, K. 1998 Does Pension Reform Really Spur Productivity, Saving and Growth? Documentos de Trbajo del Banko Central Chile, N°33 April 1998 4 Holzmann. – Hinz, R.: Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform. World Bank 2005 5 Hagstrom, R.G. 2000 Warren Buffet portfolió. Panem, Budapest 6 Botos K. 2009 Az idısödés gazdasági hatásai – egy stratégiai jellegő kutatás vázlata. In: Botos Katalin (szerk.): Idısödés és globalizáció – Nemzetközi pénzügyi egyensúlytalanság. Tarsoly Kiadó, Budapest, 1-8. oldal 7 Schmidt-Hebbel, K. 1998 Does Pension Reform Really Spur Productivity, Saving and Growth? Documentos de Trbajo del Banko Central Chile, N°33 April 1998 8 Hartmann, P. – Heider, F. – Papaioannou, E. - Lo Duca, M. 2007 The Role Of Financial Markets And Innovation in Productivity and Growth in Europe. ECB Occasional Paper Series, No 72 / September 2007
30 Electronic copy available at: http://ssrn.com/abstract=1542122
This study analyzes the existence of this bridging phenomenon in Hungary in the light of pension reforms in 1997 and 2006 – showing the innovation capacities and knowledge based economies in the subnational regions.
PENSION REFORMS IN HUNGARY
Returns of mandatory funded pillar (established by 132nd law of 1997) remained significantly lower than another multipillar user emerging countries (as Poland or countries of Latin America) and followed the MNB base rate9 – partially due to the conservative bond-oriented investment strategies10 and high transactional costs11. Market competition and economic growth was not accelerated by this reform due to the under-informed fund members or the awfully capitalized domestic capital market12 13. These problems were corrected by the modification of edict of the government 282/2001 with the introduction of eligible portfolios in 2006. Share of equities reached a 40% weight in the case of the most popular “balanced” and “growth” portfolios and holding of venture fund units were allowed with 3% or 5% share (but one fund could have at most 2% share). Therefore Hungarian pension system became compatible with the main logic issues as acceleration of real economy trough financing. But, as the Yearbook of Association of Pension and Health Funds Stabilitás suggests, there is no such development in the case of domestic mandatory pension funds – venture fund units are lacking from second pillar’s portfolios both in 2007 and 2008.14 It is necessary to study the competitive development and the role of domestic institutions to understand the difference between de jure and de facto conditions. This study based both on secondary (processing of academic literature sources) and primer (interview) methodology. Open questions were send in e-mail both to the entire membership of the Association of Pension and Health Funds Stabilitás and the Hungarian Venture Fund Association.
COMPETITIVE DEVELOPMENT IN HUNGARY Enterprises with enormous growth potentials implying unmanageable risks for the bank sector, but they are the main markets for the venture funds – while the role in employment15 is unquestioned of these SME’s in the US16. Only 2 thousand European enterprise gained venture capital support in their seeding and starting up phase in 2007 – while this number is only 30-40 in the Visegrad Countries (V4). Only 0.36%-6.22% of European venture and private capital investments were channelled into these enterprises between 2003 and 2007 (this share at the V4 remained between 0.1%2.36%), and only 1% of SMEs negotiated and planned to use this financing channel17. Subnational causes have to be beyond this supranational phenomenon as the upper developments suggested.
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MNB 2008 Ábrakészlet a legfrissebb gazdasági és pénzügyi folyamatokról. Magyar Nemzeti Bank, 2008. augusztus 29., Budapest 10 PSZÁF 2008 Nyugdíjpénztári hozamok (2003-2007). PSZÁF 11 Czajlik I. – Szalay Gy. 2006 A magánnyugdíjpénztárak mőködése és szabályozása. MNB-tanulmányok 48. 12 Palmer, E. 2007 Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance. WB 39146, IEG 13 Impavido, G. – Rocha, R. 2006 Competition and Performance int he Hungarian Second Pillar. WB 3876 14 Stabilitás 2008 Stabilitás évkönyv 2008. Stabilitás Pénztárszövetség 15 With 10.4 million employed people and 2.3 trillion USD incomes in 2006. 16 Sprague, C. 2008 Venture Capital & the Finance of Innovation. EBSCO Research Starters 17 Karsai, J. 2009 The End of the Golden Age - The Developments of the Venture Capital and Private Equity Industry in Central and Eastern Europe. MT-DP 2009/01
31 Electronic copy available at: http://ssrn.com/abstract=1542122
Imre Lengyel’s (2006) pyramid model was used to study this strange preference of financing expansive enterprises18 or buy outs19. Cross-border development of value chain caused the concentration of knowledge intensive activities and the decentralisation of processing activities – which affected strongly the subnational regions in Hungary and the other V4 countries. Centrum-peripheral relationships are strongly connected to the creation and application of knowledge. Therefore three types of regions could be defined: knowledge creator20, knowledge user21 and neofordist22. Selection of knowledge intensive enterprise’s sites depends from the quality issues nad intergation of human resources, physical infrastructure and institutional environment 23 24. Hungarian regions are in knowledge user and neofordist categories – which means a semi knowledge creator Central-Hungarian Region, the investment driven knowledge user Western- and Central-Transdanubian regions. They are circled by a static and dynamic halfperiphery with sealed knowledge islands – cities with universities and academic research facilities as Szeged, Pécs or Debrecen. A significant patent activity is concentrated there on the base of qualified professor-researcher and PhD student staff on the area of medical, biologic and chemistry sciences (engineering and economic education is still concentrated in Budapest). These rural development poles have weak connections to the local industry –they are connected directly to the networks of the knowledge creator regions during their research and development activities. The same insular phenomenon exists on national level too, in the financing sources25 of R&D. Financing of R&D from industrial sources in the case of the V4 countries remained 44.3% (abroad sources were 5.8%) after the Millennia, while it was 58% in the Euro-area, 71.4% in the US, and 81% in Japan26. Classical FDI type investments are preferred in the knowledge user and neofordist regions, and the financing of expansive enterprises from venture capital. While privatization was the main target of FDI in the nineties, transport machinery, electronics, food processing and 18
Their average share was 23.16% in the V4 and 18.76% in the EU between 2003 and 2007 (Karsai 2009). Their average share was 69.76% in the V4 and 61.42% in the EU between 2003 and 2007 (Karsai 2009). 20 Enterprises are: • individual products or services with own trade marks; • global distribution, essential need for expansion on international markets; • development of new technology based products and services which can satisfy new customes demands; • success depend on innovation; • high wages can cover only by innovative activities. (Lengyel 2006) 21 Enterprises are: • using modern technology, which is financed partially by FDI; • focus on scale of economy and productivity; • mass production of goods and services. (Lengyel 2006) 22 Enterprises are: • price competition and cost advantages; • cost advantages are based on cheap inputs; • imported low technology. (Lengyel 2006) 23 Lengyel I. 2006 A regionális versenyképesség értelmezése és piramismodellje. Területi Statisztika, 2. pp. 131147. 24 Lengyel I. 2007 Fejlesztési pólusok, mint a tudásalapú gazdaság kapuvárosai. Magyar Tudomány, 6. pp. 749758. 25 Hungary between 2000 and 2007: financed by government (51,25%), industry (38,2%) and abroad (10,55%). (Eurostat: http://epp.eurostat.ec.europa.eu/tgm/refreshTableAction.do?tab=table&plugin=0&init=1&pcode=tsiir030&langu age=en) 26 Arratibel, O. – Heinz, F. – Martin, R – Przybyla, M. – Rawdanowicz, L. – Serafini, R. – Zumer, T. 2007 Determinants of Growth in the Central and Eastern European EU Member States – a Production Function Approach. Paper Series, No 61 / April 2007 19
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chemic industry became the most preferred areas of the FDI after the EU membership of the V4 countries – while venture capital targeted the telecom, media, financial services, transportation and life sciences27 28. Venture capital fits into the development issues of pyramid model on the following ways: they need a stable physical and human infrastructure (hiring up to par management to elaborate and implement value as well as scale focused strategies), a certain level of business to business cooperation (local knowledge, which means a cooperation between global and domestic venture funds to identify enticing enterprises) and a developed capital market (to borrow cash flow based loans, and to secure the exit opportunity after 4-5 years of operation). The demands for liquid capital market is served by the Warsaw Stock Exchange, which capitalisation was higher than Wiener Börse in 2008, and gained a first place at IPO’s on the entire continental Europe28 29.
RELATIONS OF PENSION FUNDS AND VENTURE CAPITAL FUNDS IN HUNGARY Venture capital funds are acting in the V4 countries, but their behavior differs from the general premises – which ere defined on US experiences. Lack of financing innovative SMEs was explained by the pyramid model, but this chapter deals with the financing sources. The main investors of these funds were funds of funds (23.5%), western-European pension funds (13.4%), individuals (10.4%), government organizations30 (10.3%), and banks (10.2%). Only 5.4% of the entire venture capital (4.2 million Euro) were allocated into the V4 countries in 2007, but this is a dramatic growth after the 496 million Euro in 2004 (and share of 1.8%). Pension fund’s share were 18% on the entire Union, so there is no significant difference – but there is a lack of V4 pension funds. They are extruded by JEREMIE (Joint European Resources for Micro to Medium Enterprises) program of the EU, the big western-European pension funds and US/global venture funds. Answers (N=8) of interviewed Hungarian pension funds and venture funds confirmed this statement, but other problems were signed as the lack of benchmarks (opposite to government and stock markets), the low scale of the pension funds, the low level of possible allocation at pension portfolios or lack of know-how. In addition, pension funds are afraid from the market competition caused by free change of funds – so to avoid scandals of high losses, they want to follow the same conservative strategies again. This attitude is the opposite of the issues of sustainable growth31.
BIBLIOGRAPHY [1] Arratibel, O. – Heinz, F. – Martin, R – Przybyla, M. – Rawdanowicz, L. – Serafini, R. – Zumer, T. 2007 Determinants of Growth in the Central and Eastern European EU Member States – a Production Function Approach. Paper Series, No 61 / April 2007 [2] Botos K. 2009 Az idısödés gazdasági hatásai – egy stratégiai jellegő kutatás vázlata. In: Botos Katalin (szerk.): Idısödés és globalizáció – Nemzetközi pénzügyi egyensúlytalanság. Tarsoly Kiadó, Budapest, 1-8. oldal
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Arratibel, O. – Heinz, F. – Martin, R – Przybyla, M. – Rawdanowicz, L. – Serafini, R. – Zumer, T. 2007 Determinants of Growth in the Central and Eastern European EU Member States – a Production Function Approach. Paper Series, No 61 / April 2007 28 Karsai, J. 2009 The End of the Golden Age - The Developments of the Venture Capital and Private Equity Industry in Central and Eastern Europe. MT-DP 2009/01 29 Sprague, C. 2008 Venture Capital & the Finance of Innovation. EBSCO Research Starters 30 Necessity of these was analyzed by Kosztopulosz (2004). 31 Hesse, A. 2008 Long-Term and Sustainable Pension Investments. ASSET4 and the German Federal Environment Ministry
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[3] Czajlik I. – Szalay Gy. 2006 A magánnyugdíjpénztárak mőködése és szabályozása. MNB-tanulmányok 48. [4] Hagstrom, R.G. 2000 Warren Buffet portfolió. Panem, Budapest [5] Hartmann, P. – Heider, F. – Papaioannou, E. - Lo Duca, M. 2007 The Role Of Financial Markets And Innovation in Productivity and Growth in Europe. ECB Occasional Paper Series, No 72 / September 2007 [6] Hesse, A. 2008 Long-Term and Sustainable Pension Investments. ASSET4 and the German Federal Environment Ministry [7] Impavido, G. – Rocha, R. 2006 Competition and Performance int he Hungarian Second Pillar. WB 3876 [8] Karsai, J. 2009 The End of the Golden Age - The Developments of the Venture Capital [9] and Private Equity Industry in Central and Eastern Europe. MT-DP 2009/01 [10] Kiss G. D. 2009 Az idısödés arcai. In: Botos Katalin (szerk.): Idısödés és globalizáció – Nemzetközi pénzügyi egyensúlytalanság. Tarsoly Kiadó, Budapest, 115-121. oldal [11] Kiss, G. D., Dudás L. 2009 Faces of Ageing and Fundamental Background of Pension Investments – in East Central Europe, Russia and Scandinavia. In: Procházka, David Korda, Jan (ed.): The 10th Annual Doctoral Conference of the Faculty of Finance and Accounting, University of Economics, Prague – Collection of Papers 2009. Vysoká škola ekonomická v Praze, Nakladatelství Oeconomica, ISBN 978-80-245-1522-9, pp. 77-86. [12] Kosztopulosz A. 2004 Az Európai Unió kockázati tıkével kapcsolatos politikája és intézményei. In Botos K. (szerk.): Pénzügyek a globalizációban. JatePress, Szeged, 68-88. o. [13] Lengyel I. 2006 A regionális versenyképesség értelmezése és piramismodellje. Területi Statisztika, 2. pp. 131-147. [14] Lengyel I. 2007 Fejlesztési pólusok, mint a tudásalapú gazdaság kapuvárosai. Magyar Tudomány, 6. pp. 749-758. [15] MNB 2008 Ábrakészlet a legfrissebb gazdasági és pénzügyi folyamatokról. Magyar Nemzeti Bank, 2008. augusztus 29., Budapest [16] Palmer, E. 2007 Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance. WB 39146, IEG [17] PSZÁF 2008 Nyugdíjpénztári hozamok (2003-2007). PSZÁF [18] Schmidt-Hebbel, K. 1998 Does Pension Reform Really Spur Productivity, Saving and Growth? Documentos de Trbajo del Banko Central Chile, N°33 April 1998 [19] Sprague, C. 2008 Venture Capital & the Finance of Innovation. EBSCO Research Starters [20] Stabilitás 2008 Stabilitás évkönyv 2008. Stabilitás Pénztárszövetség [2] source
Gábor Dávid Kiss, Ph.D student University of Szeged, Faculty of Economics and Business Administration, Doctoral School in Economics Kálvária sugárút 1. Szeged
[email protected]
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