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Monday, July 7, 2014

Not All Foreign Investors Are Good For The Greek Economy!

"Greece’s successful return to international capital markets in April has boosted confidence in the country’s medium-term prospects, encouraging hedge funds and private equity groups to take a closer look at Greek companies that have survived the crisis".

This comes from a FT Special Report on Greece. I would argue with vehemence that what the Greek economy definitely DOES NOT need is hedge funds and private equity groups.

Private equity groups are financial investors. When PE companies invest, they do so with the explicit purpose of achieving a financial return, preferably within a 5-year time frame. The real business activities of the acquired company are not an end per se but instead only a means towards an end, whereby this end is the financial return.

Hedge funds have the same interests as PE companies with the only difference that they don't even give a damn about the real business activities of the target. Their sole objective is to achieve a quick financial return regardless of the methods applied.

Both, private equity and hedge funds are legitimate business activities. They wouldn't exist if they didn't serve a purpose. My only point is that the purpose they serve is not a purpose which serves the well-being of the Greek economy.

There can be no question that the only long-term solution for the Greek economy is foreign investment, both as a source of capital as well as a source of know-how transfer. Whoever disagrees with that is disagreeing with common sense. However, there are different types of foreign investments and investors and the challenge for Greece will be to pick the right ones.

The 'right' foreign investor for an economy like Greece's is an investor in the real economy who takes a long-term commercial view when making the investment. He doesn't invest only because taxes or labor costs are low because taxes and labor costs can quickly become high again. He invests because he sees an opportunity to expand his global business through a presence in the Greek economy and, ideally, because he sees Greece as a good location to serve other markets in the region. He invests because he sees resources in the Greek economy which are only waiting to be tapped (like talented and well educated human resources; like natural resources; like logistic advantages; etc.).

There is one aspect of overriding priority which I would advise every Greek official who decides over foreign investment to follow: "Know thy partner!" One has to understand what the foreign investor's culture and his motives are. The answer to that question can almost always be found in the investor's track record. And, at the end of the day, it comes down to a judgment about the investor's owners and managers.

About 30 years ago, BMW acquired a small Austrian engine manufacturer. Today, more than half of all BMWs sold in the entire world are run by engines made in Austria, several thousand people are employed in Steyr and BMW is Austria's largest tax payer. After the opening of Central and Eastern Europe, BMW could have easily found cheaper places within the radius of a few hundred kilometers (several car manufacturers went to Hungary, Slovakia, etc.). Instead, BMW expanded in the more expensive Austria because they were happy with Austria's infrastructure and labor resources. BMWs Austrian website states the following: "Of particular importance to us are good relations with the people and the region which is their working and living home. Also the dialogue with employees and neighbors, customers and partners and the respect for shared values and ideals. BMW engages itself publicly, culturally as well as socially". Clearly, BMW has been an ideal foreign investor for Austria.

In the late 1990s, BAT acquired the Austrian monopolist tobacco company as part of a privatization program. During the first years, investments were made into Austrian production and output increased substantially. Today, the Austrian company is owned by a Japanese company. All Austrian production has been closed and transferred to more efficient locations (economies of scale). Consequently, there is no longer R&D in Austria. Job losses in Austria were substantial. Clearly, BAT has not been a good foreign investor for Austria.

I sincerely hope that Greece will not fall for PE companies and/or hedge funds!

4 comments:

  1. ------and the respect for shared values and ideals-----. Sure, Greece fits the profile of a country BMW would invest in. You get the "investors" you deserve. The whole thing reminds me af the prison director who complain that all the problems of running the institution is because of the low quality of the clients.
    Lennard

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  2. Wish there were people like you in the Greek government. On the other hand you (and every 'you') can clearly understand that it is not a matter of lack of common sense....It IS though an issue of contempt for the average citizen...Politics is all about it....

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  3. ViennacapitalistJuly 16, 2014 at 9:30 AM

    Klaus, do not agree: Shutting down inefficient (i.e. expensive locations) can also be good for a country as it frees valuable resources (land, labour)-sometimes local guys, or companies concerned about their immage (BMW) are not willing to do this. But it is essential for a market economy. The question is whether the labour market is sufficiently flexible to reallocate the freed ressources, it is here where most problems are rooted. I agree, however, that there are a lot of dubious PE guys running around...

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    1. I am not disagreeing with the great benefits (and frequently necessity) of creative destruction at all! All I am suggesting is that financial investors like PE companies, by definition of their business model, are - in general - unlikely to do anything creative unless it has a direct consequence on the cash flow they can take out of the company. And any cash flow taken out of a company is cash which is no longer available to finance longer term investments.

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