Venture capital and private equity industry in Hungary

Abstract

Hungary represents the second most developed venture capital and private equity (VC&PE) market in Central and Eastern Europe. This article is based on a detailed survey of the entire VC industry between 1989–2010. It demonstrates that while there was a relatively strong correlation between the allocation of capital to VC&PE funds and the capital flow into the Budapest Stock Exchange, the changes in investment activities were closely related to election years. Investments had been hampered primarily not by the shortage of capital, but by a lack of demand and attractive business plans. The article illustrates the different roles and approaches of global, regional and country VC&PE funds in Hungary. It points out that VC investments hardly satisfied their principal function or mission, namely to support innovative start-up and small businesses. Government interventions in the VC market proved to be ineffective as well. Similarly to the whole region, the Hungarian market profited from a transitory situation in the case of high-value PE transactions between 2007 and 2008, at the beginning of the crisis, when the investment problems in Western Europe had yet not extended to the CEE region. From 2009 onward, however, the crisis has resulted in a drop in investments despite the significant amount of uninvested capital accumulated in recent years. As to the prospects for 2013, the early-stage VC segment in Hungary is expected to flourish owing to the Jeremie funds, while the high-value buyout segment of the market will suffer from both the euro zone debt crisis and the loss of transparency in economic policy.