The Private Equity Review: Poland
i Deal activity
Poland is the largest economy in central and eastern Europe (CEE), with a stable banking sector, active capital market organised by the leading stock exchange in the region (the Warsaw Stock Exchange (WSE)) and an established legal framework adjusted to European standards. Poland has consistently maintained growth during the past 25 years, including during the 2007–2009 global financial crisis. A positive macroeconomic environment and a well-developed and cost-effective labour market support the strengthening of Polish businesses, creating many unique opportunities for investors.
In 2018,2 71 private equity investments with an aggregate value of €850 million were made into companies domiciled in Poland (compared with, for example, 139 in 2015, 84 in 2016 and 61 in 2017). Although the total number of investments declined slightly in comparison with the numbers from previous years, the total value remains quite steady (with exception to the extraordinary total value in 2017); private equity investors invested €896 million in Polish portfolio companies in 2015, €805 million in 2016 and €2.505 billion in 2017). There were 37 buyouts in 2018 with an aggregate value of nearly €494 million. Poland is the biggest private equity market of the CEE countries, hosting 71 per cent of investments by value in the region.3
In 2018, Poland was again the largest market in the region for exits. A total of 43 divestments were valued in the aggregate at €575 million. By comparison, there were 52 divestments in 2015 (€785 million), 29 in 2016 (€374 million) and 37 in 2017 (€549 million).4 The most common exit route in Poland is sale to another private equity firm.
ii Operation of the market
MANAGEMENT EQUITY INCENTIVE PROGRAMMES
Management equity incentive programmes are commonly used to align investors' and managers' interests. Typically, the structures used for such programmes are based either on convertible bonds or subscriptions warrants entitling managers to subscribe for new shares in the company's share capital upon fulfilment of the conditions described in the incentive programme. Managers usually benefit from a discount amounting to the difference between the subscription value of the shares and their fair market value. In the case of listed companies, managers are often entitled to subscribe for shares for a pre-determined fixed price. The goals that managers are to achieve depend on the investor's objective in the investment; typically, goals in private companies include reaching certain earnings before interest, taxes, depreciation and amortisation (EBITDA) or amount of income.
Other incentive programme structures may be based on, for example, share options or phantom shares.
The sale process in Poland is typical for 'young' private equity markets. Half of the potential investment opportunities that are analysed by Polish investment funds are reported by business owners (or their financial advisers) seeking opportunities to sell a business, or to find a new source of financing or a strategic partner.5 Investment funds actively monitor the market and seek potential investment opportunities (38 per cent of analysed investment projects were found by funds' investment teams).6 Active monitoring of the market and the seeking of attractive targets by investing teams play a significant role. The majority of investment opportunities are businesses still led by their original founders (59 per cent in 2014). The second group of investment opportunities are corporates' non-core businesses (14 per cent) and the third are secondary sales (13 per cent in 2014).7
In the case of investing in original owners' businesses, the sale process often involves prior restructuring of the target. This is because many of the 'family' businesses, especially those that were established in the 1990s, continue to be run as private businesses of individuals (primarily owing to tax reasons). A change in the form of running a business and the enterprise's contribution into the company requires diligent separation of business assets from personal property, and identification of debts connected with the business.
The Polish M&A market is relatively professional, and local sale processes are largely aligned with general European practice. The majority of sellers (although still not more than 70 per cent) are supported by financial advisers, and up to 50 per cent of sales are conducted as competitive auctions.8 However, negotiations with first-generation owners of small and medium-sized businesses (which are typical in the Polish market) tend to be time-consuming, especially due to the owners' overestimation of their enterprise's value.9
II LEGAL FRAMEWORK
i Acquisition of control and minority interests
TYPES OF COMPANIES
The vast majority of investors' targets in Poland are companies governed by the Polish Commercial Companies Code (CCC). Thus, the CCC creates the basic legal frameworks regulating control over a target and the rights of a minority investor.
Companies under the CCC are divided into two general classes: partnerships (registered partnerships, professional partnerships, limited partnerships and partnerships limited by shares (SKAs)) and commercial companies (limited liability companies, joint-stock companies and, soon to arrive on the market, simple joint-stock companies).10 Except for SKAs, partnerships are tax transparent; however, no corporate veil is in place to protect the partners. On the other hand, running a business in the form of a commercial company is connected with double taxation (first to be paid by the company and then by the shareholder) but provides the shareholder with the benefit of the corporate veil. In consequence, a business whose scale may attract private equity investors is usually conducted in the form of a commercial company rather than a partnership (with the significant exception of first-generation 'family' businesses).
Another significant factor that influences the preferable form for conducting business are the statutory restrictions on how Polish law-governed investment funds invest. Under the Investment Funds Act (IFA), closed-ended investment funds cannot invest in partnerships, while open-ended investment funds cannot invest in partnerships or limited liability companies. Although these restrictions apply only to Polish investment funds, other private equity investors often also prefer to invest in commercial companies.
CONTROL IN JOINT-STOCK COMPANIES
In Polish joint-stock companies, the level of a shareholder's control over the company is connected with the percentage participation of the shareholder in the total number of voting rights. In a private joint stock company with 'default' corporate governance rules derived from the provisions of the CCC, a general assembly (which consists of all of the shareholders) appoints the supervisory board members (while the supervisory board nominates the management board), has the power to dismiss members of the supervisory board and management board, and has the power to adopt critical resolutions for the company. Obtaining basic control over the company requires the acquisition of more than a 50 per cent stake; however, some important resolutions require a higher majority.
Reaching a 50 per cent plus one share shareholding allows the shareholder to appoint the majority of the supervisory board, and indirectly gives the shareholder control over the personal policy of the company. The CCC prohibits shareholders from giving management or supervisory board members binding instructions; however, due to the fact that the general assembly has the power to dismiss the company's managers, shareholders have, in practice, indirect influence over the policy of the supervisory and management boards.
Although the management board runs the daily operation of a joint-stock company (shareholders are not entitled to act on behalf of the company), undertaking the majority of fundamental corporate actions requires a resolution of the general assembly. A general assembly resolution is required to, inter alia:
- amend the statutes;
- appoint supervisory board members;
- approve financial statements and the management board's annual reports;
- dispose of, lease or encumber a company's enterprise or its organised part;
- acquire or dispose of real estate (unless the statutes provide otherwise);
- issue bonds or subscriptions warrants;
- increase share capital and issue new shares;
- allocate profits;
- exclude a shareholder's pre-emptive rights (the required majority of votes is four-fifths);
- dissolve the company;
- merge, demerge or transform the company;
- change a private company into a public company; or
- change a public company into a private company (the required majority of votes is four-fifths).
The CCC provides for several regulations aimed at protecting minority shareholders. Most notably, shareholders with at least a 10 per cent shareholding may request that an extraordinary general assembly be convened and have influence on the agenda of each general assembly. A 20 per cent threshold of shares in the company allows a minority shareholder (or group of shareholders) to request a vote on the appointment of supervisory board members in groups. In the case of voting in groups, a group of shareholders may vote individually on the appointment of one (or more) supervisory board members, notwithstanding the provisions of the statutes governing the election of the supervisory board members; as a result, minority shareholders who are able to create a voting group may influence the composition of the board. Each shareholder has a right to challenge resolutions of the general assembly, management board or supervisory board. A minority shareholder's level of influence on the company may be further extended by the statutes of the company, which may, for example, provide for the shareholder's individual right to appoint a number of supervisory or management board members, or both, or convene a general assembly.
ii Fiduciary duties and liabilities
The CCC does not expressly state the fiduciary duties of a shareholder towards the commercial company or other shareholders. Shareholders exercise their rights by voting on resolutions at the general assembly. Resolutions may be challenged by other shareholders and members of the management or supervisory boards (or both), which creates a mechanism of control over the majority shareholder's actions. A resolution may be challenged if it contravenes the statutes of the company or good practices and harms the interests of the company, or if it is aimed at harming a shareholder. The general 'good practices' clause allows the majority shareholder's actions to be opposed in a wide range of circumstances if the company's or other shareholders' interests are harmed. Although there are no specific provisions of law governing the matter, legal doctrine and jurisprudence have developed the concept of a duty of loyalty, which shareholders (especially a majority shareholder) owe to the company and other shareholders.
Due to the nature of commercial companies, the liabilities of a shareholder towards a limited liability company or joint-stock company are, generally, limited to the proper fulfilment of an obligation to make a contribution to the company (in exchange for shares). In the case of an acquisition of shares, the acquirer is jointly and severally liable for the contribution with the seller. A shareholder is also responsible towards the company or other shareholders in accordance with the general principles of civil law (i.e., for damages caused by illegal actions).
Company officers (members of the management and supervisory boards, liquidators) are personally liable for the damage caused to the company by their actions or omissions contrary to the law or the statutes, unless they were not at fault. Company officers should perform their duties with higher standards of care connected with the professional nature of their positions; they should act diligently, reasonably, cautiously and with foresight, and anticipating the results of undertaken actions. They are also obliged to act in the best interests of the company (which is independent from the individual interests of shareholders) and treat shareholders equally. Management board members cannot conduct a competing business activity without the company's consent and are obliged to refrain from performing duties in the case of a conflict of interest. Shareholders, the general assembly and the supervisory board are not entitled to give the management board or its members binding instructions with respect to the management of the company's affairs.
Management board members in limited liability or simple joint-stock companies may become liable for the obligations of the relevant company – jointly and severally with the company – if enforcement proceedings against that company are ineffective and the managers did not timely file for a declaration of bankruptcy (the liability may be avoided if they demonstrate that despite the application not being filed, the debtor has not suffered damages).
Private equity investments (Polish or foreign) in regulated financial institutions are limited to smaller stakes and smaller target institutions by the current policy of the financial services regulator (KNF). This is largely because the suitability criteria applied by the KNF in assessing acquisition of controlling stakes usually include the requirement for investors to commit to a long-term investment horizon, as well as capital and liquidity support that is not compatible with many private equity investors' policies.
iii Regulations applying to foreign investors
Poland, as a Member State of the European Union, forms part of the European Union's internal market and aims to guarantee, within the framework of applicable regulations, the EU's 'four freedoms' (i.e., the free movement of goods, capital, services and people).
While the obvious beneficiaries of Poland's membership in the EU are entities from the remaining 27 EU Member States, Poland sets out very few barriers for investors from non-EU countries, as noted below.
The principal remaining limitations on foreign investment are found in the Act on Acquisition of Real Estates by Foreigners (AAREF). Under the AAREF, if a foreigner (i.e., an individual foreign citizen, a legal person with its registered seat outside of Poland or a company domiciled in Poland but controlled by a foreign entity) acquires real property or obtains control over a company holding real property, a prior approval of the Ministry of Internal Affairs is required (under pain of nullity).
The AAREF, subject to some minor exceptions, does not apply to foreigners from the European Economic Area (EEA) or Switzerland, nor does it apply to Polish law-governed investment funds (regardless of the sponsors' domicile) or to investing in public companies listed on the WSE. Other foreign investors may decide to operate through holding companies incorporated in an EEA country, usually in Luxembourg or Cyprus, to avoid the application and requirements of the AAREF.
The Act on Control over Certain Investments (ACCI) gives the government a tool to control investments (in particular, foreign investments) in companies that are strategic for national interests and security. In general, the regulation follows similar solutions established in other European countries. According to the ACCI, acquisition of a shareholding above certain thresholds (the lowest threshold is 20 per cent) in companies indicated in secondary regulation issued by the government or acquisition of the company itself requires previous notification to the Minister of State Assets, the Minister of National Defence or the Minister of Marine Economy and Inland Navigation (depending on the relevant company sector), which can oppose the transaction. Lack of notification or acquisition contrary to the opposition results in the invalidity of the transaction and is sanctioned with a fine of up to 10 million zlotys or imprisonment for up to five years. As at the beginning of 2020, only nine entities (leading Polish companies in the energy and telecommunication sector) are subject to ACCI regulations.
iv Tax matters
Poland conforms to global trends aimed at closing the remaining loopholes in the tax system through various regulations, such as:
- the General Anti-Abuse Rule (GAAR) and specific tax anti-abuse rules applicable to the exchange of shares and dividends;
- transfer pricing documentation requirements;
- the Mandatory Disclosure Rules (MDRs);
- changing the withholding tax regime by strict application of the beneficial owner concept; and
- introduction of the exit tax.
Poland has participated in the Organisation for Economic Co-operation and Development's base erosion and profit shifting project (known as BEPS) and has implemented Council Directive 2014/107/EU (the country began reporting in January 2017).11 Moreover, Poland has signed many double tax treaties (more than 80 conventions) and international agreements on the exchange of information on tax matters.
From an investor's perspective, the most crucial change was the introduction in 2016 of the GAAR into the Polish tax law system. The GAAR was created as a new tool that tax authorities may apply to reclassify the business operations of a taxpayer who obtains substantial tax profits through tax-avoidance strategies. The clause allows the authorities to ignore artificial legal arrangements, which means that the taxpayer may be obliged to pay the avoided tax with default interest and become exposed to penal fiscal liability. To decide whether a legal arrangement is artificial, various factors should be taken into account, such as excessively complex transactions or the use of conduit entities. To protect taxpayers from the tax authorities' discretionary powers, the former may apply to the Minister of Finance to issue an opinion that disallows the application of the GAAR. Since 2017, the tax rulings classified as tax abusive do not secure the taxpayer's position in the case of dispute with authorities. Following the introduction of the GAAR, the tax authorities have conducted numerous tax audits and proceedings targeted at previous optimisation projects (e.g., concerning step-ups on the value of trademarks, commercial premises and financial instruments). The approach of the tax authorities is currently much more aggressive than in the past, and they are even trying to apply GAAR to tax years prior to its adoption. In 2019, the laws concerning GAAR were expanded and tightened.
The most effective structures for optimisation of business activity carried out in Poland are related to the Polish open-ended investment funds and specialised open-ended investment funds (SFIOs), unless an SFIO applies investment principles and limitations relevant for collective investment funds (CIFs). Comparable EU-based investment funds fulfilling certain conditions will also retain the income-tax exemption.
In turn, structures based on Polish CIFs are not tax-effective. In particular, due to the taxation of CIFs, the structures in which Polish and foreign CIFs participate in fiscally transparent entities have been eliminated from the market. The tax administration classifies such activity as being against the primary purpose of establishing the tax exemption of CIFs (i.e., exemption from taxation of taxpayers' investment activity conducted through the CIF).
Various tax optimisation solutions regarding contributions of assets to companies, with a portion of the contribution allocated to the share premium, are also now ineffective. Prior to 2017, the taxable revenue from a contribution of assets had been limited to the nominal value of shares received in exchange for an in-kind contribution. However, since 2017, the revenue achieved by the entity making the in-kind contribution is the market value of the contributed assets.
A more detailed description of justified economic reasons warranting preferential taxation of mergers of companies or CIFs and demergers of companies has also been introduced. This 'small' anti-abuse rule has also been expanded to the exchange of shares and in-kind contributions of enterprises or their organised parts (and previously, in 2016, to dividends). These activities will no longer be tax neutral if there are no justified economic reasons for them. The tax authorities may challenge the tax neutrality of share exchanges and in-kind contributions of enterprises or their organised parts when these are carried out with the sole purpose of enjoying tax benefits and not for justified economic reasons.
As for transfer pricing documentation, more comprehensive information on related party transactions should be disclosed to the tax authorities. Under these provisions, taxpayers are obliged to prepare more extensive transfer pricing documentation (in particular, local files are expanded). In most cases, benchmarking studies would be necessary. Since 2019, transfer pricing requirements have been limited to transborder transactions. In turn, most transactions among local Polish entities are not currently subject to transfer pricing documentation requirements.
In 2018, the following new anti-abusive rules were implemented:
- new thin-cap regulations limit the amount of tax-deductible interest from intra-group and third-party financing to 30 per cent of EBITDA;
- it is no longer possible to offset interest from loans or credit incurred on purchases of shares against revenues from business activity (debt pushdowns become tax ineffective);
- deductibility of intra-group immaterial services and expenses on intellectual property (IP) rights is limited to 5 per cent of EBITDA;
- the scope of dividends and similar sources of revenues has been expanded, and the application of the exemption based on the Parent-Subsidiary Directive has been narrowed; and
- revenues from commercial premises are now subject to lump-sum tax with no tax costs deductible.
Since 2019, taxpayers and their advisers involved in tax optimisation projects have been obliged to report these projects under the MDRs. The MDRs apply both to individual and corporate taxpayers and require a detailed reporting of the tax-effective activities, transactions and restructurings. An exit tax was also introduced in 2019, which is charged on the transfer of assets outside Poland and when changing tax residence from Poland to another country. It also applies both to individual and corporate investors. In 2019, the provisions concerning controlled foreign companies were expanded and tightened.
A new withholding tax (WHT) regime has applied to individual taxpayers since mid-2019 and is expected to apply to corporate taxpayers from mid-2020. It provides for some restrictions that impact the application of exemptions and reduced rates to WHT collection. The new regime maintains, in principle, the existing rules for the collection of WHT from payments not exceeding 2 million zlotys with respect to one taxpayer in a fiscal year but obligate the WHT agents to duly examine, in each case, whether tax regulatory conditions for the application of tax exemptions or reduced tax rates are satisfied. These regulatory conditions have been extended since 2019 by, inter alia, strict application of the beneficial owner concept. An obligation to collect the full amount of WHT applies to payments over 2 million zlotys without the possibility of applying tax exemptions or reduced rates unless a taxpayer receives a special opinion issued by the tax authority or if the WHT agent declares under pain of fiscal penal liability that it holds appropriate documents proving grounds for non-collection or reduced collection of WHT. In the case of full collection of WHT, a subsequent refund of tax will be available on condition that the taxpayer proves grounds for application of exemption or reduced rate.
Some positive changes are also observed in the market. The novel IP Box regime was introduced in 2019. Under this regime, revenues related to IP may be taxed at the lower 5 per cent income tax rate. The income tax rate for the smallest corporate taxpayers was also reduced to 9 per cent in 2019.
Poland has commenced its battle to prevent tax avoidance and tax evasion through introducing numerous regulations designed to combat these negative phenomena. It is no exaggeration to state that Poland is becoming a less tax-friendly country, which, in practice, eliminates the possibility of tax optimisation. Additionally, the aggressive approach of the authorities is present not only in income taxes but also in VAT and transfer taxes.
III YEAR IN REVIEW
i Recent deal activity
Although no statistical data for 2019 is yet available, market participants and observers indicate that 2019 has continued to witness the market dynamics observed in previous years. The priority for CEE region investors is to make new investments. In July 2019, 58 per cent of respondents intended to focus on such new investments, while only 32 per cent claimed that they will focus on portfolio management. Investors expected the average size of transactions to remain the same (68 per cent of respondents), while 19 per cent claimed that it will increase. Overall, 55 per cent of investors expected to buy more than they sell.12 Investors also expect that the biggest competition between acquirers will be among market leaders.13 Medium-sized companies remain popular but are seen as less competitive.14
A growing number of Polish public entities engage in fundraising and investing. The first public source of financing on the private equity market was the National Capital Fund (KFK), a fund of funds sponsored by, inter alia, the government. The KFK manages €230 million of funds and is focused on small venture capital investments only, providing up to 50 per cent of their acquisition financing. However, a merger of the KFK with another state-controlled entity is currently in progress. Another public entity operating on the Polish market is Polski Fundusz Rozwoju (PFR), established by the Ministry of Treasury with the State Treasury and Bank Gospodarstwa Krajowego as stockholders. PFR holds the means to approximately 5 billion zlotys. Open pensions funds are restricted from investing on the private equity market.
In 2019, the Capital Investments Fund, which is fully managed by the Prime Minister, was established. Its main purpose is to acquire shares owned by the State Treasury; however, it remains inactive as its investing activity is planned to commence in 2021 at the earliest.
The typical structure of financing consists of an investor's equity, banking loans (senior debt in the case of other financing) or other sources of financing (e.g., bonds). According to market surveys, 71 per cent of private equity investors consider that debt financing is easily available and does not pose an execution risk.15 A quarter of respondents claimed that debt financing is difficult to obtain, although promising prospects can be sure to succeed in that area. Only 4 per cent of respondents stated that debt financing is very hard to get and constitutes an investment barrier. The Polish banking sector is relatively strong, having avoided the global financial crisis. The level of leverage in Poland (and in the CEE generally) has never reached the pre-crisis levels achieved in western Europe. In addition, the percentage participation of equity in capital structures in the CEE (including Poland) in 2014 was reported to be 20 per cent higher than in Europe;16 the typical loan-to-value ratio for investments in Poland does not exceed 50 per cent.
Polish investment funds are subject to limitations on incurring debt. Closed-ended funds may only obtain loans or credit from banks, foreign banks or credit institutions.17 Other debt financing available for closed-ended funds is the issuance of bonds, but only with a value not exceeding 15 per cent of the net value of the fund's assets. The total value of debt incurred by closed-ended funds (both in the form of credits and loan facilities and bonds) must not exceed 75 per cent of the net value of a fund's assets. Debt financing restrictions are more stringent in the case of open-ended funds, which may only obtain credits and loans with a maximum value of up to 10 per cent of a fund's net assets, with the repayment date being no longer than one year after acquiring the debt financing, and only from Polish banks or credit institutions.
In terms of legal documentation, facility agreements are typically based on the Loan Market Association standard documents with the usual set of clauses. Security documents are, in turn, local, but there is a well-established practice with regard to both their structuring and the composition of security packages. Depending on the available assets, the package usually consists of a share pledge, asset pledge, account receivables pledge or assignment, and mortgage. It is often coupled with a corporate guarantee and a voluntary submission to enforcement, which is not a security instrument in the strict sense, but allows for faster satisfaction of the creditor.
iii Key terms of recent control transactions
Key legal terms of control transactions on the Polish market are rather standard. The most important points are the mechanics of the transaction, conditions precedent, shareholders' mutual obligations and corporate governance, as well as the sellers' liability for representations and warranties.
The scope of legal documentation required to effect takeover transactions varies for investments in which the investor acquires 100 per cent of shares, and those in which the investor acquires a controlling stake but the other shareholder (or shareholders) remains in the target company. The latter requires execution of an investment agreement regulating the mutual commitments of the acquiring investor and the shareholder regarding their involvement in the target company and describing its corporate governance structure. Under Polish law, investment agreements are of contractual effect only, meaning that voting contrary to the agreement constitutes a breach of an obligation towards the other shareholders, which may result in liability for damages or an obligation to pay a contractual penalty, but which is valid and has no impact on the effectiveness of the adopted resolution. Thus, the parties will usually strive to specify additional rights of the shareholders directly in the company's statutes because a resolution adopted in breach of the statutes may be effectively challenged before a court. Commonly, such additional rights of the shareholders will include the right to appoint some of the management or supervisory boards members (or both) to monitor the company's regular business activity; and the establishment of a blocking minority to protect the shareholders from a loss of investment value (e.g., in the case of the adoption of resolutions approving the disposal of key assets) and from the dilution of their corporate rights. On the other hand, the controlling investor will usually aim to structure the statutes in such a way that the company officers appointed by it may freely conduct the company's day-to-day business, and to have the majority required to adopt most of the resolutions to avoid deadlocks. Investment agreements will also typically provide for regulations facilitating an exit from the investment, such as tag-along and drag-along mechanisms, rights of first refusal and provisions facilitating a possible initial public offering in the future (e.g., regarding the obligation to adjust the statutes accordingly).
Other key terms of a share purchase agreement include representations and warranties, which are usually extensively negotiated between the parties as the scope of liability of the seller depends primarily on the wording of the contract in this regard, as well as conditions precedent, which determine the mechanics and timing of the closing of the transaction. Typical conditions precedent include subscription for shares in the increased share capital, registration of amendments to the statutes with the commercial registry and obtaining concentration approval from the antitrust authority.
Liability caps range on average between 15 and 25 per cent of the purchase price (with, however, 100 per cent of the purchase price as the cap for liability on title). Representations and warranties insurance is increasingly considered as a possibility; however, it is still not much used in practice.
In 2016, the new legislation on agricultural lands entered into force and, unexpectedly, had an impact on transaction mechanics. The Polish Public Agricultural Lands Agency has a priority right in the case of any sale of agricultural land. To prevent circumvention of this right, the new regulations also provide the Agency's priority right with respect to shares in a company that holds any agricultural land. The size of such given company, the structure of its assets and the value or area of the given agricultural land are irrelevant for the application of the priority right. On the other hand, there is no register of agricultural lands in Poland, and in certain cases it is not clear whether such land is in fact agricultural. As a result, in the case of any share deal, due diligence of a company's real estate is required and, if the company holds agricultural land, non-performance of a priority right by the Agency is a condition precedent.
In the opinion of private equity investors, the most likely type of exit from an investment is a trade sale to a European strategic investor outside the CEE.18 One-fifth of investors believe that a strategic acquirer will be from Poland, and 17 per cent that it will be from the CEE. No investors have claimed that an acquirer will be from outside Europe. The second most likely exit route is via the public market. However, it should be compared with hard data, according to which the most common exit route in 2018 was sale to another private equity firm.19
IV REGULATORY DEVELOPMENTS
i Investment funds
Polish investment funds operate in accordance with the IFA. There are three basic types of investment funds: open-ended, specialised open-ended and closed-ended. Each investment fund type must be managed by an investment fund management company (TFI). Both investment funds and TFIs are subject to the supervision of the KNF. Establishment of a TFI or an investment fund requires a licence from the KNF. The IFA provides for a number of limitations as regards types of investments that an investment fund may carry out, as well as requirements as to the diversification of risk. If a TFI or an investment fund managed by a TFI breach a provision of law, and especially of the IFA, or infringe a fund's statutes or the terms and conditions of a licence (e.g., if the investment fund invests contrary to the IFA or its statutes), the KNF may impose a financial penalty of up to 500,000 zlotys on the TFI or cancel the licence.20
Alternative investment companies (ASIs) are an additional category of investment vehicle and are deemed alternative investment funds under the AIFMD. ASIs are generally non-regulated investment vehicles in the form of 'ordinary' commercial companies that are governed by the applicable rules of the CCC.
ii Antitrust issues
Larger-scale transactions that may influence the market come under the purview of both the Polish and European competition authorities (the President of the Office of Competition and Consumer Protection (UOKiK) and the European Commission, respectively). Any M&A transaction subject to statutory turnover thresholds may require competition clearance. If the turnover thresholds are exceeded, Polish antitrust law requires prior notification to the UOKiK on the intention of concentration. Until the UOKiK issues a decision allowing the transaction (or the lapse of the statutory deadlines for the UOKiK to issue the clearance, which are one or four months, depending on the complexity of the transaction), the acquirer should refrain from closing the deal. Antitrust issues are especially relevant in the case of a trade sale exit.
We believe that, overall, the Polish private equity market has significant potential for further growth.
Poland is typically the largest CEE private equity market and still hosts the highest number of companies invested. In 2018, the value of private equity investments in Poland amounted to 0.171 per cent of the country's GDP, which is slightly higher than the CEE average of 0.17 per cent.21 These two factors, when combined, suggest that the already large market should continue to expand. A high average rate of return on investment adds to the positive picture of Poland as the place to invest.22 The general impression of market participants and observers is that private equity investors are taking an increasingly large portion of Poland's M&A market. As a result of investments in recent years and the continued interest of private equity investors in Poland, sales between private equity funds are increasingly common.
1 Marcin Olechowski is a partner, Borys D Sawicki is a senior counsel and Jan Pierzgalski is a senior associate at Sołtysiński Kawecki & Szlęzak.
2 2019 figures are not yet available.
3 Invest Europe, 2018 Central and Eastern Europe Private Equity Statistics, June 2019.
5 KPMG, Rynek private equity w Polsce 2016.
9 According to a Polish Private Equity and Venture Capital Association (PSIK) representative.
10 A regulation on simple joint-stock companies was planned to enter into force on 1 March 2020; however, an amendment to the law postponing its entry into force by one year has already been submitted to the Polish Parliament. A simple joint-stock company is essentially a subtype of a Polish joint-stock company, but without share capital, partially influenced by corporate law solutions derived from the common law.
11 Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards the mandatory automatic exchange of information in the field of taxation.
12 Deloitte, Central Europe Private Equity Confidence Survey, Summer 2019.
15 KPMG Poland; see footnote 5.
16 PSIK, Time for another look – Central & Eastern Europe Private Equity, 2013.
17 According to the Polish Banking Law, credit institutions are entities whose registered office is outside the Republic of Poland, but in another Member State of the EU, and that conduct activity in their own names and for their own account, on the basis of the authorisation of the competent supervisory authorities, consisting of accepting deposits or other resources entrusted under any redeemable title and consisting of granting credit or issuing electronic money.
18 See footnote 5.
19 See footnote 3.
20 In 2019, several TFI licences were revoked as a result of the widely discussed GetBack case.
21 See footnote 3.
22 See footnote 5.