Arin Ion, founder of The Black Sea Fund: If governments and central banks had not intervened as they did in 2020, we could very easily have slipped into an uncontrollable area
:If in 2020 governments and central banks had not intervened as they did, it would have been very easy to slip into a uncontrollable area, says Arin Ion, founding partner of the Black Sea Fund.
“I have been working in investment for about 20 years, but last year was by far the most complicated, even though it ended much better than we would have expected in March - April.
The economic crisis, on top of the medical crisis, was something I had never experienced before and the year that passed was, in fact, three years in one. If in the first two months of the year, the medical crisis was just a 7,000 km away topic and business were running as usual, then we were hit by a wave of maximum uncertainty. I think the only time I ever witnessed the level of uncertainty we experienced between March and May of last year, was in October 2008. But last June the economy reopened, and we saw signs of recovery.
But what made the transition from a period of great uncertainty to a period of near normalcy was the unprecedented intervention of governments and central banks. Had they not intervened as they did, it would have been very easy to slip into an uncontrollable area. Central banks and governments, based on the experience they gained in the 2008 crisis, took very serious measures and pumped money into the economy. One way or another, people and companies have been helped, which brought things somewhat closer to normal, starting the second half of 2020.
To put things in context, over the past year, FED (the central bank of the United States) injected $ 2.7 trillion into the US economy through acquisitions of financial securities (government bonds, corporate bonds, etc.). The US Treasury (United States Department of the Treasury, part of the US Government) pumped about four billion dollars into the economy through credit schemes (loans) and grants. According to the estimates of the eminent American economist, Larry Summers, we have witnessed the most significant economic stimulus package, similar to the government commitments in the USA during World War II. If the economic stimulus and liquidity package injected during the Obama administration accounted for about half of the US financial loss during the 2008 crisis, the package injected into the economy in 2020 represented, according to Larry Summer's estimate, almost six times the loss of economic activity generated by the Covid crisis in 2020. This explains, mostly, why the main index of the American market (S&P 500), after a fall of about 35% in February-March 2020, had a spectacular recovery of around 68% at the end of 2020 compared to the March lows (similar to many other markets and asset classes). This dynamic has been
replicated in various world economies, on a smaller scale (especially in developed economies, where budgetary efforts are easy to finance), including in our country.
Had it not been for this powerful intervention of governments and central banks, the dramatic consequences are easy to imagine, as they would have been significantly more severe than the ones in 2008, given that in the second quarter of 2020, the US economy fell by 32.9 %. This is the largest decline in economic activity since 1928 when the Great Depression in the interwar period spread globally and lasted half a decade.
On this occasion, it was clear from the first signs of the pandemic that central banks would act much more vigorously, much more firmly than they had done in the past to support the economy. Central banks intervened quickly to ensure ample liquidity and low financing costs in financial markets through various levers, including acquisitions of riskier assets, which, not even during the
2008 crisis, did not have the political support to be included in their securities repurchase programs.
Moreover, the governments of some developed countries (USA, EU) quickly intervened with measures to provide liquidity to small and medium-sized enterprises (credit programs, guarantees, grants, deferral of taxes, etc.) and the population. In the US, the people not directly affected by the Covid-19 crisis were also helped. Basically, governments have supported those areas of the economy where central bank intervention levers were limited.
Our position, at the Black Sea Fund, was to find solutions to move forward for all the projects and all the transactions we had in progress. Not necessarily in the same formula or based on the same assessment of the transaction as prior to March, but we focused on finding a solution to move forward with the projects. We wanted to find methods, in terms of assessing and structuring transactions, aimed at managing the risks and uncertainty related to the financial performance of the companies in 2020.
Our vision was that one way or another, starting in 2021, things would recover. And the only significant transaction risk was the performance in 2020. We also made sure that the companies we were dealing with had liquidity resources to withstand the shock of a difficult financial year. We did not want to partner with companies that were very fragile and would be swept away by the crisis. In ordinary times, you don't look that closely at liquidities. You focus more on the results of the previous two or three years, but in a year like 2020, we wanted to be sure that the companies had the resources necessary to make it through the crisis.
For Theta and DigiRay we found solutions so that the entrepreneurs not be penalized for the performance of 2020. We wanted to identify structures that would help entrepreneurs recover in 2021-2023, to gain through actions or sums of money what they lost in 2020.
Those who wanted to make transactions in 2020 made them. For example, in March last year, we chose to put a project on hold, but another fund had a vision bolder than ours. At that time, in March 2020, we truly wanted to step back to reflect and evaluate the project, but when we returned to discussions in June, it was too late.
The important thing, throughout this pandemic, was that both sides - the founders and ourselves - talk openly and find a constructive way to manage the times of uncertainty”.
Matei Păun, Black Sea Fund: Suspending transactions due to an economic crisis or a pan-demic is not the hallmark of an experienced professional
Suspending transactions due to an economic crisis or a pandemic is not the hallmark of an experienced professional. In 2020, in the midst of a pandemic and an economic crisis, the Black Sea Fund completed two transactions with DigiRay and Theta using a structure that would not take advantage of entrepreneurs, but would allow them to recover possible valuation losses suffered as a result of the crisis, said Matei Păun, co-founder of the investment fund.
"A good fund manager finds equitable solutions around possible risks during a crisis. Stopping and waiting for a particular difficult moment to pass is a disservice not only to the entrepreneur but also to one's investors. Doing nothing robs everyone of potentially great opportunities.
The recent pandemic is clearly a temporary and finite phenomenon, unlike the crisis of 2008, which did not necessarily have a clear time horizon. In 2008, when it started, no one knew if it would last six months, six years or 20 years. Instead, regarding this pandemic, there was sufficient scientific consensus that indicated from the beginning that it would be unlikely to drag out for more than two years. So the pandemic had this critical quality of having palpable end. Even if initially difficult, we maintained our idea that even in the middle of the crisis, there are opportunities.
A structure that allows entrepreneurs to regain the value eroded by the pandemic
Thus, we completed two transactions based on the 2020 figures but with a structure that would allow those companies to make up the value eroded by the pandemic. We found ways to not "penalize" the entrepreneurs for the results affected by the crisis. Perhaps many would have expected us to take advantage of the context, to squeeze the entrepreneurs; perhaps some of them thought that 2020 would be the perfect time for investment funds to take advantage of entrepreneurs battling a crisis. But we didn't look at 2020 in this way and we didn't act in this manner. Instead, we strived to create a win-win transaction for everyone, ensuring a long-term alignment and a sustainable balance between entrepreneurs and investors. Only this would allow us both to seize opportunities and and aim for success.
The discussions with DigiRay began just before the pandemic, in January-February 2020. The founders of DigiRay are a young, very serious and hardworking coupke from Zalău, which have have successfully grown this business across Transylvania. Moreover, we were attracted to, and comfortable with, the dental sector due to our sister company's (BAC) experience in brokering the sale of DentEstet to MedLife and Dentotal to Abris Capital.
Dentistry - one of the most fragmented economic sectors
On the other hand, dentistry is among the most fragmented economic sectors, with around 17,000 dentists and approximately 12,000 dental clinics. We had looked at several opportunities in the dental clinic segment, but in the end we thought it would be smarter to approach the sector through the imaging side. This niche is less fragmented and it is far easier to take 30% of the imaging market than to reach the same percentage via clinics. To take 30% of the latter we would have to make transactions with hundreds or even thousands of clinics, which is completely unrealistic.
Two key moments marked the transaction with DigiRay, as in every transaction: reaching a concensus on the company's value and on the sum of money needed for its development. In order to achieve that, we created a structure which allowed us and the entrepreneurs to look past the immediate negative impact of the crisis. The alternative would have been to wait for the pandemic to pass, but that would have meant wasting huge opportunities and precious time.
Companies will need fit-out services even in difficult times
In the transaction with Theta, we used the same adjustment mechanism that allowed us and the entrepreneur to move forward in this challenging context. We considered that even in these difficult times, companies would need fit-out services, albeit perhaps for different reasons. Most have reorganized themselves, for example, on the work-sharing model. This is true for any business. Some businesses are relocating or changing the way they work. The only real problem for Theta would be if everything were to suddenly simply freeze. But as long as there's a dynamic in the commercial real estate sector, the direction is less important.
Black Sea Fund, as a company, adapted quickly and easily to the lockdown and the new way of doing business. For a long time already I had strong digital approach, with many online conferences and e-mails. Obviously, an initial physical contact is necessary and helps a lot in the development of the relationship, but, overall, we managed to complete two transactions in a very virtual context”.