Hugh Wheelan examines the venture capital opportunities.

The rise of venture capital offerings in eastern Europe has not gone unnoticed by in-vestors on the lookout for new opportunities.

The Hungarian economy has matured to a stage where private equity can take its place, according to Michael Carter, managing director of Rona & Company, fund manager for First Hungary, one of the country's first venture capital funds. This can be seen in the excellent re-cord of Hungarian venture capital over the last three years, where an average internal rate of return of 20% has been achieved," he adds.

First Hungary began attracting significant in-vestors in 1989, including the pension fund of the United Nations in New York and the UK-based Merchant Navy Officers Pension Trust, with original fund assets of $80m. The present fully paid-up venture stands at $210m.

The 27 original investments included three outstanding successes, with a further 60% of its ventures offering good returns. As a pointer to the future, Carter cites Biorex, a Hungarian pharmaceutical research company promoting a successful anti-diabetes drug, which has at-tracted $28m of investment for a 20% company stake from Abbot Laboratories in the US. "Coupled with the push to be part of the EU, Hungary has a much greater GNP growth than EU countries. This should see it follow the paths of Portugal and Ireland as a low labour cost market success," he says. As a result, Hungary's rapid-ly expanding economy should offer increasing outperformance for venture capital compared to other markets.

Significantly, First Hungary has just initiated a second fund, on a limited partnership basis, with the European Bank for Reconstruction and Development having already agreed a 20% stake, and a number of fund of funds groups in-terested. Poland has enjoyed similar private eq-uity success, despite a slower approach to privatisation than its neighbours.

Investors such as the US government-backed Polish American Enterprise Fund have been successful in bringing expertise and investment to the market and reaping the rewards available.

David Hartford, chief investment officer for Pioneer, Poland, which closed its own fund in October 1995 with around $60m invested, attributes much of this success to the entrepreneurial spirit of the Poles. "Out of a population of around 40m in Poland, there are about 2m registered private businesses, which is remarkable."

He offers anecdotes of companies such as Computerlab, which went public on the Warsaw stock exchange last year, and Euronet, a Polish automated teller machine company now listed on Nasdaq, as support for the surge in Polish venture capital.

"Traditional analysis might turn investors away from Poland, with eight governments in as many years, and housing and construction sectors falling over 10 years. But despite European recession and Soviet Union implosion, Poland has sustained growth rates of between 5-7% per annum," he argues.

The Russian market is still relatively young, beginning in 1994 through a regional fund network launched by EBRD. It now boasts around 40 active venture capital funds. The EBRD network now includes 11 of these, with an average fund size of $30m.

Private funds from houses such as Barings, Framlington and AIG Brunswick have also raised money for Russia and the newly independent states, accounting for about 90% of the total capital.

According to Ilkka Linnakko, member of the Russian Venture Capital Association and managing director of Citrans, which has two funds in Russia, this growth can be attributed to low as-set values and high return potentials that outweigh the inherent risk in private equity.

"Although there have been very few exits in Russia, the interest in venture capital here is still extremely high, particularly in the fields of gas, oils, minerals and telecommunications. The ex-pectation is that those who invested here first will receive very high returns," he says.

Despite stock market falls, the Russian venture capital market has remained stable thanks to its long-term outlook. Linnakko is optimistic for the future, claiming pension fund investment is mushrooming and that many large US invest-ors are sitting on large sums ready to move into Russia when the results finally materialise.

The case for the Czech Republic is not so rosy. Private equity investment has shown promise, but is still characterised by a low number of deals and players in a difficult market. Of the 70 funds operating, only about five represent large transactions of $2m-5m.

Exits are scarce, with a notable exception being the Czech Venture Partners project involving Barings, which gave returns of $7m on $1m in investment.

Michael Nosek, chairman of the Czech Venture Capital Association (CVCA), is not optimis-tic about the future. "Privatisation here was a bit of a mess and there are grave problems with bankruptcy and contract laws. We are about three years behind Poland and Hungary in private equity evolution," he concedes, although Czech banks are starting to back small companies with strategic venture partners abroad.

"With elections in process and efforts being made by the CVCA and Coopers & Lybrand to implement venture capital results for the future, maybe we will see increased investment. The opportunities are clearly available," he concludes."