CEOInterviews.AIOdcinek 05: Krzysztof Krawczyk, CVC | Jak się inwestuje z ramienia globalnego giganta

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Krzysztof Domaradzki0:03

This is Krzysztof Domaradzki. You’re listening to the Polish Private Equity and Venture Capital Association podcast. Join me to discover how private equity and venture capital firms select investment projects, collaborate with entrepreneurs, and grow the value of their businesses. Enjoy the episode. Welcome to the PSIK podcast “Private Equity about Value Creation”. My name is Krzysztof Domaradzki and my guest is Krzysztof Krawczyk, head of the Warsaw office of CVC Capital Partners. We will talk, among other things, about how to turn good businesses into great ones. Do join us. Hi.

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Krzysztof Krawczyk0:36

Thank you for the invitation.

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Krzysztof Domaradzki0:38

My pleasure. I have a question: Spain’s La Liga, France’s LFP, Premiership Rugby, the Six Nations Championship, the United Rugby Championship, the Women's Tennis Association, previously Formula One, now Comarch, to name a few. CVC has all these sports competitions and organizations in its portfolio. Are you the most sports-oriented private equity fund in the world?

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Krzysztof Krawczyk1:03

I think so. It all started with Formula One and demonstrates the organizational culture of our fund. We had Formula One in our portfolio and it was a phenomenal success. We transformed it from straightforward racing into a business based on IP and content. That sparked our interest in sports as an industry. So the portfolio you mentioned is the result of that, coupled with a very entrepreneurial approach to this sector by one of my partners.

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Krzysztof Domaradzki1:44

How many years have you been in private equity?

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Krzysztof Krawczyk1:47

It’s been 27 years already, I can hardly believe it.

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Krzysztof Domaradzki1:52

More than a quarter-century! You started at Pionier, then Innova, now CVC. You’ve been observing this market from the perspective of various organizations and you know it from every angle by now. What’s changed the most when you compare your industry beginnings with what you see today?

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Krzysztof Krawczyk2:12

Today, we treat this ecosystem as a given but it took this last quarter-century to build, it didn’t exist before then. I remember many outstanding lawyers and experts in financial due diligence learning its rudiments a quarter of a century ago. So we all grew together with this industry and we all had to learn it as we went along. The second thing is that it's easier to reach investment goals today, thanks to this ecosystem. Many companies, entrepreneurs, and management teams have advisors who help them reach funds and vice versa. We also use such channels. In the ’90s it was all about trying to get through to the secretaries of CEOs and company founders using snail mail, not email.

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Krzysztof Domaradzki3:06

To get to even talk to them.

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Krzysztof Krawczyk3:08

Exactly. I'll share an anecdote. I met the late Professor Filipiak.

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Krzysztof Domaradzki3:13

When you were still at Pionier?

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Krzysztof Krawczyk3:14

Yes. We learned about companies by going to fairs and seeing who had the most interesting stands, not from the internet. Comarch was very visible back then. For a very long time I used doors, windows and the chimney even in my efforts to reach the professor, and managed to see him eventually. He really liked the idea of the Pionier investment as a pre-IPO round. And he said he’d do it if we convinced his group of young, very ambitious and energetic managers. But we didn't manage to sway them.

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Krzysztof Domaradzki3:50

But 20-something years later you succeeded and CVC did buy Comarch in the end.

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Krzysztof Krawczyk3:56

Exactly. And that’s what the history of this industry is like. It's an endless marathon. There are companies I came across say 10, 15, 20 years ago that we might end up investing in one day.

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Krzysztof Domaradzki4:09

You mentioned Professor Filipiak. I'm curious as to how entrepreneurs' understanding of what private equity is has changed.

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Krzysztof Krawczyk4:17

They definitely see it as an alternative to selling the company to a strategic investor, which is often the end of the story for them, or as an alternative to handing over the reins to their children or to managers. I'm glad they have these options. Sometimes people from private equity get frustrated that some goal is unavailable because the owner has a very clear vision of what they want to do for the next 20 years. But this makes me happy.

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Krzysztof Domaradzki4:53

That they have that vision?

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Krzysztof Krawczyk4:54

Exactly. It's brilliant that we have different examples and different market segments. So you need to do your job and have something to offer entrepreneurs so that they want to take it on. Also, build a certain position, a certain brand, to explain why these people want to do business with me.

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Krzysztof Domaradzki5:17

Do you often reach out to companies which are meant to be family businesses that won’t be sold for generations, and you convince those entrepreneurs that going with you and perhaps going public or selling to a strategic investor further down the road is a better path?

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Krzysztof Krawczyk5:33

Yes, this is one of CVC’s flagship approaches, and not just in Poland, because we’re a global company. One of the more interesting stories of this sort is our investment in the watch brand Breitling. It had been a family company for decades. We managed to convince the head of the family that it would be worth having an institutional partner to help the company adjust its trajectory, tweak and refresh its strategy, and above all rejuvenate the brand, which had incredible potential but had become a bit dusty. That having such a partner, who acts as a kind of enabler for our companies, would add value. Today we are already a minority shareholder, as we sold the majority stake to the Swiss-owned Partners Group. But we all look back on those last few years of working with the family as being extremely fruitful.

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Krzysztof Domaradzki6:38

When you invest in companies and make them an offer, is it always the same value or is it different for each business?

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Krzysztof Krawczyk6:49

Every business is different and is at a different stage of its lifecycle, of course, so what we offer must be tailored to fit. However, there’s a common philosophy, which we call the value creation plan. It’s based on focusing on what will make a good company great. There are, of course, a few common denominators. Like management. As it’s management that runs the company and sets the world in motion. Then there are the employees. We are very meticulous about how we evaluate employee engagement and how we improve that, once we’ve found what needs fixing. Clients are the next element. They must be at the heart of the company; the company has to know what it wants to offer them and why. And this flywheel produces outstanding companies. We don't talk to our management teams about what happened to a particular cost line the previous month. Our approach is strictly about seeing where we are on our value creation plan path in terms of our employees and our customers.

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Krzysztof Domaradzki8:10

I liked what you said about striving to turn good companies into great ones.

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Krzysztof Krawczyk8:17

That’s our aim, at least.

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Krzysztof Domaradzki8:18

Of course, you’ve got to have your sights set on something. But I'm curious, because at Innova, for example, you targeted mid-sized companies and tried to make them big. At CVC, you’re already focused on investments in large companies, often market leaders, and I'm curious about how you see this difference between mid-sized and large companies, and how much your work has changed since making that switch.

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Krzysztof Krawczyk8:45

Working at CVC gives us access to global resources. We’re present in over 30 locations worldwide. My partners are highly experienced, each of them has invested in various industries and geographies for decades. And we give our portfolio companies access to all this knowledge. This is a huge advantage and has huge value. If a company needs some resource or knowledge, it usually takes no more than two phone calls from my office. And that’s a huge value that CVC has built over the years. When it comes to value creation itself, at the end of the day that's down to human relationships. It's about who we work with, how we motivate those people, how we help them find the right path for growth, development or transformation.

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Krzysztof Domaradzki9:48

What qualities do you look for most often in entrepreneurs?

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Krzysztof Krawczyk9:52

Energy, passion and some degree of obsession with our shared company.

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Krzysztof Domaradzki10:03

Uh huh. And when you find that, what do you do to convince such entrepreneurs to work with you?

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Krzysztof Krawczyk10:10

We’ve built a track record over the years, so we have a lot of stories to tell and analogies to show.

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Krzysztof Domaradzki10:22

So, for example, you come in and tell them that company X was worth this much when we entered, and after five years it was worth five times more?

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Krzysztof Krawczyk10:28

Yes, for example, although we never take full credit for that, of course. It’s always down to those elements I mentioned earlier. However, having credible examples of value creation is a massive selling point. But if a company was treated badly that really sticks, which is why reputation is so important in this industry.

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Krzysztof Domaradzki11:02

Let me quote someone to you. “Many companies operate locally and don’t have the scale needed to grow internationally. They lack sufficient capital for expansion.” Your words.

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Krzysztof Krawczyk11:14

Sounds familiar.

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Krzysztof Domaradzki11:15

Yes, that’s from a conversation at Forbes. So is bold expansion a matter of capital or does it require something else as well?

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Krzysztof Krawczyk11:27

Definitely capital, but also a certain perspective and horizon. Polish companies are very often focused on the Polish market because it’s huge. So why seek fortune elsewhere? But you don’t have that option if you’re a Czech or Estonian company. That’s why companies from smaller countries are eager to go beyond their own borders. So we encourage our management teams and entrepreneurs to dare to venture outside Poland. If we have a partner in Paris, Shanghai or New York, our job is much easier if they find these markets interesting. The fact that my associates work in the CVC network all across the world is an enormous value that every entrepreneur gains access to the day we become partners.

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Krzysztof Domaradzki12:36

In which companies do you like to invest in the most, personally?

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Krzysztof Krawczyk12:44

For most of my life I’ve been involved in the TMT industry – technology, media & telecoms.

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Krzysztof Domaradzki12:54

So this is your thing, by necessity

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Krzysztof Krawczyk12:56

Well, that love continues. I’m very happy about the Comarch investment because it’s a return to my roots. Generally speaking, I find service companies to be a very interesting challenge. Services are intangible. Customers have to be convinced that they need a particular service and they have to understand why they’re paying a particular price. This strikes me as a bit more challenging than a product sitting on a shelf.

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Krzysztof Domaradzki13:27

What else besides TMT?

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Krzysztof Krawczyk13:30

I love transformation. I prefer to look at companies as investment goals, in terms of what needs to be done and how challenging that is, than whether they’re in one sector or another. Throughout my career, I’ve been involved in transforming companies where not everyone understood why we bought them in the first place.

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Krzysztof Domaradzki13:56

Do you mean digital or organizational transformation?

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Krzysztof Krawczyk14:01

It's primarily always a transformation of the organizational culture. I remember when we bought Wirtualna Polska, that company was not very dynamic, it wasn't a market leader. But by combining it with O2, which was number five on the market, and whose owners took the helm, we managed to hugely dynamize Wirtualna Polska and add new business lines. Today, this is a completely different company to the one we bought from France Telecom.

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Krzysztof Domaradzki14:37

So you transformed what we’d call a mindset, for want of a better word.

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Krzysztof Krawczyk14:42

Exactly. Very often that stems from the owner’s lack of conviction, vision or desire to take such a step. Sometimes a corporate owner loses interest in a particular area. An example of that is PKP Energetyka, which we bought in 2015 from the PKP group, which needed funds to reinvest in its fleet and was getting rid of non-core activities. There are also cases like Comarch, where the owners, the family, are looking for a partner to help them take the next step. Such a transformation is usually needed when the previous owner can’t see a good development path ahead. That’s where we come in with a new vision and often with a slightly modified strategy, a bit more focused and sometimes riskier and more ambitious.

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Krzysztof Domaradzki15:52

Tell me about day-to-day operations at CVC’s Warsaw office. What’s the decision-making process? How do you find companies and then move on to managing those businesses and working with their headquarters?

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Krzysztof Krawczyk16:07

I joke with the team that we already have our next investment on our target list, in our so-called shadow portfolio, but we still don't know which one it is. We’re a buyout fund, so we invest in market leaders. Those are large and highly visible companies and we know exactly where they are. But not all of them are ready for a transaction. So searching for these companies means constantly staying in touch with their owners or leaders, continuously educating them about the value we can bring, and waiting for that critical moment when the time is ripe for such a transaction.

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Krzysztof Domaradzki16:59

And is that more about waiting, or about persuading, convincing and encouraging them to go with you?

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Krzysztof Krawczyk17:07

This is very active work, of course. Every day we have several meetings with potential targets. As I mentioned, sometimes they can turn into transactions after many, many years. However, cultivating these relationships and showing what we do for our portfolio companies pays off in the longer term. You also asked about our interaction with the global organization. CVC has several hundred investment executives. What I value most about CVC is our investment committee. It’s composed of industry veterans who have invested in various sectors worldwide. They expect us to demonstrate incredible passion and conviction that the proposed transaction will bring our investors above-average returns. Our investment committee is known for being exceptionally demanding. The discussions are unbelievably heated and exciting. But the intellectual level of those interactions totally rewards this effort.

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Krzysztof Domaradzki18:37

For the record, I should add that CVC manages over USD 190 billion, operates from 30 offices worldwide, and its portfolio numbers more than 130 companies. Quite something.

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Krzysztof Krawczyk18:49

Yes, and funnily enough this business was created when three Citigroup employees decided to buy out the investment arm, then a small company, more than 30 years ago.

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Krzysztof Domaradzki19:07

Let’s talk about specific investments. You've already mentioned a few companies, but I’m curious which of your investments you consider the most successful.

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Krzysztof Krawczyk19:18

It's impossible not to mention the latest one, Żabka. We’ve already completed the full path, having successfully taken the company public. In 2016, when we first looked at Żabka, which we already had on the list I mentioned, the company obviously had a large presence in Poland with a nationwide network, but when conducting due diligence, we always do a thorough customer analysis, which in this case revealed two target groups that had no interest in Żabka whatsoever: young people and women. That unleashed our imagination regarding the company’s potential, if only we could convince these groups that there was a Żabka store nearby and it had something to offer them.

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Krzysztof Domaradzki20:23

Exactly, what arguments did you use? Was proximity one of them?

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Krzysztof Krawczyk20:28

Yes, of course, because convenience means I don't have to think about what to buy, I don't have to plan ahead. I know that when I'm hungry, I can pop into Żabka, because it's nearby. However, the assortment we saw when we bought the company in 2017 compared to now shows just how much hard work has been put in by management. Because within seven years those customers in their 20s and 30s who previously saw this as a store for their parents and grandparents, now form the core customer group.

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Krzysztof Domaradzki21:07

Exactly. This is also a very interesting case in that Żabka has been held by investment funds for years and you, too, bought it from a fund. How do you manage this type of business and organizational culture where the original owner who started it all is no longer around, and you take the business over from another investment fund?

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Krzysztof Krawczyk21:28

We need to find a management team that will be an entrepreneur. I should say that all our management teams, the ones that are successful, have a sense of ownership. As a fund, we share that ownership with our management teams, but it's not just about owning part of the company, it's about the mindset. The fact that the CEO of my portfolio company and I both wake up each morning and the first thing we think about is what's happening at the company today. That's the mindset we want in our management teams.

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Krzysztof Domaradzki22:07

Żabka is now on the stock exchange, and its value this morning was over PLN 20 billion. What else is in store for this business and what role do you want to play in Zabka’s future?

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Krzysztof Krawczyk22:20

I want to support it. An IPO is never an exit, it’s a path leading to an exit. As financial investors we can’t stay in our companies forever, since we have to return capital to our investors. But the reason we decided to go public was simple. We see this company has huge potential for at least another decade, as convenience is just emerging in Poland. The true convenience assortment that we introduced is less than six to seven years old. We want to develop in step with the changes we see among Polish consumers, as we know they’ll keep changing. They’re becoming busier, not less busy, and they need quick, healthy solutions. Secondly, it would be a sin not to try and use abroad the know-how we’ve accumulated in Poland. We had a lot of work in the first five years and consciously agreed with management to focus purely on transforming the business in Poland, rather than dissipate our efforts. At a certain point, when we felt that this transformation had reached the “business as usual” stage, we immediately launched an international expansion project, tested various markets and decided that Romania was where customers need the solutions that Żabka offers.

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Krzysztof Domaradzki24:03

Żabka is an example of a successful investment. Which one do you consider the most difficult, for various reasons?

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Krzysztof Krawczyk24:10

Fortunately, I haven’t accumulated any losses in my portfolio over these 27 years.

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Krzysztof Domaradzki24:21

I know, that's why I'm asking you about difficulties rather than failures.

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Krzysztof Krawczyk24:25

I must admit that the first transaction we did as CVC in Poland was difficult. As I mentioned, PKP Energetyka was bought back from a state-owned company. First, we bought it from the government, which had a certain vision for developing the PKP Group. Then the government changed and the new one had different views on who should own a company like PKP Energetyka. So we became a victim of that change in strategy or perspective. PKP Energetyka was a highly regulated business, overseen by not just one regulator, but several. Therefore, I feel the bar was set much higher for us than if we’d been a state-owned enterprise. We were watched with great attention, or to put it bluntly, scrutinized. This, too, was a state-owned company. Which means that on the one hand, it had an incredible knowledge base, and employees with huge experience. But state-owned means belonging to no one, in other words a lack of ownership.

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Krzysztof Domaradzki25:44

No one takes responsibility.

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Krzysztof Krawczyk25:46

There was no one focused on how to motivate and engage those employees. Of course, state companies are also heavily unionized. We met with a lot of distrust initially, but I have in my office a diploma I got from the chairman of Solidarity when we sold the company after seven years, for being an exemplary owner.

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Krzysztof Domaradzki26:20

So private equity is not as bad as it's made out to be.

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Krzysztof Krawczyk26:22

Exactly! Our union workers even referred to us as “our fund managers”!

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Krzysztof Domaradzki26:31

At what stage of development is the Warsaw office of CVC and what lies ahead for you in the coming years?

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Krzysztof Krawczyk26:41

I think we're just getting started. We began almost ten years ago as a team of four: three people in London and me opening the Polish office. We are still part of the team that handles all of Central Europe and the Middle East. After all these years, it’s about to be 13 people in Warsaw, London, and Dubai. So I think my partner and I have built a good foundation for the team, for them to take our place in X years.

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Krzysztof Domaradzki27:28

Are there any specific metrics you use to keep your bearings?

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Krzysztof Krawczyk27:35

Regarding the team?

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Krzysztof Domaradzki27:37

Not necessarily the team – regarding the value of invested capital, or your returns.

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Krzysztof Krawczyk27:42

Yes, of course. But in this industry, you shouldn’t focus on short-term goals. As partners at CVC, we set goals that span several years. There’s often a year when the environment isn’t favorable and we don’t land an investment. In our market segment we don’t have to handle large transaction volumes. We need to find big transactions, and they don't happen every year. So here, size and quality are what we focus on. But we do have long-term capital deployment goals. That’s what our investors hired us to do. Secondly, it's about the level of value creation. If we have a certain investment plan, we want to check and test ourselves to see if we’re following it. Our other goal is to increase the portfolio's value over the year. And lastly – since this is quite a straightforward industry – exits.

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Krzysztof Domaradzki29:03

Contrary to appearances, it's not that simple.

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Krzysztof Krawczyk29:05

When investing, we know our time horizon and the return we want to achieve, so those exits kick in later on. But our investors expect to get those funds back, so one of our three goals is returning capital to investors.

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Krzysztof Domaradzki29:29

We mentioned at the beginning that you’ve been in the private equity market for 27 years. What should change in this market to make your work simpler, your returns more impressive, and to make everyone in this industry happier?

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Krzysztof Krawczyk29:49

In our market segment, we operate among companies that always have to deal with regulations, no matter which industry they’re in. Operating on a certain scale requires regulation. Whether it's a juice producer or a telecommunications operator, they have to deal with regulations. Unfortunately, in Poland a huge amount of legal changes are often produced needlessly.

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Krzysztof Domaradzki30:23

So regulatory stability and predictability is something that both we and entrepreneurs complain about.

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Krzysztof Krawczyk30:32

Exactly, because that doesn't concern just the PE sector.

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Krzysztof Domaradzki30:34

Absolutely. It concerns people who are responsible for employees, their well-being, and for managing the company in a predictable and profitable way in order to reinvest. This is a huge problem in our market.

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Krzysztof Krawczyk30:55

The second thing that worries me is how behind we are in terms of automation and investments in efficiency. In Poland, a huge country, labor drove growth for almost 30 years. There’s virtually no unemployment. Wages are approaching European levels, which is good. But investment in productivity should follow, so that employees who earn more have work that is more interesting, more efficient and more engaging. But Polish entrepreneurs and state-owned companies have fallen behind a bit when it comes to reinvesting. It seems to me that in the past, this reluctance to invest may have resulted from regulatory uncertainty. Why should I freeze funds for three, four, five years if the rules of the game change during that time? But right now, this is a huge challenge for the Polish economy, to enable employees to generate greater value. This way, they can earn even more because there’s a bigger pie to be shared. The state benefits from the higher profitability, and entrepreneurs can reinvest funds to pay themselves dividends.

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Krzysztof Domaradzki32:42

After all these years, do you still have any personal goals related to the private equity market that you want to talk about?

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Krzysztof Krawczyk33:06

I am increasingly trying to become engaged in CVC itself, not only by running the Warsaw office but also getting involved in developing our company.

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Krzysztof Domaradzki33:16

So Krzysztof Krawczyk more mentor than investor, at some point.

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Krzysztof Krawczyk33:19

I think that at some point you need to create space for the next generation. I strongly believe in succession as an inherent part of our industry. It’s extremely important to show the next generation that they have the opportunity to succeed, to find their own investment goals and to transform companies.

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Krzysztof Domaradzki33:48

Thank you very much for the conversation.

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Krzysztof Krawczyk33:49

Thank you, Krzysztof.

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Krzysztof Domaradzki33:50

My guest was Krzysztof Krawczyk, head of the Warsaw office of CVC Capital Partners, and I warmly invite you to watch and listen to other episodes of the PSIK podcast “Private Equity about Value Creation”.