Rob Irving and Pavel Hristov

Interview for Capital Weekly, 15 December 2017 (Translation from Bulgarian)


Rob Irving is the Co-Chair of Dentons’ Global Private Equity Group. Rob’s practice focuses on cross-border M&A particularly private equity transactions, throughout CEE and SEE where he has been active since 1991. In the last few years, he has led landmark buyout, growth equity and exit transactions, in, among other countries, Bulgaria, Serbia, Slovenia, Croatia, Hungary, Poland, Romania, the Czech Republic and Turkey.

Pavel Hristov is partner in Hristov & Partners Law Firm. He is a corporate and M&A lawyer specializing in commercial transactions, corporate governance, mergers and acquisitions, share and equity transfers or assets, private equity deals, joint ventures, and competition law.

Dentons and Hristov&Partners advised the Belgian Spadel, which at the beginning of the year completed the acquisition of Devin from the US investment fund Advent International.

We speak with Rob and Pavel during the annual investment summit “Deals and Dealmakers” organized by Capital on November 29.

Can you tell us more of Dentons, other than that it is the largest law firm in the world?

Rob Irving: The legal sector is going through significant changes and law firms are addressing the new challenges differently. In Dentons, we have decided that we should cover the planet with our own offices, in as many jurisdictions as possible. Our organization was established through a merger of three law firms, four years ago. The number of our lawyers back then was around 2-3 thousand and now they are almost 9 thousand. What is particularly typical for Dentons is that we are a law firm with an entrepreneurial approach and spirit – we partner with our clients to share both the risks and benefits with them and to invest in long-term relations. This allows for a larger flexibility of our lawyers’ activities.

How do you select your markets? For instance, you are not present in Bulgaria, at least not directly?

R.I.: At the moment we have presence in six jurisdictions in Central and Eastern Europe and we have more than 600 lawyers in the region – but we operate practically everywhere in the region, even in smaller countries like Moldova and Slovenia. For the future – who knows? Maybe we would open offices in other countries in the region, including Bulgaria. At some point, we will turn to Southeastern Europe and we will develop a strategy for the region that may also include our current model – we currently have many fantastic partnerships, such as the one with Pavel’s law firm (Hristov&Partners) and this is a very successful formula for us. I am responsible for our strategy in Southeastern Europe and I can say that we have not taken any decision to enter the region. This could change, but not in the next two years.

If we say you are an investor in our country – what makes it attractive and what would be a barrier to entry?

R.I.: Our clients are becoming more and more interested in the country. The deal for Devin is a great example – a 100-year Belgian company that traditionally invests in France, Belgium, the Netherlands and the UK, and whose next step is to invest in Bulgaria. This shows a lot of trust in the country as an investment destination.

I also know of some other investors – an American-Canadian technology company that has signed a deal with a big European client and has decided to establish its European holding company in Bulgaria, already hiring people in Sofia. They could have done it anywhere else, given that they also started operations in other places like Germany and the Czech Republic, but they chose Bulgaria.

In the last years we have considered technology / IT sector as the ‘success story’, but are there other sectors that may attract international investors interest?

R.I.: Sectors like transport that can benefit from the location of Bulgaria are attractive – because the country is at a crossroad and many people and goods have to pass from here to reach either the EU or places like Russia or Turkey. The concession at Sofia Airport will be very attractive for investors – but something of this magnitude requires very careful preparation with an international consultant – as it happened with the airport in Belgrade.

Could the entry of a major player in Belgrade clash with the potential investors’ interest in the Sofia [airport]?

R.I.: I don’t think so. In my opinion, there is sufficient distance between the two destinations and they are not perceived as competing for a large number of identical clients. The experts in the field do not seem concerned by that.

Spadel is an excellent example of a strategic investor in the region, but the overall feeling is that strategic investors are not yet active here – do you think this would change and what would attract them?

R.I.: I think it’s changing – I’m hearing about more and more opportunities, some of which I think will happen next year. But if you look at, for example, the “Acibadem City Clinic” in the hospital sector – this is also a very good example and a great recognition. As far as I know, as from the investment, the company significantly outperforms its budget and provides good services to the country, meaning that strong results do not come because of cost cuts. This is a successful story. And the more successful stories involving large, familiar investors happen, the more the country’s reputation will improve and will attract more investments.

What is your feeling of Bulgaria’s investment climate currently?

R.I.: The low corporate income taxes are particularly helpful…

Yes, but we cannot only rely on low corporate income tax and low labour costs – at some stage these will inevitable lose their advantages…

R.I.: When I talk with investors, I never hear them speaking about low labour costs. What they are talking about is the presence of smart, motivated young people who know many languages. Together, they are a competition for many Central European countries such as Poland, Hungary, and so on. Bulgaria continues to produce a large number of very well-educated, motivated people but who may not have so many fantastic opportunities to use their potential …Investors do not talk as much about the costs as about finding young, smart people with language knowledge and lateral thinking – and Bulgarians have a long-standing reputation for “out of the box” thinking. I think these are strong advantages.

And what are the negatives of the local market – other than that it is small and traditionally remains under the radar?

R.I.: There are certain issues in the past that damage Bulgaria’s reputation in the eyes of investors – some big State disputes with international investors that have come to arbitration, such as the cases of Advent for the privatization of the Bulgarian Telecommunications Company (BTC) and of some investors in the energy sector. I know that certain private equity funds, including successive shareholders in BTC, came out of the investment very dissatisfied with some of the government’s decisions along the way.

Of course, there are currently many such problems with political interference in the business arena in France, Poland, Hungary and so on.

Obviously, if you operate in a sector without too much government intervention, the situation is better. In the previous panel at the conference, there was a representative of The Rohatyn Group that is investor in a Bulgarian pastry company (“Prestige-96”), Advent was investor in Devin and now is Spadel. These are all very good sectors with less capacity for government intervention.

Except those government’s decisions and the related international arbitration proceedings what are the other challenges with which we will need to solve?

R.I.: I do not think there are any other major challenges. Rather, the challenge is to be noticed, to attract attention and to have a consistent flow of good stories, which is always a problem in this region – so that investors really wake up and say: “oh, we should look closer and visit Bulgaria every year or every six months”.

But with people like Elvin Guri and Rosen Ivanov who create and improve the entrepreneurial ecosystem in the country – I think this is the future. And if we look globally – the future is with entrepreneurs and people with ideas. (I have two daughters, 10 and almost 13, and I’m trying to teach them entrepreneurial skills so that even if they decide to do something else first, they would have the flexibility to adapt and become entrepreneurs later. And as far as the entrepreneurial spirit and good ideas can be stimulated here, they will bring a good future for Bulgaria and for the young people.) In this sense, the next challenge is to build a sustainable base of entrepreneurs so that the country becomes a destination for technology investors and instead of them going to the Czech Republic or Germany, to come straight to Bulgaria. This is a sector where you can really compete with any country.

The deal for Dynamo Software drew a lot of attention – a few weeks ago I was in London and I met with Francisco Partners (the investor in Dynamo Software) and they are really enthusiastic about their investment. I have seen other private equity funds with a focus on the technology sector and they also talk about the deal. So this is a good example and if there is another similar investment next year, then investors will see a trend.

Pavel Hristov: We already have a trend, this is the 3rd noticeable significant deal in the IT sector – that attracts a strong interest. The positive for Bulgaria is the development of an ecosystem where we have serial entrepreneurs like Elvin Guri and the founders of Telerik. The more success stories we have the better. Many people follow the footsteps of entrepreneurs like Elvin and Vassil Terziev. I trust Bulgaria has the potential in terms of young people with expertise. But also the experience and the self-confidence of people who have created and sold successful, strong and viable businesses and have built market shares on highly competitive foreign markets for their products. They have developed their products here, thanks to the talent and experience of the Bulgarian developers but also have added the appropriate sales and marketing teams and knowhow to enter the US market, grow a large and sustainable market share, create a brand, and hence attract the interest of large multinationals like Progress Software and Citrix.

We have talent outside Bulgaria – the Bulgarian diaspora abroad – Bulgarian who have studied and worked in the US, Canada, UK, Western Europe. Many work for investment banks and funds and have first class expertise how to structure a transaction or build a successful company. And many of them invest and reinvest in Bulgaria, just like one of the co-founders of Dynamo Software.

We have an ecosystem the next step for us is to connect with people and organisations like Dentons with enormous knowledge of numerous deals completed in various jurisdictions. For us at Hristov & Partners this is a great opportunity to cooperate with them thus learning from them and raising the quality of our services. And our role in our society and economy is to support them by sharing such knowledge and expertise. For this purpose we work with startup companies helping them to structure their businesses, walk them through the M&A process phases and prepare for the next stage – investment by a PE or VC fund or a strategic investor.

Large companies will look in Bulgaria for growth opportunities. Bulgaria is on the map. Though not as large and developed as the Czech Rep. and unlikely to be the home of the next unicorn startup company, for sure some smaller-Avast companies will be established here.

Where do you expect deals next year except in the technology sector?

P.H.: The banking and financial system is one of the sectors that will attract significant investments for various reasons but mainly due to the technology revolution . As Rob said, not only the legal industry experiences a fundamental change due to the new technologies – the financial sector lives through similar turbulences. Speaking of fintech, many banks will invest in more, different forms of e-banking and different online based added value services and applications – they will use fully the possibilities open by the new technologies to achieve a greater effect, more efficiency and offer cheaper and faster services to their customers.

R.I.: Look at Elvin Guri who signed an agreement to acquire an online bank in Serbia  that is practically virtual. And I am convinced that he will find a way to transfer this model outside Serbia in due time. This is the future and this exactly is the reason for banking to be among the sectors to experience the most fundamental changes. In countries like Bulgaria and Serbia you may experiment with similar projects without need to invest huge sums as such that would be needed in the US or the UK. For the likes of JP Morgan in the US it will be extremely difficult to transform into an online bank as this would require an enormous transformation. But for Telenor Banka in Serbia… or think of a bank operating in Bulgaria that may transform – this is possible and may be a good example. This happened in the telecom sector in some CEE countries 20 years ago – the western European operators acquired local telecoms and experimented with the new technologies first in the CEE and then introduced them to their home markets.

P.H.: Other sectors are lifesciences and healthcare. The Acibadem deal is the beginning. Bulgaria is an attractive destination. The quality of Bulgarian medical professionals and doctors is high. We have had a brain drain to CEE and Western Europe but currently those specialists have excellent opportunities to practice in Bulgaria because the hospitals will have the top quality equipment and processes.

Other hot industry is the transport services which will also be strongly affected by the new technologies. We have clients in the different segments of the automotive industry – fleet management and traditional distribution of commercial vehicles, trucks and buses. Today they are not selling vehicles but services, the mobility service – transportation of people or goods from point A to point B. The investment is made not in the vehicle but in its availability at the time when necessary. So the volume of the traditional sales of automobiles will shrink and the shred use of vehicles will reshape the sector. The consolidation in this sector is a sign of the fundamental change and the entry of the new players in the market who will offer their services in a fundamentally different modern manner.