On 26 November 2015, an anxious official of the state-owned Hungarian Development Bank (MFB) sent an email to some of his colleagues. MFB has been running an EU-funded venture capital programme to private companies, and the official had some concerns. He wrote in the email that certain projects were against the purpose of the programme as it “was not created for that” kind of businesses.
The criticized projects are related to one of Hungary’s most influential businessmen, Zsolt Hernádi, the president and CEO of the partly state-owned Hungarian oil company, Mol. Hernádi owns one of the fund manager companies that provide investments through the scheme known as the Jeremie programme. Jeremie’s aim is to support innovative start-ups in less developed regions but some of the projects supported by Hernádi’s fund did not meet these criteria, the MFB official noted.
This 2015 November episode is known from a massive cache of internal Jeremie-documents, which were obtained by Forbes and analysed by Direkt36. There have been news reports about the anomalies of certain Jeremie-funds but this leak of more than 20 thousand official documents provides an unprecedentedly deep and comprehensive insight into the controversial programme.
The records showed that Hernádi’s fund, Gran Private Equity, gave 840 million forints (2.7 million euros) to a relative of the CEO and a business partner of the relative so that they could pursue property deals that lacked any innovative element. It was also exposed that Hernádi’s fund was cooperating closely with another fund controlled by his long-time business partner István Garancsi, who is known to be close to Prime Minister Viktor Orbán. Hernádi’s fund even supported a company co-owned by Garancsi.
The leaked documents also reveal that the European Commission found such grave violations in the programme that in 2015 they blocked the payments for months and imposed a fine of 4.3 billion forints (14 million euros). One of Brussels’ main concerns was that even though the programme was supposed to help businesses in the less developed rural regions of Hungary, several supported companies operating in the capital Budapest. The Commission also criticized the Hungarian authorities, arguing that they did not take sufficient measures to screen and rule out those violations.
Hernádi’s fund claims that they followed the regulations and emphasized that in the investments each side takes risks. The National Economy Ministry, which is overseeing the Jeremie programme in Hungary, acknowledged that the EU imposed a fine but argued that the country did not suffer any actual loss because the money taken away from the programme could be used in other development projects. István Garancsi did not respond to questions.
Let’s buy bank branches!
The European Union launched the Jeremie venture capital programme in Hungary in 2009. A subsidy totalling 130 billion forints (422 million euros) is allocated to 28 fund managements companies operated by private investors who had been selected via a public tender. While 70% of the investment given to start-ups comes from the EU, the remaining 30% has to be provided by the private investor. The fund managers must repay the subsidies within 10 years, but not to the EU, but to the Hungarian state, which can re-use the amount for similar purposes. If the fund management company exits the start-up with a profit, most of the gain goes to the private investor. In case of significant loss, however, it has to share at least part of that, too.
Hernádi was selected in 2013, and his fund, Gran Private Equity received 3 billion (9.7 million euros) worth of EU subsidy to support start-ups. Gran derives from the German name of Esztergom, a city at the Slovakian border, an hour drive from Budapest. Hernádi is connected to the city in many ways: he was raised in Esztergom, he owns a house there and he is even an honorary citizen of the city. His fund management company invested in several projects based in Esztergom, including those real estate businesses, which were criticized by the MFB.
These property projects – worth a total of 840 million forints (2.73 million euros) – have been conducted by two companies. One of them was founded by György Bacsa, who is the son of Hernádi’s cousin, according to multiple sources of Direkt36 (Hernádi did not want to comment on this information). Bacsa also has business ties with Hernádi: he is the business development director at Mol, and a board member of the Hungarian-Russian gas trader, MET Holding AG co-owned by Mol.
On paper, there was no conflict of interest, as Bacsa is not a direct relative of Hernádi according to the Hungarian law.
The other company that received support is owned by Viktor Sasvári, a council member in Esztergom from the governing Fidesz party. Bacsa and Sasvári have a close relationship; they were classmates in primary and in secondary school, and they also co-own a real estate company. Sasvári leads the financial committee of the Esztergom municipality, and Bacsa is also an external member of the body. Sasvári told Direkt36 that he has known Hernádi for a long time.
According to the website of Hernádi’s fund, Gran ”primarily seeks to invest in research projects of universities and innovation labs, in businesses that lack capital but have great growth potential, and in high-risk, innovative projects”. It also supported, however, Bacsa’s company, HEBBO, which – even according to a decision support document written by the company itself – is not innovative, as it provides stable profit without significant innovation or risk.
HEBBO’s concept was simple. It buys four properties on rural towns from a business group, that had been renting out the properties to Hungarian bank MKB as the location of four of its branches. As the bank’s previously signed long-term rental agreements remain valid until 2025-2028, HEBBO, as the new owner of the properties, only needs to collect the monthly rent.
HEBBO planned to buy the four properties for 1.5 billion forints (4.8 million euros), an internal document showed. The final purchase price was not revealed. The document shows that in addition to a 547 million forint (1.8 million euro) investment received from Hernádi’s asset management company, HEBBO covered the purchase price from its own funds and from a 2 million euro loan from Duna Takarek, a bank co-owned by István Garancsi.
The company will receive 100 million forints (322,800 euros) of rent annually from MKB, according to HEBBO’s decision support documents. After repaying the monthly instalments of the bank loan and covering operating costs, the company would have an annual profit of 18-20 million forints (58-64 thousand euros). The document shows that HEBBO will not have to do much for this, as MKB has to take care of the maintenance of the properties and cover all operating expenses. This solution “is quite different from the ’spirit’ of venture capital,” the anxious MFB official wrote in the e-mail in November 2015.
Purchases in central Esztergom
The venue of Viktor Sasvári’s property project, who is a Fidesz member of the local government, was also Esztergom. Hernádi’s fund gave the politician’s company called Borostyán Udvar Ltd. 293 million forints in two instalments. There is not much innovative about its concept either, as the company received money to purchase properties, and its income is expected come from renting fees.
In 2015, Sasvári’s company purchased a property in the same street of central Esztergom where HEBBO did, right next to one of the earlier mentioned MKB branches. Sasvári bought and renovated a 523 m2 multi-level building. It was closed at the time of our visit to Esztergom, but Sasvári hopes to soon rent it “primarily for touristic and business purposes”.
Last year, the politician’s company used the money received from Gran to purchase further local governmental properties, one of them located on the central square of Esztergom. His company was the sole bidder at the public tender for the properties, allowing the company to buy five properties for 34 million forints (110 thousand euros), including four apartments sized between 40 and 90 m2 and one ruined retail premise of 146 m2.
Sasvári explained that the reason for the seemingly low price was the bad condition of the buildings, arguing that the cost of reconstruction of the retail premise would exceed 150 million forints. He also stressed that he himself did not participate in the related decision-making process of the local governmental body. This was also confirmed by the Esztergom local government.
The Prime Minister’s friend
Hernádi’s several Jeremie-related activities are connected to István Garancsi. The relation of the two businessmen has a long track record – they worked together in a bank group in the 90’s and they both participated in a profitable privatisation deal at the beginning of 2000s. Moreover, they are both in close relation with Prime Minister Viktor Orbán – the three of them were seen together at football matches and went on hiking tours together, for example on a three-day hiking in the Austrian mountains in 2009, as Garancsi once told weekly magazine Figyelő.
Hernádi and Garancsi have also cooperated in the Jeremie-programme. We found five persons who fulfilled or are fulfilling positions in both Hernádi’s and Garancsi’s fund called Garangold, which also received 3 billion forints from the EU. Moreover, the 50-page-long documents with internal rules of Gran and Garangold regarding the functioning and investment policies are almost word-by-word identical.
Another link between the two businessmen is Miklós Kóbor, citizen of Esztergom who was the CEO of Hernádi’s fund. Later, one of his companies participated in the preparation of investments in both funds. Since December 2016, the cooperation between the two funds has become even closer. The mandate of all members of the management and supervisory committee was terminated in Garancsi’s fund except his own, and in the past few months Hernádi’s fund started to represent and manage several investments of Garangold, according to company data.
Kóbor declined to comment and the Hungarian Development Bank did not answer whether they noticed the connections between the two funds and whether their relation raised any concerns.
As a further link, in 2014 Hernádi’s fund invested in a factory co-owned by Garancsi. A company called TRP – Terenye Ltd. built a factory in Nógrád county producing fuel materials from biological waste. One of the owners of the investor company is Market Ltd., which is linked to Garancsi. Gran provided the almost 2-billion value investment with 400 million forints (200 million as capital injection and 200 million as a loan).
We asked Gran why they supported the business interests of one of Hernádi’s long-time business partners but the representative of the company said he “did not understand the question.” We tried to contact Garancsi through various channels but one of his employees told us that the businessman was abroad and could not be reached.
The EU suspended the payments
The problems concerning the Hungarian operation of Jeremie funds also caught the attention of the European Commission. The auditors of the Commission investigated the investments of three funds in October 2014. Besides the investigation of Hernádi’s fund they also checked the Morando fund of András Tombor, the former foreign and security policy adviser of the Prime Minister (its anomalies were revealed by Forbes Hungary last September).
Part of the concerns was that the supported companies are operating in the Central Hungary region (consisting of the capital and Pest county), and this is against the rules. The aim of the EU was to provide funding to start ups in less developed regions even if it might be more difficult to find such companies in these areas.
Even though the seat of some companies was located in the countryside, they were active in the region of Central Hungary, the auditors found out. Such problems were also revealed in the case of two companies supported by Hernádi’s fund. According to Gran, they acted in line with the rules with regards to both companies. After we sent them those parts of the Commission’s report that detail the anomalies connected to the companies supported by Gran, they responded that “we do not know the report, thus we will not comment on it.”
In April 2015, the head of the Regional Policy Directorate-General of the European Commission sent a letter to the Hungarian Ambassador to the EU regarding the irregularities in the Jeremie programme. “Based on the number of cases revealed during their investigation, the auditors of the European Commission concluded the irregularities are systematic,” Walter Deffaa wrote according to the letter obtained by Forbes. In his opinion, “serious deficiencies can be experienced” in the work of Hungarian authorities that did not find the irregularities during their investigations. He called on them to address these problems and also signalled the interruption of payments.
The European Commission declined to comment but another leaked document showed that the interruption was in force until July 2015. The Commission appears to have lifted the suspension of payments due to stricter measures introduced by the National Economy Ministry in charge of the implementation of the programme. On the Commission’s recommendation, a 10% financial correction – in other words a fine – in the amount of 4.3 billion forints (13.9 million euros) was imposed. This, however, did not mean that the money had to be paid back to Brussels because the 4.3 billion forints could be invested in another part of the Jeremie programme, the ministry said.
No fine had to be paid by the funds, which were found problematic during the EU investigation, including Hernádi’s fund. The objections of the EU did not prevent the continuation of controversial practices. For example, several months after the sanctions of Brussels, Gran took a decision about the projects in Esztergom, which – according to the employee of the Hungarian Development Bank – were in line with the rules but not with the spirit and aim of the Jeremie programme. The Hungarian Development Bank did not respond to our question whether they took any steps with regards to these cases and the Ministry of National Economy supervising the Jeremie programme only said that it had informed all funds concerning the warnings of Brussels. In its reply to Direkt36 it also added that “the regular and contractual use of EU financial support” is the responsibility of the funds.