Private equity funds could disrupt Hungarian economy

Private equity funds have become a vehicle not only for hiding wealth, but also for the siphoning out of public funds in Hungary, as they have enjoyed extensive access to public funds, despite the fact that their operation, ownership structure and the public capital investments are not transparent. This is how Judit Zeisler, Head of Policy at Transparency International (TI) Hungary, summed up the main claim of their recent study on the situation of Hungarian private equity funds.

Private equity funds have become increasingly popular in recent years in Hungary, especially in business circles closely linked to the government: according to TI, while in 2016 there were only five funds operating in the country, by 2023 their number had risen to more than 160.

The assets held in private equity funds have also risen steeply, reaching some HUF 2,400 billion today, equivalent to 3 percent of the Hungarian GDP.

TI's study sought to identify the legal and practical shortcomings that have led to private equity becoming a legalized form of hiding wealth in practice.

Nobody can see it

There are two reasons why the subject of private equity funds is currently relevant in Hungary: firstly, because these funds, which are also popular abroad, have started to operate according to a very specific, unconventional business logic here; and secondly, because the EU has also taken note of this Hungarian practice. The EU’s anti-money laundering regulation, and the Hungarian regulation based on it require the identification and registering of the actual owners (i.e. natural persons acting as the ultimate beneficiaries or managers of the entities). However, in 2023, after a lengthy article by Direkt36 revealed the identity of the owners of several private equity funds and fund managers, the government removed the data on private equity funds from the Hungarian register of beneficial owners. In the course of preparing the study, TI also inquired about the regulation with the Ministry of National Economy, which confirmed that private equity funds are currently not included in the tax authority's registry of beneficial owners.

This means that this information is not available in any aggregated form, not just to the public, but also not to the authorities. This, however, is contrary to EU legislation.

In response to TI's question, the European Commission has made it clear that Hungary should be keeping accurate and exhaustive records of the beneficial owners of private equity funds. TI has also notified the EC of these shortcomings, and infringement proceedings were launched against Hungary in July 2024.

However, the complexity of the issue is further illustrated by the fact that it is not at all clear which of the individuals concerned can be identified as the ultimate owners of the private equity funds. The fact that there is a distinction between the decision-maker, i.e. the board of the fund manager, and the investor in the private equity fund, i.e. the individual holding the assets, makes interpreingt the concept of the beneficial owner difficult. An EU anti-money laundering regulation adopted earlier this year could change this, but it will not be transposed into national law until 2026.

Until then, lengthy investigations by journalists will be needed to find out who may be behind each private equity fund. This summer, Válasz Online estimated that the NER's four big oligarch groups are holding roughly HUF 1452 billion in private equity funds:

• fund managers and some of the major funds linked to Lőrinc Mészáros (the PM's childhood friend) amount to HUF 770 billion;
• fund managers linked to István Tiborcz (the PM's son-in-law) manage HUF 487 billion;
• Quartz Investment Fund Manager and the main funds linked to it, belonging to Ádám Matolcsy, (son of György Matolcsy, governor of the Hungarian National Bank) amount to HUF 116 billion;
• László Szijj's fund management company and its affiliated funds manage assets of HUF 79 billion.

The portal's journalists linked the funds to well-known pro-government businessmen based on which fund manager is managing them.

A uniquely Hungarian way of hiding money

When presenting the study, Levente Zsembery, associate professor at Corvinus University of Budapest, pointed out that the sector has been set up for concealment from its very inception, and said that the lack of transparency is in the "genes" of private equity funds. Thus, according to him, the answer to the question of whether secrecy is a Hungarian peculiarity is that it is not. "But the way we use private equity funds is unique to Hungary," he says. For example, the reverse logic in the way investments are made is a Hungarian peculiarity: that is, in Hungary, private equity funds don't start out by looking for funds, but the funds simply appear on their own, similarly to the way wealthy foreign billionaires set up a team of trustees to manage their family fortune.

“The value of these funds is also unique.”

“A demonstrable percentage of the Hungarian economy is in the hands of an owner who, in theory, wants to sell it in 5-10 years. The private equity funds have grown to a size that could cause disruption at the level of the national economy.”

TI believes that the concealment of the private equity funds’ owners is dangerous for several reasons. The inclusion of funds of unknown origin raises the risk of money laundering, with the European Court of Justice (ECJ) specifically having identified this as a risk in the case of Hungarian private equity funds. In its July 2023 Rule of Law Report, the European Commission recommended an increase in the transparency of private equity funds in Hungary, given their "role in hiding profits gained illicitly from corruption".