Book a free call
Tips

Private investor test

Do you need to conduct a private investor test? Read our article to find out how much it costs, why it is performed and what it involves.
Filip Samczuk
Author of the article
Published
April 22 2024
Reading time
9 minutes
Table of contents

The private investor test - the key to informed investment decisions

The private investor test is an assessment that determines whether state support for businesses avoids qualifying as unauthorized state aid. Read our article to understand the key steps and criteria of the test, as well as its practical application to ensure that public actions comply with market standards.

Highlights

  • The Private Investor Test makes it possible to assess whether the state's actions towards companies do not constitute unauthorized state aid under EU law, analyzing whether the state acts rationally as a private market investor. The measure is designed to test whether an external investor other than the state would subsidize an entity (company) under normal market conditions.
  • Properly conducting the test requires an analysis of capital exposure, expected profitability, risk and alternative investment opportunities in a market context.
  • The private investor test differs from the private creditor test in its assessment perspective - the former focuses on the terms of the investment, the latter on the terms of the debt restructuring.
  • The private investor test is usually carried out by an outside consulting firm.

The basics of the private investor test

The Private Investor Test is a tool that assesses whether state actions, especially against public enterprises, constitute state aid. A positive result of the test indicates that the state's actions are not state aid. A negative result, on the other hand, suggests that the actions are a form of such aid, which constitutes an element of unauthorized state aid. A thorough understanding and application of this tool is key to avoiding potential non-compliance with EU state aid law.

Like the private creditor test, the private investor test is used to analyze investment activities and debt restructuring plans by public authorities. State aid can be ruled out if the public authorities' actions are in line with normal market operators, which can be demonstrated using the private investor or private creditor test. In such a case, the proceedings that would be conducted against the debtor could also be conducted by a private creditor.

private investor test

Definition and objectives

The Private Investor Test is an analysis of the actions of public entities with respect to entrepreneurs to determine whether support provided by these entities with public funds constitutes state aid. A key component of the test is verification that the transaction does not involve prohibited state aid by assessing whether the state acted as a private investor in a particular transaction, according to Article 107 of the Treaty on the Functioning of the European Union.

The primary purpose of the Private Investor Test is to confirm that the transaction is conducted under conditions acceptable to a private investor seeking long-term profitability. In this context, the test's analysis includes the private investor's decision under conditions analogous to those of a public entity, particularly in terms of capital commitment, and an assessment of whether the benefits provided by the state were granted at arm's length and do not constitute unlawful state aid.

definition of the private investor test

Application in practice

Companies considering cooperation with state-owned entities or state agencies should be aware that the private investor test can be used to assess whether such cooperation will be conducted at arm's length.

The use of the private investor test is particularly important for companies that may receive state financial support. If the test is positive, the state's actions do not constitute state aid, which can facilitate the process of obtaining financing for the financier. On the other hand, a negative test result suggests that the state's actions may constitute a form of state aid, which can complicate the financing process.

Elements and stages of the private investor test

do you need a private investor test? get back to us

The private investor test consists of various stages that allow an accurate and reliable assessment of the state's performance as an investor. These stages include:

  1. Research phases in which the necessary information is collected;
  2. Analyze this information using appropriately selected research tools;
  3. Assessing whether state actions against a company constitute state aid.

Key steps in conducting a private investor test include:

  1. Identifying the purpose of the investment;
  2. Investment risk analysis;
  3. Assessing the expected profitability of investments;
  4. Assessments of alternative investment opportunities.

Each of these stages requires detailed analysis and evaluation, which should be carried out in an objective and transparent manner to ascertain their effectiveness, and to assess the actions taken during these stages, including the enforcement proceedings carried out.

Evaluation criteria

Evaluation under the private investor test is based on several key criteria. First and foremost, the test involves assessing whether the transaction is conducted on terms that a private investor would find acceptable. In this context, the analysis includes such aspects as:

  • capital commitment;
  • anticipated return on investment;
  • investment risks;
  • market conditions.

In addition, the assessment must take into account the economic and market context in which the activity is implemented. A proper understanding of the specifics of the market in which the entity operates is key to a sound assessment. The peculiarities of the sector in which the entity operates must also be taken into account, as they can affect financial flows and profitability.

private investor test

The process of conducting the test

The process of conducting a private investor test is complex and requires detailed analysis. The first step is an ex-ante analysis, which takes into account the extent of information available in the investment decision-making process and foreseeable developments. Then, the process can include various evaluation methods, such as the pari passu method or conducting an open, transparent and non-discriminatory bidding process, when evaluating the deal against market conditions.

The final stage is a comprehensive economic evaluation, which compares the behavior of the public enterprise under study with that of private entities. This evaluation requires a thorough economic analysis with reference to objective and verifiable circumstances to assess the economic soundness of investments using public funds.

Private creditor test - comparison with the private investor test

The private creditor test and the private investor test are two different tools that are used to assess the state's performance as an investor or creditor, including individual public creditors. While both tests are designed to assess whether the state's actions are in line with market conditions, they differ in their application and perspective.

The private creditor test aims to assess whether the proposed terms are reasonable and whether a private creditor would accept them. The private investor test, on the other hand, focuses on assessing the terms of an investment that a private party would find acceptable. Both of these tests are designed to ensure that the state's actions are consistent with market conditions, but they differ in their application, purpose and perspective.

What are the differences between the tests?

The private investor test focuses on the terms of the investment that a private party would find acceptable. In this context, the test consists of assessing whether the transaction is carried out under conditions that a private investor would find acceptable. In other words, the private investor test involves assessing whether the state's actions as an investor are consistent with the actions a private investor would take under similar conditions.

On the other hand, the private creditor test evaluates the state's behavior as a creditor. In this context, the test is to assess whether the proposed conditions are reasonable and whether a private creditor would accept them in order to pursue a claim. In other words, the private creditor test is to assess whether the state's actions as a creditor are consistent with the actions a private creditor would take under similar conditions.

private investor test

When to apply each test?

When to apply the private creditor test and when to apply the private investor test? The answer to this question depends on the financial context. The private creditor test is used to assess situations in which a private creditor accepts debt relief or facilitation, acting rationally under normal market conditions.

In contrast, the private investor test is used for both the evaluation of investment activities of developed companies and startups. In the case of evaluating investment activities carried out by public authorities, the private investor test is used. The appropriate application of the private creditor or investor test depends on the financial context - the former relates to debt restructuring, while the latter is used to evaluate planned investments.

Cost of private investor test

Conducting a private investor test comes at a cost. Such an analysis is customarily outsourced to an external consulting firm. The cost varies and depends on both the scope of the analysis and the prestige and recognition of the firm conducting the private investor test.

Typically, the cost of such an analysis is in the tens of thousands of zlotys. To get an accurate calculation, ask a consulting firm for a quote.

Cases of application of the private investor test

The private investor test can be applied in a variety of cases, such as evaluating the profitability of investments in new technologies or analyzing asset purchase transactions from a company in financial distress. These examples show the variety of applications of the private investor test and highlight its versatility.

In the situation of a public entity's planned purchase of assets from a company in financial distress, the private investor test was applied to assess whether the transaction would find applause in the eyes of a private investor concerned with profits. On the other hand, analyzing the profitability of investments in new technologies through the private investor test allowed the state-owned company to make an informed decision to finance a project that yielded significant returns over the long term, given the committed capital of comparable investments.

Examples from the Polish market

The private investor test is used all over the world, including the Polish market. The test is used in a variety of contexts, from evaluating investments in new technologies to analyzing the financial support provided by the state to companies in financial distress.

In Poland, the lack of a developed business plan or quantitative cost-benefit analysis before finalizing a deal may indicate non-compliance with the private investor test.

A private entity in certain situations may also be interested in conducting a private investor test.

International experience

The private investor test is also used in international markets, where it has helped assess whether state actions constitute state aid. For example, the private investor test played a key role in the case of tax write-offs as part of the aid France granted to Électricité de France in 1997.

The case involved a large French public company and a key player in the European energy sector. The private investor test was used to assess whether the tax write-off constituted state aid. In this case, the private investor test allowed for an accurate assessment of the situation and contributed to a fair decision.

Selected challenges and pitfalls of the private investor test

While the private investor test is a powerful tool for assessing the state's actions as an investor, there are some challenges and pitfalls associated with it. A positive result on the test means that the state's actions are not state aid, while a negative result suggests that the actions may be state aid.

Besides, the private investor test requires careful analysis and evaluation, which creates the possibility of subjective interpretation of data. Proper understanding and application of the private investor test is key to avoiding potential incompatibility with EU state aid law.

Taking into account the specifics of the market

An important challenge of the private investor test is to take into account the specifics of the market. The market in which an entity operates has its own unique characteristics that must be taken into account in private investor testing. For example, the specifics of the sector affect cash flows and profitability, which are key in private investor testing.

In addition, it is important to consider market trends that may affect the chances of investment success. Proper understanding and application of the private investor test is key to avoiding potential incompatibility with EU state aid law.

Avoiding subjectivity

Avoiding subjectivity is a key challenge when conducting a private investor test. Independence from external factors is crucial for objective and reliable data. Using multiple sources of data can help eliminate subjectivity, and using a thorough research methodology enables an analysis that is free of individual investor bias.

Validation of results by independent parties is one step in avoiding subjective interpretation of data. Regular evaluation of procedures and review of results by outside experts can help identify and reduce subjective factors.

Benefits of conducting a private investor test

  • Avoiding legal problems (classification of activities as unauthorized state aid);
  • Analysis of the entity's business situation based on, among other things, the market and competitors;
  • A tool to obtain financing for further development.

Summary

The private investor test is a key tool for evaluating the state's performance as an investor. This test assesses whether the state's financial support activities are in line with market conditions and do not benefit the beneficiary. This is extremely important to ensure compliance with EU state aid law.

While the private investor test is a powerful tool, there are some challenges associated with it. A positive test result means that state actions are not state aid, while a negative result suggests that actions may be state aid. However, by properly understanding and applying the tool, these challenges can be overcome.

Frequently asked questions

What is the private investor test?

The private investor test is an analysis that assesses whether the state's actions as an investor are consistent with market conditions and benefit the beneficiary without distorting competition.

When does the private investor test apply?

The private investor test is used when evaluating investment activities carried out by public authorities. It can also be used when evaluating investment projects carried out by financial institutions.

How does the private investor test differ from the private creditor test?

The private investor test focuses on the terms of the investment, while the private creditor test evaluates the state's behavior as a creditor. The two tests differ in their scope of evaluation.

What are the challenges of the private investor test?

The challenges of the private investor test include taking into account market specifics and avoiding subjectivity. It is worth being aware of these aspects when conducting the private investor test.

What are the benefits of applying the private investor test?

The benefit of applying the private investor test is to avoid potential incompatibility with EU state aid law. This makes it possible to assess whether state financial support is in line with market conditions.

About the author

Filip Samczuk
For 12 years, he has provided substantive support to entrepreneurs in realizing their dreams of starting or growing a business. He advises on obtaining financing, business development and legal issues. Privately a fanatic of sports, travel and history of the 20th century.

Want to learn more?

Find out how we can help you.
Contact us
More than 250 satisfied entrepreneurs in Poland and abroad

Similar articles

podatkowe due diligence
Tips
5 min. reading

Co to jest podatkowe due diligence?

Podatkowe due diligence to kompleksowy proces oceny i analizy zagadnień podatkowych związanych z przedsiębiorstwem będącym przedmiotem potencjalnej transakcji. Proces ten ma na celu zidentyfikowanie wszelkich ryzyk podatkowych, które mogą wpłynąć na wartość przedsiębiorstwa i przyszłą sytuację podatkową inwestorów.
Tips
6 min. reading

Due diligence prawne - kompletny audyt prawny

Audyt prawny, znany również jako due diligence prawne, to fundamentalny proces w świecie biznesu, który umożliwia dogłębną analizę stanu prawnego przedsiębiorstwa lub określonych aktywów. Ten wpis blogowy ma na celu przybliżenie kluczowych aspektów due diligence prawnego, jego znaczenia, zastosowania oraz kroków, które są niezbędne do jego przeprowadzenia. Wiedza ta jest nieodzowna dla przedsiębiorców, inwestorów oraz osób zarządzających spółkami, które pragną zminimalizować ryzyko związane z transakcjami biznesowymi.
opłacalność inwestycji
Tips
8 min. reading

Jak ocenić opłacalność inwestycji?

Ocena opłacalności inwestycji jest kluczowym etapem każdego przedsięwzięcia inwestycyjnego. Przedsiębiorcy, inwestorzy i decydenci muszą zrozumieć, czy planowane przedsięwzięcie przyniesie oczekiwane korzyści finansowe. Analiza opłacalności jest procesem, który polega na porównaniu kosztów i korzyści związanych z inwestycją, a także na ocenie, w jakim czasie inwestycja się zwróci. W niniejszym artykule przedstawimy metody, kryteria i narzędzia, które pozwolą na efektywną ocenę opłacalności inwestycji.