CEE private equity confidence rebounds

The most recent edition of Deloitte's Central Europe Private Equity Confidence Survey (CEPECS) shows a marked improvement in the sentiment in the region's industry, compared with a more grey-skied outlook in 2015.

Deloitte's Central Europe PE Confidence Index launched in 2003 at index 100 and has been measuring private equity industry confidence levels in central, eastern and south-eastern Europe (excluding Ukraine, Russia and Greece) on a bi-annual basis. From a three-year low of 92 in 2015, the latest survey has seen regional confidence levels rebound to 124 – a jump of nearly a third. Current confidence levels represent a return to more normalised levels compared to the post-crisis index average.

While there are obviously a number of large opportunities and transactions that happen in central Europe, in terms of volume, the mid-market represents a much more target-rich opportunity" – Mark Jung, Deloitte

Deloitte partner and private equity leader for central Europe Mark Jung says the positive economic backdrop in central Europe is one of the key drivers for the return in confidence. The region's largest single economy, Poland, is currently experiencing near-record levels of employment and GDP growth in excess of 3%.

"In terms of macro expectations and economic factors, there seems to be support," Jung says. "That drives the mid-market and provides a rising tide for a lot of the mid-market companies. While there are obviously a number of large opportunities and transactions that happen in central Europe, in terms of volume, the mid-market represents a much more target-rich opportunity."

At the same time, the region is seeing high levels of available capital for investment and debt – in part driven by the underlying macro conditions – with a highly competitive lending market and plenty of euro and zloty-denominated debt available. The cost of capital is also at a reasonable level and low by historic standards, according to Jung.

Geopolitical stabilisation
While Jung says specific reasons for the drop in confidence last year are difficult to pin down, he notes the Russia-Ukraine crisis and resulting instability, as well as the economic volatility resulting from the uncertainty surrounding the health of Greece's economy at the time, as major contributing factors.

Since the last survey, the uncertainty surrounding the impact of the Russian crisis on the CEE economies has diminished, while the Greek situation has stabilised. Though the refugee crisis and the ongoing Brexit debates have created new uncertainties and stunted dealflow in some areas, the confidence of deal teams in the CEE region appear to be less affected so far.

Market sources tell us the quality of their dealflow seems to have increased, so the market seems to be picking up and we're looking forward to a number of quite sizable transactions" – Mark Jung, Deloitte

"What we're hearing and seeing is the historical pricing gap – the difference in price expectations of owners and buyers – is starting to narrow," Jung says. This could be part of the reason for the confidence reflected in CEPECS. "Whether that's a function of vendors believing this is an opportune moment to consider exits and the track record of transactions in the region, a readjustment in people's minds, or vendors being more realistic is hard to say."

According to unquote" data, buyout volume and value dipped slightly from H1 2015 to H2 of the same year, but activity so far in H1 2016 shows deal value has surpassed the preceding four six-month periods, and the number of deals has a good chance of being higher than both H1 and H2 of last year. From January to date, unquote" recorded 11 deals in CEE, worth a total of around €1.26bn, compared with 14 deals worth €934m in H2 2015 and 17 deals worth €1.11bn in H1.

Deloitte's Jung says the region's dealflow could pick up in the remainder of 2016: "There might be a bit of a backlog. Market sources tell us the quality of their dealflow seems to have increased, so the market seems to be picking up and we're looking forward to a number of quite sizable transactions that are about to start, or are on the near-term horizon."

Further reading

• Investments

Russian private equity vacuum remains

• 24 Mar 2016

• Industry

CEE deals, LP interest on the rise

• 07 Apr 2011

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