Post-communist succession driving Czech dealflow

In the wake of the USSR's collapse, the shift from planned to free market economy saw a wave of entrepreneurs found new companies or take over former state operations across the Communist Bloc.

With 27 years having passed since the fall of the Berlin wall and the Velvet Revolution in Czechoslovakia, the first generation of post-communism entrepreneurs are now generally nearing retirement age. For founders without a second generation ready to take over, private equity as an exit route continues to grow in popularity.

As such, the post-Communist Bloc generational change remains perhaps the foremost driver for dealflow in CEE in recent years. "There is a generational change happening in the Czech Republic at the moment," says Jan Tauber, founder and managing partner of Czech private equity outfit Genesis Capital. "This is the first one to happen outside of the planned economic system, which ended in 1989, so we're seeing the first generation of entrepreneurs handing over their companies." He says this is the case across post-communism economies in the CEE region.

The best companies – those who have survived in the 27 years since [the fall of the wall] – their founders would have been around 35 or 40 when they started and are now reaching retirement age" – Jan Tauber, Genesis Capital

The generation of founders looking to realise value in their companies and pass the torch on represent a substantial opportunity for private equity in the region, particularly for firms skilled at developing and maintaining proprietary dealflow.

"The fall of the Soviet Union, starting in 1989, is still such a historically ground-breaking event, which enabled people to start personal entrepreneurial activities, set up companies and develop them," Tauber says. "The best companies – those who have survived in the 27 years since – their founders would have been around 35 or 40 when they started and are now reaching retirement age."

The companies that have reached this point but have no immediate successors in the family to take over their SMEs have to look for exits. According to Tauber, the foremost option for these companies is private equity funds that have been present in the region for the past 15-20 years.

Examples of recent succession-driven deals in the Czech Republic include TA Associates' minority investment in transport payment services business Eurowag, and the investment by Tauber's Genesis Capital in Prague-based healthcare research and regulatory service Quinta-Analytica.

Tauber's comments allude to the importance of private equity firms having established a solid reputation in their local markets. Even in more developed markets, there can be a gap of understanding about what private equity is and does, so a GP's recognisability is in some ways the first step in closing that gap.

"Private equity is still not an entirely established class of financial investor that people in the CEE region are used to yet," Tauber says, though he adds there are a good amount of founders who are aware of private equity as an option and are making approaches when looking to sell.

Great expectations
While the flow to market of companies founded in the early 1990s does provide a substantial pool of assets for private equity firms to consider, market conditions for vendors have arguably never been better than right now, meaning GPs are facing exuberant owner expectations when it comes to pricing.

"The current exit market is the best I have ever experienced and I've never seen such a good situation for private equity. This is an ideal time to exit for GPs," says Tauber.

Financial market characteristics prevalent in the western economies such as excess balance sheet cash and plentiful access to credit are also present in CEE, driving up return multiples, but also pushing up vendor expectations of asset values. Additionally, countries such as Poland and the Czech Republic have been showing strong macro fundamentals recently, underpinning local companies' performance and growth.

"The zero-rate environment and high levels of capital in the market means everyone knows they can get a high price for their assets, and that is having a negative impact on entry multiples from a buyer's perspective," Tauber says. "Entry multiples have been rising and are becoming an issue. Founders looking to exit their companies have too high expectations on price and that discussion is one we're experiencing every day. Everyone is trying hard to talk down the valuations to a sensible level but of course we don't always succeed."

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