Romanian buyout activity shows no signs of picking up

"When you say you are going to Romania, people look at you with shock and horror, as if you're going to some place where there is no law and order and bandits roaming in the hills," British journalist for English-language Romanian news site Romania Insider, Liam Lever, told the BBC in 2013. Though he continued by saying, "The reality is something quite different", it may seem the private equity industry's view of the country is not altogether positive.

On the surface, Romania does not appear too dissimilar to the main drivers of CEE private equity, Poland and the Czech Republic. Romania has the third largest gross domestic product in central and eastern Europe (excluding Russia and Turkey) of around $200m in 2016 and a population of 20 million, equating to a GDP per capita of $21,400 – adjusted for purchasing power parity (PPP).

In comparison, the International Monetary Fund puts Czech GDP at around $206m in 2016 and Polish GDP at $547m, with World Bank figures showing PPP-adjusted GDP per capita of $26,000 for Poland and $32,000 for the Czech Republic. Though the Romanian GDP per capita is slightly lower than CEE's strongest economies, it is not as stark as the contrast in private equity deal activity.

The average Romanian deal value between 2005-2015 was a measly €28.26m, compared to the CEE average of €69.3m

Between 2005-2015, unquote" data recorded 39 buyouts worth a combined €1.1bn in Romania. By comparison, Poland saw 113 buyouts with a total EV of €5.6bn and the Czech Republic tallied 71 deals totalling just shy of €5.2bn.

Overall, deal volume and value has been declining in Romania since 2007, apart from spikes in value in 2012 and 2015. The average deal value for the 10-year period was a measly €28.26m, against the CEE (excluding Turkey and Russia) average of €69.3m.

The Baltic region, consisting of three countries with a combined population of six million and combined GDP of $206m in 2016 managed to log 34 deals in the same period with an average buyout value of €44.37m.

With a population of 20 million, Romania should rightfully be an attractive prospect for consumer-driven plays, and unquote" data shows consumer goods and services to be the second-most active sector in the past decade.

However, the lack of a developed middle class makes Romania a less attractive prospect than other countries in CEE and is overlooked as a result, registering just nine consumer deals between 2005-2015. In May 2016, Poland-focused GP Enterprise Investors said it was exploring options for the sale of Romanian discount supermarket chain Profi, which is rumoured to be worth around €500m, but some advisers in the region suggest the lack of domestic and cross-border expansion opportunities for Profi is limiting the GP's options.

Attractive alternatives
The lack of deals in Romania is likely not down to a single overarching factor, but rather a range of issues that make the country less attractive for private equity investors.

From a demand perspective, a look at the firms operating in CEE reveals a distinct lack of Romania-focused funds or Romania-first funds. Multiple firms have vehicles with a majority focus on a single geography, particularly the Czech Republic or Poland. The sole Romania-first firm is Axxess Capital, which manages the Romania- and Bulgaria-focused Balkan Accession Fund – backed by the Romanian-American Enterprise Fund, the European Bank for Reconstruction and Development (EBRD), the German and Netherlands development banks DEG and FMO, and the Black Sea Trade and Development Bank.

Similarly, very few CEE-based private equity firms maintain a Romanian office or substantial presence in the country, and, combined with an underdeveloped advisory sector, deal-makers are few and far between. One senior London-based advisory services professional with extensive experience in central and eastern European M&A tells unquote" GPs rarely go outside their comfort zone to find deals and expect to be approached by local investment bankers or advisers with deal opportunities, which is rare in a Romanian context.

"Other countries in central and eastern Europe have better access to western money, more international trade, better infrastructure, less corruption, more settled legal framework – and international investors know and understand countries like Poland and the Czech Republic. It isn't talked about a lot, but sentiment plays a very large part in these transactions," the adviser says, noting Romania is also suffering a brain drain as high-skilled workers leave the country following its entry into the EU.

Much like the country's geographical location – stretching to the Black Sea coast on the edge of Europe – without major changes on the horizon, the Romanian market is likely to remain on the fringes of private equity in central and eastern Europe.

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