Mega-deals cap good year in CEE

In the Mid Europa-, Permira- and Cinven-backed buyout of Polish online marketplace Allegro, central and eastern Europe saw one of the region's largest ever private equity investments. The $3.253bn deal is comfortably 2016's largest CEE transaction and also the largest in the past 10 years.

Along with the €533m secondary buyout by Mid Europa of Romanian discount supermarket chain Profi from Enterprise Investors, the final quarter of 2016 hosted the two largest and arguably two of the most high-profile deals of the year in the region.

The past 12 months have seen an unusually large number of deals in the €100m-plus bracket for CEE, including deals for telecoms assets Bité and Starman, both valued above €200m, and Bridgepoint's €247m investment in jeweller Smyk. Larger deals such as these have been among the defining characteristics of 2016, where CEE – excluding Russia – has seen a drop in overall deal volume compared to the previous five years, but more than a doubling of aggregate deal value, according to unquote" data.

"If you aggregate the transactions that have already happened in 2016 as well as what is coming up, it has been quite a lot of visible and large deals," says Mid Europa co-managing partner Robert Knorr. "This year has been extraordinary in that respect."

While large deals were a central feature of the year gone by, Knorr does not expect a continuation in 2017. Having secured two of the region's largest deals in 2016, he says he expects the firm's dealflow to revert to more proprietary and Mid Europa-specific transactions, as opposed to broad auction processes.

There is an ever-increasing amount of opportunities in the region – and anyone who says anything to the contrary is probably not leaving his office much or spends too much time moaning at the conferences." – Ondřej Vičar, Genesis Capital

The positive outlook on dealflow for 2017 is shared by Kaido Veske, co-founder of Baltic buyout firm Livonia Partners: "From our perspective and talking to other industry participants, in terms of investment opportunities available, the market appears to be at its highest in recent years."

Ondřej Vičar, a partner at Czech GP Genesis Capital, also takes an optimistic view of the coming year in CEE: "In terms of the future and 2017, we expect a quite similar market situation. There is an ever-increasing amount of opportunities in the region – and anyone who says anything to the contrary is probably not leaving his office much or spends too much time moaning at the conferences."

Pricing and exits
Despite the explosion in average deal value this year, most unquote" sources in the region are unconcerned about upward price pressure, in part due to CEE being a market under-served by private equity and with positive prospects for proprietary purchases as a result.

Knorr says the region has a tradition of not dabbling in excessive leverage or valuations, compared to western markets. However, Vičar says his firm is seeing "a general increase of valuations expected by the owners/sellers" of around one turn of EBITDA multiple compared to a few years ago. This has also affected the exit market, he says: "2016 has been the year of exits, which reflects the fact that it is a seller's market now.

"The external reasons for this are obvious: positive economic sentiment and growth, increased appetite in M&A and excess of capital, which all translate into favourable valuations and general exit conditions."

The total number of private equity and VC exits in 2016 remained roughly on par with 2015, according to unquote" data, though the impression left is of a market with a broadening range of exit routes. Typically dominated by exits to trade buyers, 2016 has seen the number of SBOs double compared to last year, and more than triple compared to the four years preceding that.

"I think the year finished with some strong exits and I expect to see more of that next year," says Veske. "We have witnessed an increase of companies coming up for sale from financial buyers. If not all, then at least some of them are likely to be sold, in addition to some very well-performing assets that should have a broad buyer universe."

Mid Europa's Knorr takes a similar view on the exit market, saying his firm has always looked positively on the exit prospects and exit availability in terms of buyers in CEE. While he says SBOs and strategic buyers have proven to be viable exit route in the toughest of times for his firm, Knorr notes that the Warsaw Stock Exchange – an important exit option for mid-market players – has also opened up again in recent years.

Looking ahead, Knorr says: "I hope the world will not be impacted by unexpected events that mean financing or equity markets will suffer and influence private equity as a result. Barring that, next year will be better for transacting and exiting businesses in central and eastern Europe."

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