New government may jeopardise Romanian progress

Romania's Social Democratic Party (PSD) returned to power in December with prime minister Sorin Grindeanu at the helm. The victory came a year after the populist party had been ousted following national demonstrations and anti-corruption protests, and the resignation of PSD minister Liviu Dragnea following his conviction in a voter fraud case.

Less than two months after assuming parliamentary power, PSD was faced with scores of Romanians taking to the streets in protest at two government proposals. In late January, more than 10,000 people in Bucharest's University Square congregated to protest against PSD plans to pardon convicts in order to reduce prison overcrowding, but which critics claimed would also release government allies convicted of corruption.

Instead of silent acceptance of corruption in past decades, people are publicly condemning it and that is a boost to investors' confidence" – Krzysztof Krawczyk, CVC

These protests were followed by others throughout February, which involved an estimated half a million residents rallying against an emergency ordinance enacted by the government to decriminalise official misconduct in cases where financial damages are less than RON 200,000. Despite the PSD government dropping the legislation after massive protests, anti-corruption demonstrations continued for more than 13 consecutive days in February with the government eventually agreeing to hold a referendum on fighting official corruption.

Having relented for now, continued attempts by the current Romanian government to undermine or roll back the progress made on weeding out corruption in the country could soon threaten Romania's nascent investment success story.

King of the castle
For the past two years, Romania has been lionised as the region's next fairy tale by CEE-focused investors, who point to the country's strong GDP growth, growing middle class, and improving political climate – even despite a slowdown in GDP growth from 5.2% in 2016 to a projected 3.9% this year.

According to the 2016 Mergermarket/Wolf Theiss Corporate Monitor CEE M&A Spotlight, Romania saw record M&A activity in 2016. Deal volume hit an eight-year high with 45 deals, representing year-on-year growth of 41%, while value increased 60% to just shy of €2bn.

Private equity activity has been scarce in the past five years, so the sample size is statistically insignificant – but the Romanian market has been showing good signs, with eight PE and VC deals registered by unquote" data last year. Mid Europa's €533m November SBO of super market group Profi from Enterprise Investors drove total deal value up and also marked the largest ever Romanian private equity buyout.

As always, past performance is no guarantee of future results, and we have seen previous CEE private equity darlings fall by the wayside as a result of political shifts. Hungary was an early favourite to become a leading CEE market, but the surge never materialised. More recently, the Russian and Turkish markets fell swiftly out of favour following geopolitical turmoil.

However, at the recent Mergermarket/Wolf Theiss CEE M&A Spotlight launch event, a panel of CEE dealmakers – including UniCredit's CEE corporate finance managing director Alexandra Nagle, Advent director Milan Kulich and Enterprise Investors managing partner Robert Manz – called for calm regarding the situation in Romania. The panel remained optimistic about the future of the country as an M&A and private equity market, despite the new government's rocky start.

Speaking separately to unquote", CVC partner and head of Poland Krzysztof Krawczyk explains a similar view: "What happened in Romania is refreshing. It shows the people can influence policymakers to not deteriorate laws. People went onto the streets to make sure the existing strict laws to eliminate corruption were not repealed. Instead of silent acceptance of corruption in past decades, people are publicly condemning it and that is a boost to investors' confidence."

"Romania is on a long-term growth path. It has a strong macroeconomic standing, a highly entrepreneurial culture, and at the moment it is among the most predictable countries in CEE politically," Krawczyk says.

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