Strong start in CEE for second year running

Deal activity in the CEE region, during the first three months of 2017 was on par with 2016's corresponding period – with a total of 10 buyouts – but saw aggregate value increase to €1.5bn, an uptick of €350m compared to the same quarter last year. Consequently, the region's private equity market has seen its best start to a year since 2011, when unquote" data recorded 13 deals totalling €1.55bn of EV.

Central and eastern European deal-makers will hope the activity levels can be sustained throughout the year, as opposed to 2016, which saw deal volumes drop by half in the third and fourth quarters. However, the region has been on a positive trend for deal activity in recent years, and last year built on the market's good form in 2015.

CEE's investment activity in 2017 to date builds on a strong overall performance in 2016, which was among the better vintages for central and eastern European private equity post-crisis. A total of 29 buyouts were recorded for the full year in 2016, with total deal enterprise value of €7bn – driven almost entirely by the $3.25bn buyout of Polish online marketplace Allegro by Cinven, Permira and Mid Europa in December.

Deals of Allegro's size have historically been few and far between in the CEE private equity market, and accordingly 2017 is unlikely to surpass 2016 in overall deal value. However, local practitioners were upbeat about the outlook for CEE private equity dealflow towards the end of last year and generally remain so. "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," said Ondrej Vičar, partner at Czech small- and mid-cap GP Genesis Capital, in December.

Exit concerns
Meanwhile, after a bumper year for private equity exits in central and eastern Europe, the market began the year somewhat off pace.

The number of exits in Q1 fell to five, compared to 10 in the same period last year, and also dropped in comparison to the nine sales registered by unquote" data in the final three-month period of 2016. In a region where the private equity industry has struggled to keep exit numbers up since the financial crisis, last year's performance was a welcome bucking of the downward trend seen in CEE for the past half-decade.

With 34 companies sold during the year, exit volume increased for the first time in five years, surpassing the 2015 tally of 31.

In a region that has fallen somewhat out of favour with western LPs post-crisis, improving the industry's exit record has been a major theme in CEE private equity over the past two years. Industry veterans in the region noted over the course of last year that LPs are increasingly concerned with the pace of exits from CEE portfolios in recent years and that there is a growing risk it could impact investor appetite.

Though exit routes are less plentiful in CEE compared to western Europe, the current market conditions are, to a large degree, in favour of firms on the sell-side of the table. Local practitioners have repeatedly noted the uptick in entry multiples in the past 12 months as a key theme of CEE private equity, though prices remain relatively reasonable compared to the west. While this has underpinned the improved exit performance in 2016, it is also exacerbating the gap in pricing expectations between buyers and sellers that is increasingly becoming a feature of the market.

Should this gap continue to grow, the CEE private equity exit market could lose the momentum it built up in 2016, much to the detriment of a region that feels it needs to work particularly hard to convince LPs of its attractiveness.

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