Tech deals return to the CEE region

Nicole Tovstiga
19 October 2017

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While deal volume in the CEE technology space is yet to recover following a slow 2016, aggregate value is soaring. Nicole Tovstiga reports

Deal activity in CEE's technology sector has seen somewhat of a recovery in the first half of 2017 after slumping to an eight-year low in the second half of 2016. Additionally, in September 2017, two major funds with remits to invest in technology – managed by Enterprise Investors and Abris Capital Partners – closed around the €500m mark.

The industry leaders who gathered at the unquote" and Mergermarket CEE M&A and Private Equity Forum in Warsaw in late September appeared optimistic that the region was on track for positive dealflow. The technology sector and digital transformation were considered to be key drivers behind this.

According to Pawel Padusinski, partner at CEE-focused buyout house Mid Europa Partners, the region was exhibiting an element of catch-up and is likely to see an increasing number of deals in the coming years. Yet, Tomasz Czechowicz, managing partner at private equity group MCI Capital, which runs the largest tech fund in the region, said investors remained cautious about developing value in an unpredictable market.

2017 is proving to be another slow year in terms of dealflow, with 14 tech deals recorded to date, compared to 22 in the whole of 2016

Figures from unquote" data provide insight into the contrasting views surrounding investor appetite, with deal volume coming in fits and spurts. Only five deals were recorded in the tech sector in H2 2016, a level last seen when four deals were inked in H2 2009. Activity in the space reached its peak in the first semester of 2014 when a record number of 82 deals were completed, after which deal volume declined. And despite the positive sentiment in parts of the market, 2017 as a whole is proving to be another slow year in terms of dealflow, with 14 deals recorded to date, compared to 22 in the whole of 2016. Poland, the driving force in the CEE region, witnessed five of the deals this year while one deal was registered in Romania.

Nevertheless, a handful of large deals boosted the aggregate value figure for the first half 2017, which reached the record levels witnessed in the first half of 2014. These transactions include a $30m series-A funding round for Bucharest-based robotic process automation software company UiPath led by Accel Partners and a €15m series-D funding round for Warsaw-headquartered medical appointments software company DocPlanner, in which Target Global and One Peak Partners took part.

"Technology has value very early on, even when the customer has not paid yet," says Margus Uudam, a partner at Estonia-based venture capital firm Karma Ventures. The VC held a first close for its inaugural fund on €40m in February 2016. The vehicle is European-focused and invests €500,000-3m in companies developing technology for ICT with potential to scale into a large market. It looks for firms with initial customer traction and revenues of €3m and above. However, if the technology is very strong the team has made exceptions, says Uudam.

Soviet legacy
The rise of tech firms is rooted in the region's Soviet history, Uudam explains. The education system championed maths, chemistry and physics, which has led to a large base of engineers. The result is a strong upcoming tech space in which startups and venture funding have a big role to play.

However, while tech represents a promising opportunity for venture capital and growth investors, the sector in its current state of maturity is a riskier option for private equity firms in the region, according to Livonia Partners co-founder Kaido Veske. He argues that while venture players have the luxury of knowing that some of their investments will ultimately prove unsuccessful, private equity players face greater pressure to generate returns from all portfolio companies, something that is currently challenging in the CEE region.

Yet private-equity-backed growth strategies differ greatly between firms and portfolio companies, and this is no different when it comes to making investments in technology-focused businesses.

CEE-focused mid-market buyout firm Abris Capital Partners takes a very specific approach to investing in the space, where risk is lowered in comparison to pure growth-focused investments. Recent Abris deals in the tech sector include the acquisition of a majority stake in Serbian TV and broadband service provider Kopernikus Technology in December 2016.

"We focus on investing in companies that are experiencing succession issues," the GP's chief investment officer Pawel Giernski says. In order to generate value, and ultimately returns, the firm "cleans up" a business and increases transparency, as well as developing and implementing a digital strategy.

As the CEE tech market matures, future deal activity might be dependent on how confident private equity players are that they will be able to generate reliable returns.