CEE mid-market players welcome renewed attention from larger GPs

When US private equity firm Advent International announced the closure of its Prague and Warsaw offices in late 2015, it sparked a debate around challenging market conditions in central and eastern Europe.

Advent was one of the first global private equity firms to open an office in the CEE region with its Warsaw office in 1998. After retreating from the area, the PE firm has since run European operations from its London and Frankfurt offices.

However, other big players stayed the course. These include CVC Capital Partners and Bridgepoint, which both operate offices in Warsaw. CVC's portfolio of CEE companies comprises three investments, including Czech security software firm Avast bought in 2014, Polish energy utility business PKP Energetyka acquired in 2015, and Polish retail company Zabka bought in 2017.

Bridgepoint, meanwhile, has two investments in CEE. Both companies are in the consumer sector: Polish confectionery company Dr Gerard, acquired in 2013, and toy chain retailer Smyk, bought in 2016.

Positive results have nudged the CEE region back onto the radar of global private equity investors, and law firms have seen big financials entering the CEE market. The renewed presence and interest of larger PE houses has been welcomed by local players.

Says Abris managing partner George Swirski: "The presence of these investors raises the profile of our region, which for a long time was perceived by investors as one where interesting and profitable investments were few and far between. In short, they validate the region for global capital."

And the fact that some larger players are still actively looking at assets in the region affords interesting secondary buyout opportunities to local GPs – including Mid Europa selling Zabka to CVC last year.

Passing the torch
Rather than compete with mid-market funds for deals in the region, large global funds are seeking to invest significantly more capital compared to the equity tickets deployed by a GP such as Abris. Abris looks to invest equity in the region of €30-75m per deal, but a larger fund would want to invest an equity ticket worth significantly more than €100m, Swirski says.

Meanwhile, another CEE mid-market specialist, Mid Europa, is also at ease with this ecosystem. "We normally invest equity of between €50-200m when we buy companies, more than other regional funds but below what global funds would invest," says Mid Europa co-managing partner Robert Knorr.

Besides, capital injected into a mid-market company is typically used to implement the necessary operational, managerial and governance changes needed to enhance the growth of the business, both organically and through acquisitions.

"Large global funds typically look for situations where such issues have already been addressed and where day-to-day involvement is at a minimum," says Swirski. This difference is critical because a less hands-on approach by the likes of Advent means it can make and monitor investments from a regional hub and not have a presence in each country in which it operates, Swirski says.

The region still has to deal with questions surrounding stability, but local GPs remain confident and will carry on while capitalising on these exit opportunities. "Headline-grabbing news from the CEE region are monitored by some global investors as they want to see how the EU reacts to political developments in Poland, Hungary or the Czech Republic," says Knorr. "But for the companies and investors locally, it is business as usual in the region."

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• Abris Capital Partners
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