
CEE exit activity picks up in Q1 as buyouts drop
Central and eastern European private equity saw a significant decrease in buyout activity in the first quarter of 2018, but exits flourished and increased year-on-year. Nicole Tovstiga reports
The first three months of 2018 saw just seven buyout deals inked in central and eastern Europe, according to Unquote Data – a significant drop compared with the corresponding period in 2017. During last year's Q1, the region's private equity market recorded 17 deals with a total EV of €1.6bn, the most active start to the year since before the financial crash and the highest aggregate value since Q1 2013. By comparison, 2018 has witnessed somewhat of a slow start, with deal value amounting to €610m.
However, the region has been on a positive trajectory for deal activity in recent years. Economies in the CEE region are performing well and eastern European countries remain largely competitive in terms of wage costs, making it an attractive destination for foreign direct investment. Furthermore, the growth potential in CEE attracts investors, both in private transactions and public markets.
"Strong macroeconomic growth of 3-10% on the domestic markets and foreign expansion are helping CEE companies substantially improve their profits and margins," says Enterprise Investor's (EI) president Jacek Siwicki. Indeed, investment activity last year built on strong overall performance in preceding years.
Eastern European deal-makers saw 2017 end on a high note, as 14 deals were penned in the final quarter, with an aggregate value of €647.7m. In total, 49 buyout deals were announced throughout the year, the best vintage since 2008, when 71 deals were recorded by Unquote Data. The aggregate value of €3.47bn in 2017 fell some way short of the €5.78bn recorded the previous year, though 2016's figure was heavily impacted by the $3.25bn buyout of Polish online marketplace Allegro by Cinven, Permira and Mid Europa.
Exit mood
While buyout activity peaked in 2017, the market saw the lowest level of exits recorded in the past five years. The region saw 36 divestments, compared with an average of 43 per year across the preceding three years and 52 in 2013. But 2018 could be heralding a fresh start, reflecting investors' confidence to sell assets in an attractive environment. This year to date, the region has seen 10 exits, compared with eight conducted in the same period last year. "For deal-makers, it is the time to take profits and, right now, it is extremely easy to be confident," says Livonia Partners co-founder Kaido Veske.
Of particular note in 2017 was the increased prominence of flotations as an exit route. Though trade sales remained the most popular exit route, Unquote Data recorded five IPOs in 2017 for the region, with an aggregate value of €1.66bn. This compares with only one flotation in 2016. Meanwhile, 2015 saw two public offerings and 2014 recorded four. IPOs have not historically been the preferred exit option for private equity investors, in part because they typically cannot sell their entire stake.
IPOs are dependent on the stock market environment, and there are limited time slots during the year when you can pursue such a transaction" – Jacek Siwicki, Enterprise Investor
EI was one firm to have successfully completed a flotation in 2017, selling its 49% stake in Polish supermarket chain Dino in an IPO generating around €400m in gross proceeds. Says EI's Siwicki: "IPOs are dependent on the stock market environment, and there are limited time slots during the year when you can pursue such a transaction. On top of that, the preparation process is complex."
Nevertheless, in some situations an IPO can be preferable to an M&A exit, and there have already been three in the region in Q1 alone, suggesting the window has remained very much open. The recent global stock market blip has contributed to investors wanting to reduce riskier positions and some want to IPO within three months, ahead of any future potential wobbles, says Veske.
"It would not have been easy to sell our minority stake in Dino through an M&A deal," says Siwicki. "So the decision to float the company was relatively obvious for us, especially as this gave foreign investors exposure to the Polish food retail business."
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