Secondary buyouts back on the scene in CEE

Secondary buyout transactions between private equity firms in CEE have rebounded from a slump in 2017. Figures from Unquote Data highlight an underlying trend, with the first half of the year typically recording a higher number of deals than the second half.

In the first half of 2018, the region saw seven SBOs compared with three in H1 2017 and just one in the second half of last year. Indeed, the figure is the second highest half-year volume since the financial crisis in 2008, with the third highest total being the six recorded in the first half of 2015. However, while numbers have picked up considerably year-on-year, they are yet to hit the heights reached in the first half of 2016, when a post-crisis record of 13 were recorded.

A prominent recent example was Budapest-based online insurance broker Netrisk.hu, which CEE-focused buyout house Enterprise Investors (EI) sold to Warsaw-listed MCI Capital Group in a deal valued at €56.5m in January this year.

Secondary buyout activity is a sign of a maturing market. Private equity houses are getting more experienced and there is a bigger variety of funds, with increasingly more later-stage investors" – Piotr Nocen, Resource Partners

For MCI partner Krzysztof Konopinski, Netrisk.hu is a prime example of the overall movement towards an increase in secondary buyouts in the CEE exit market: "Secondary buyouts are getting more popular – and there is still a lot of opportunity to grow businesses further."

Meanwhile, Piotr Nocen, partner at Resource Partners, says a rise in SBOs is synonymous with the evolution of the market: "Secondary buyout activity is a sign of a maturing market. Private equity houses are getting more experienced and there is a bigger variety of funds, with increasingly more later-stage investors."

SBOs can be a preferable exit option due to a number of factors, including certainty of funding, verification, and the overall speed of the process. GPs are used to acting quickly, says Nocen. This can ease the transition when companies change hands from one private equity owner to another.

"The pipeline of bigger funds is increasingly built on a portfolio of smaller funds," says Nocen. Examples of these include Mid Europa, a GP that has sourced a number of deals from other funds, alongside EI, Abris and, at the upper end, players such as CVC.

Finding an exit route
However, not all private equity firms in the region are focused on selling to their peers. EI managing partner Dariusz Pronczuk says that secondary transactions in western European markets are still more popular than in the CEE region: "SBOs are growing, but it is still a small market. In my view, the number of transactions and companies that can be sold from one financial sponsor to another is limited."

Pronczuk adds that certain segments could attract more SBO-type deals than others, with the size of typical SBO deals another factor to consider. Certain companies, although attractive, are simply too small to interest a buyer such as EI, which is typically seeking to commit €20-75m per transaction.

Therefore, Pronczuk says the number of exits to financial buyers is usually higher than the number of assets EI has acquired from financial sponsors. "It is really about developing companies for value," says Pronczuk. "There is no clear pattern on which a buyer might add value. At the time of buying, no one will know who will offer the best price. For example, there are periods where the public market can offer a good price and other times it will not."

Conversely, as a GP focusing on assets in the lower-mid-market, Resource Partners takes a different approach and typically seeks a strategic investor rather than a financial buyer. "We have made two investments buying from financials, but we usually exit to trade buyers," says Nocen. "It is a very focused strategy to build companies suitable for trade buyers."

With 30 exits recorded in the first six months of 2018, the CEE private equity market saw the highest number of H1 divestments since 2006, when the region saw 32 exits, according to Unquote Data. If this year’s strong exit market to date is anything to go by, 2018 could surpass the post-crisis record of 53 exits recorded in 2011.

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• Topics
• CEE
• Investments
• Top story
• Secondary buyout
• Unquote Data
• Resource Partners Sp. z o.o.
• MCI Management