CEE fundraising activity promises buyout revival

Private equity firms completed 36 buyout transactions in the CEE region in 2018, significantly down on the 57 completed in 2017, and the lowest figure since 2014. Most of the attrition was in the lower mid-market (€5-25m enterprise value bracket), where only 13 deals were inked, compared with 24 last year.

This market segment is where most of the local players are active and part of the reason for this is related to where in the fundraising cycle they are. Bill Watson is a partner at Polish investor Value4Capital, which is currently raising its first fund since the crisis, V4C Poland Plus Fund. The vehicle held a close on €80m last year and expects to hold another close this year, towards its €150m target. Watson tells Unquote that the region is at something of an inflexion point: "There is a bit of a cycle because there are a number of funds that will not raise again and some new ones are in the process of raising. But the region has strong financial infrastructure and with private equity only having been active for 10-15 years, it remains a region of growth."

This is supported by Unquote Data, which shows a fairly resilient fundraising environment that could experience a more significant boost if some recently launched funds – or funds that have recently hit a first close – can build momentum. Five buyout funds held final closes in 2018, one more than 2017 for a total of €553m, but what is more notable is that a further six vehicles held first closes totalling €1.5bn.

Building momentum
Watson thinks this is significant, due to the nature of how fundraising momentum is built. He says: "The first close is often the hardest in the CEE region. Funds generally get a bit of EIF and EBRD money, but getting that bit extra from institutions that you need to reach the first close threshold is a challenge."

This is especially applicable in the dual-speed fundraising environment discussed in detail in this month's cover story (see page 4), where larger brand names raise faster than ever at the expense of firms in the lower-mid-market. Part of what is driving this is a consolidation of relationships by major LPs that want to write fewer cheques with a larger value. Watson explains how this affects private equity firms in CEE, where fund sizes are small by design: "Most funds in the CEE mid-market are relatively small, and big investors cannot really do a ticket that matches their size. Even the funds-of-funds want to put in larger cheques than is really appropriate for a €50-100m fund."

The region has strong financial infrastructure and with private equity only having been active for 10-15 years, it remains a region of growth" – Bill Watson, Value4Capital

Even as dealflow slumped in CEE, there were signs of the strong fundamentals alluded to by Watson. Investment into the consumer sector held strong in 2018, and several private equity firms had strong exits in the sector. The most recent was Mid Europa's sale of biscuit producer Bambi to a Coca Cola subsidiary for an enterprise value of €260m (which actually completed in 2019), but Enterprise Investors also made a sizable divestment from its now listed drinks producer Kofola Hoop.

"Economic growth is driven in large part by consumer spending," says Watson. "This gives the private equity buyer a lot of confidence to invest in consumer-facing businesses." The industrial sector, on the other hand, has been an area of concern for private equity, as the number of deals plummeted from 15 in 2017 to just three in 2018.

Mid Europa Partners' Matthew Strassberg says the industrial slowdown in western Europe could be affecting CEE, but Watson thinks the lack of private equity activity may be exaggerating the situation. "Industrials still have strong fundamentals but it is often a global market where size matters so the local funds struggle to compete with the big industrial conglomerates to capture the opportunities," he says.

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