CEE market: Catching up fast

Following a tough couple of years post-financial crisis, it would seem that CEE countries are now marching on to better days, and are in some respects catching up to their more established Western neighbours. Deal activity in the first quarter has already surpassed the whole of 2010 by a large margin, with unquote" recording in excess of €1bn worth of transactions - including the €370m buyout of Polish grocery store operator Zabka Polska by Mid Europa.

Confidence, while not unchecked, is back among deal-doers, as our recent survey of CEE industry participants indicates. 68% of respondents expect a rise in activity for the region in 2011; and at a time when LPs are said to be increasingly looking to emerging markets such as Asia, 78% of respondents expect LP appetite for CEE funds to stay the same or even rise slightly.

Panellists at the congress highlighted that private equity in the most mature CEE countries - notably Poland and the Czech Republic - increasingly shares similar features with its Western counterpart and can benefit from good infrastructure, available debt financing, experienced management and process-driven businesses.

Good assets therefore command multiples not unlike those seen in the UK or in France: "Valuations are high and will continue to be so. More and more quality is coming to the market and that will justify the high prices," noted Riverside Europe Partners vice president Ludek Palata. According to the unquote" CEE survey, 45% of respondents indeed expect pricing to stay in the 7-9x EBITDA range going forward.

As most European GPs are set to go fundraising in the next couple of years - and CEE players are no exception - SJ Berwin partner Sonya Pauls highlighted that CEE funds are "firmly in line with ILPA guidelines" and are therefore well positioned to attract LPs: the "fund as a whole" model is the most commonly used, and corporate governance is just as strong as in the rest of Europe.

That said, this morning's speakers also stressed that CEE cannot be considered as a uniform region in terms of investments. Some countries - notably in the Balkans - still have ground to cover before attracting as much attention as the likes of Poland: "Some CEE countries compete for capital with GPs in France, the UK or Germany. Others have a higher hurdle to overcome," warned Harbourvest vice president Till Burges. Furthermore, as Arx Equity partner Brian Wardrop noted, FX risks and their impact on portfolio companies cannot be overlooked when investing in the region.

Mark Florman, the new BVCA CEO, also urged delegates not to downplay the impact of the AIFMD and upcoming regulation in general. According to him, smaller firms across Europe are going to be slowed down by the numerous processes introduced by the directive. Finally Tomáš Sedláček - chief macroeconomic strategist at ČSOB - warned investors not to overlook the importance of large deficits in most CEE countries, even if strong growth is back.

Sobering remarks aside, congress delegates remain optimistic regarding the potential for CEE dealflow to pick up throughout the year - and maybe steal the West's thunder on more than one occasion.

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• Topics
• CEE
• Poland
• Czech Republic
• Hungary
• Romania