Q&A: 3TS’s Zbigniew Lapinski

Ellie Pullen: What were the most significant developments in the CEE region's private equity market in 2014?

Zbigniew Lapinski: The most significant development in 2014 was that the quality of leads coming to us continued to improve. We are seeing more opportunities that have immediate regional or even global potential.

We have observed year after year that the quality of management and of the actual products and services are improving greatly. This meant that last year we saw many good opportunities. Unfortunately, that improvement in quality also creates a downside – quite often those projects have very high valuations. We looked at quite a few deals last year that we really liked, but decided not to invest because of the very high expectations of the pre-money valuation or, in the end, we were substantially outbid by US or pan-European buyers.

The past 12 months also saw a big change on the Warsaw equity market which should support private equity going forward, as pension funds lost a large portion of funds under management. As a consequence, the public market will be much more selective due to limited funding.

In our space, we probably will not see much obvious change, but the mid-market will - namely the bigger private equity houses that deal with €20-30m transactions. There will be fewer alternatives for mid-market companies as they will probably experience difficulty in listing on the public market, so that opens up the market much more to private equity.

EP: As 3TS focuses on technology, media and telecommunications investing, what kind of opportunities are you seeing in the Polish and Baltic TMT markets at the moment?

ZL: We are seeing a very strong pipeline. The quality of companies is increasing rapidly and businesses are beginning to think on a much more international scale. A few years ago – in Poland, in particular – you tended to see more local deals that focused on capitalising on Poland's large population, so really just a copy and paste of what was working in the UK or the US.

Now, we are seeing more projects that are going in the opposite direction – people are really thinking about regional or global solutions. This mindset is particularly strong in Estonia – because the country is so small, they develop new products with the immediate intention to expand outside of their home market, because domestically, there is not enough scale.

In Poland, we are now seeing far more interesting projects that are following that same pattern of planning for immediate international expansion. Polish companies are now even immediately registering their businesses in the US and this trend started to become much more visible in 2014.

Overall, the region's TMT companies are thinking more about scalable, international projects, which means we are seeing more interesting opportunities. Some of them are still too small for us to invest in, but we are keeping our eye on them and we have a couple of recently closed deals that will be announced in the near future.

EP: You mentioned that companies are quickly registering in the US. Is the region beginning to receive more attention from international players?

ZL: It is not as though there are US venture houses hovering around Warsaw, Bucharest, Budapest and so on – rather these Polish and Baltic companies are establishing business links very quickly with the US. They are going to conferences, winning contests or joining incubators and that is how they get spotted very quickly.

There is a bit of hype around the region's TMT space that has been created in the US. Estonian and Polish companies in this space are asking for valuations based on transactions in the US, but we are not in the US and that is a problem we are seeing. Often we will find a project that is a great idea and that we really like, but the asking price is too high. This is coupled with the influx of US or western European investors that offer much higher valuations.

EP: Do you think the market will remain consistent this year, or are there any big changes on the horizon?

ZL: It is difficult to say right now because there are so many macro-economic issues taking place. It is still hard to say how Russia will impact our region – specifically Poland and the Baltic states. There is still a big question mark over how that will influence us.

But in terms of dealflow, I do not think there will be any dramatic shifts in the market. The space that we look at – with companies looking to grow regionally or internationally – will always attract a lot of attention and we now have a lot more competition than we originally did from western European funds that are looking at the region.

In today's market, if there is an interesting technology deal, we are seeing a lot of interest from the US or western Europe, even if the deal is not large. The space we look at is occupied by companies that sell their products outside of their domestic markets or raise money to do so, and that attracts international players.

Zbigniew Lapinski will be speaking on the deal origination panel at the unquote" CEE Private Equity Forum, taking place on 16 April. To find out more about the conference and to book your place, click here.

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