CEE: Activity picks up despite ongoing fundraising woes

Greg Gille
17 February 2014

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An uptick in dealflow in the second half of last year has left local players hopeful for a more sustained recovery. Greg Gille reports

Once a shining beacon of appetite for emerging markets, Central and Eastern Europe has had a tougher time generating sufficient dealflow and attracting investors in the wake of the financial crisis.

With funds failing to attract investors, things won't have turned around as dramatically as local players would have hoped in 2013 - with Advent pulling out of a dedicated fund approach in the region in the beginning of the year a particularly ominous development.

Activity-wise though, CEE fared perhaps better than others in Europe. "The second half of 2013 was quite a lot busier than the first - things have picked up and are continuing to pick up, with Poland in particular remaining attractive for investors," says Graham Conlon, a partner at law firm CMS Cameron McKenna. "A significant number of deals are driven from the sell-side, with many portfolio companies that were acquired in the boom years by funds now at the end of their life cycles - this trend should continue in the next year as well."

unquote" indeed recorded an acceleration in dealflow in the second half of the year, with 51 transactions as opposed to 37 between January and June. Although overall activity levels remained very much on par with 2012 volume-wise, the overall value of 2013 deals also shot up by 70%. This is thanks in no small part to KKR's €1bn acquisition of Serbian pay TV provider SBB/Telemach from Mid Europa in October - one of the largest deals seen in the region in recent years.

The fact that a CEE-based asset was able to attract an international heavyweight such as KKR is also cause for celebration for most local industry participants. "It is amazing to have a major US private equity firm turning to CEE for a large acquisition", says Anne Fossemalle, director for equity funds at EBRD. "This could signal the beginning of a trend for more large US houses looking at assets in the region. This used to be the case some years ago but such investments became scarce, so the SBB deal is undeniably a good sign of rekindled interest."

The other end of the value spectrum also brought on its fair share of positive developments, with Fossemalle highlighting a burgeoning venture capital scene: "Earlybird - a well-known, established German GP - setting up a dedicated CEE fund [Earlybird Digital East Fund, which recently held a first close on $110m] was one of the major developments in that space last year. Another highlight was a Russian VC manager, Almaz Capital Partners, raising a second fund for the first time in our region."

Fighting for attention

Fundraising however remains a challenge for local players, with many LPs not so convinced of the region's attractive risk/reward profile anymore - especially compared to other, more thriving, emerging markets. "It is true that within the emerging markets category, the general feeling is that the CEE region is still a bit too complicated for investors to fully understand," admits Fossemalle. "Investors that saw Advent pulling out of CEE could be thinking that is because of the region itself - although it is of course more complicated than that. The macro-economic and political environment is also tough to read as it varies so much from country to country. All this requires significant time and resources to fully grasp."

Contrasting fundraising fortunes last year indeed painted the picture of a tough market to read. Enterprise Investors raised €314m for its Fund VII after nearly a year on the road, against three months for its predecessor - which attracted twice as much capital. Meanwhile Abris Capital Partners raised €450m for its second fund, up 50% on its debut vehicle.

Looking ahead, and if international LPs remain at a distance, building local support for the industry will increasingly become paramount. "With regards to fundraising, one of the main tasks going forward will be to try and entice local investors to look at private equity. This remains challenging, especially in Poland, and this would be the most important thing that could ultimately fuel dealflow in the region," says Fossemalle.

Even homegrown LPs will want to see what is perceived by some to have been lacking in the region, though: outstanding performance. Fossemalle is confident: "We think that because fundraising has been so difficult, the current vintage is going to be a very good one, with less competition. The refocusing of the market towards smaller deals, with some players looking at transactions below their usual investment size, should also be viewed in a positive light: this is where some of the best opportunities are at the moment. Finally, many businesses that were set up in the 1990s are approaching a generational change, which should translate to interesting opportunities for private equity funds."

Perfect price

However, for these opportunities to entice GPs and ultimately deliver strong returns, the price will have to be right, says Conlon. "Poland and the Czech Republic are considered by many to be on par with western Europe in terms of risk appetite - hence valuations being logically higher," he notes. "On the other hand, in countries that are still seen as emerging markets, we have witnessed a few transactions not succeeding because funds are not ready to match high price expectations since the risk is considered too high."

unquote" is holding its annual CEE Private Equity Forum on April 8, 2014 in Warsaw.

The annual unquote'' CEE Forum provides a unique platform for senior private equity professionals of the leading companies in the market to share their knowledge, best practices and gives them opportunity to discuss the issues concerning the whole community in the region. Click here to view the program and book your place.

You can also cast your votes for the most impressive exits and fundraising achievements of 2013, ahead of the Awards ceremony in April. Winners will be announced at the CEE Private Equity Congress in Warsaw.

Each shortlisted entry comes with small explanatory text to help readers familiarise themselves with the transaction. Information is based on publicly available information where appropriate.

Click here to cast your votes. The survey closes on 3 March 2014.