CEE makes strong start to 2016 despite lack of LP attention

Private equity firms operating in CEE have wasted no time in 2016, completing five buyouts and four exits in January alone.

Poland, the largest market besides the sanction-hit Russian and volatile Turkish markets, led the charge with two exits and three buyouts, while the Baltic countries saw an exit and an SBO and the Czech Republic contributed a single acquisition. This compares to just one buyout recorded in Poland for January 2015 and just one exit, which took place in the Czech Republic, according to unquote" data.

CEE's solid start to 2016 follows a year in which the private equity industry's view of the region appeared mixed and investor appetite fluctuated. Long-term local player Arx Equity decided to close its Warsaw operations to focus on other countries in the region, while CVC opened its Polish office following its €477m buyout of PKP Energetyka.

LP appetite for CEE has been lukewarm since the market arguably overheated in the mid-2000s when the region was touted as a new hotspot for private equity, as several countries made their ascension to the European Union. Since the financial downturn, LPs on the whole have over-looked CEE due to below average returns generated because of the double effect of Europe's troubles and the market's inability to absorb and deploy the large amounts of capital it had previously raised.

No LP, no problem
One GP, in particular, contributed the most to January's strong dealflow in the region: US and Poland-focused Highlander Partners exited ZREW Transformatory and Medi-system and acquired QFG – all at the beginning of January.

The ebbing of LP interest in the region is something I've heard quite a bit about and that's another advantage for a structure like ours." Dawid Walendowski, Highlander Partners

The firm operates without traditional LPs, investing only its partners' capital from its offices in Texas and Warsaw. Managing partner Dawid Walendowski says the firm's non LP-reliant structure has been an advantage for its Polish operation, partly because its capital is not dependent on investor appetite for the region. "There's a kind of fashion component, where particular regions and industries come in and out of fashion," he says. But Walendowski says he is not particularly plugged into the LP community: "The ebbing of LP interest in the region is something I've heard quite a bit about and that's another advantage for a structure like ours," he says.

"It brings a lot of advantages. In terms of how we function, we don't have to spend a lot of time fundraising or reporting to external LPs. Our colleagues at funds with institutional investors need to spend a very substantial part of their time doing that and that is time we can devote to looking for deals and working with our portfolio companies."

The pressure's off
While the lack of LP pressure to deploy capital somewhat changes the need to compete for an asset, Walendowski's view of the Polish private equity market is broadly in line with the general investor view of the country. "In general, the market here is far less competitive, particularly at the smaller end of the market where we operate, than you see in the environment our partners in the US office encounter. We're in a relatively attractive space from a competition point of view," he says.

While many GPs in the region focus on a range of geographies, Highlander's focus remains solely on Poland: "All of our investments so far have been in Poland and for us it's been a good decision to focus there specifically."

There have been cases of large international GPs investing in CEE on a deal-by-deal basis, such as KKR and Cinven, but this has been done mainly through generalist European funds, which typically focus almost exclusively on western Europe.

Though the idea of deal-by-deal investments in CEE without LP pressure is enticing, investing without a local presence may be tricky. Highlander has a dedicated Poland office, as do most GPs active in the area, large-cap deals notwithstanding.

Firms should take into account the size and nature of a potential investment before deploying capital in CEE: "Each of these countries has its own language, culture, businesses and community," says Walendowski. "It's difficult when you have a relatively small team to be dispersed geographically, or to have good local people who are plugged into the respective business communities."

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• Topics
• CEE
• CEE
• Poland
• Highlander Partners