CEE: The dark horse of private equity

Despite positive signs, the CEE region still only gets a very small slice of the global private equity allocation - perhaps less than 2% of the capital allocated annually. Although total fundraising for the region did increase over recent years, it was not nearly by the exponential levels seen elsewhere, and it mainly came as a result of existing investors raising larger funds.

That said, the region did attract quite a few new LPs during the peak years between 2005 and 2007 - hence the rise in fund sizes of the most established local players - but it is still too early to see if any of these will retain any appetite for investment in the region following the financial crisis.

The irony of this is that there is strong evidence to suggest that private equity in CEE has outperformed the global averages for some time. According to the EBRD, which has backed over 100 vehicles raised for investment in CEE (all of which were required to submit performance data), the region has outperformed the EVCA's full European sample in one, three, five and ten-year performance analyses and compares favourably with the Cambridge Emerging Markets Venture Capital & Private Equity Index.

Furthermore, looking ahead the signs are also positive. To begin with the macroeconomic fundamentals look good: according to research carried out recently by the Economic Intelligence Unit, nine out of ten of the larger CEE markets are projected to meet euro-entry criteria by 2014 (based on budget balances and public debt levels), compared with just four of the 16 "old Europe" nations.

And, while local private equity specialists may have spent much of the last two years focusing on their embattled portfolios, the region is not expecting to see the sort of shake-out that their Western counterparts are facing. For a start, the prevailing investment philosophy of the region relies less on leverage and more on industrial and operational support, which has protected many local investors from the worst of the fall-out.

Also, unlike the West, the CEE market was not unduly affected by a dramatic growth in competition and prices did not see the same sort of inflationary pressures as elsewhere. True, there were some new entrants - mainly at the top end of the scale - but the market conditions have tempered many of their expansion plans. Nevertheless, the fact that some of the larger international houses are still prepared to look at opportunities in the region, underlines their belief that it offers real opportunities for growth.

This is an extract from "CEE: Leading the way out of the recession", an in-depth feature on private equity in the CEE region to be published in the upcoming issue of Private Equity Europe.

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• CEE
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