Local capital may bridge gap between global LPs and Czech PE

Mikkel Stern-Peltz
12 April 2016

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Increasing interest in Czech private equity from local and regional institutional investors could be a catalyst in attracting the attention of international capital, which has overlooked the country and CEE region in recent years. Mikkel Stern-Peltz reports

While central and eastern Europe continues to struggle to attract institutional capital from non-local investors, the Czech Republic may be on the verge of once again sparking the interest of international LPs.

Aggregate buyout value in the Czech Republic reached its highest point in five years in 2015, with total deal enterprise value in excess of €250m, according to unquote" data. Though overall deal volume fell compared to 2014, the four buyouts registered is not a substantial deviation from the five-year average of around five deals annually.

According to Brian Wardrop, co-founder of Czech-focused private equity outfit Arx Equity Partners, the Czech Republic and surrounding region has the capacity to develop high-performing companies with international reach. "From a macroeconomic perspective and to a large extent geopolitical perspective, the northern part of CEE is certainly well-poised to deliver European and global champions," he says, mentioning the examples of Czech Republic-founded anti-virus software developers AVG and Avast, as well as the country's under-the-radar precision engineering and value-add manufacturing industries.

The need to find and develop attractive companies has become increasingly important for the Czech private equity industry as a way of making a case for local pools of capital to invest in the asset class. A key investor in CEE, the European Bank for Reconstruction and Development "graduated" the Czech Republic in 2008, ceasing investment in the country not long after the large pre-crisis vintage of private equity funds had been raised.

Local support
CEE-focused funds raised pre-crisis have notoriously underperformed and the region has been under-served by international capital since. This current fundraising cycle will see local GPs rely much more heavily on local LPs – though the EIF is still backing funds in the Czech Republic – and last year's strong dealflow will provide a solid base for attracting capital.

However, there has been some uncertainty about whether local investors are sufficiently sophisticated and willing to invest in private equity. "There are almost no local investors in private equity in central and eastern Europe," Wardrop says. "Though there have been a few isolated cases, one of the challenges in the region is to somehow attract local pension funds, insurance companies and high-net-worth individuals to private equity. Generally, the role of institutions such as the EBRD and EIF is still very relevant in the region."

One of the challenges in the region is to somehow attract local pension funds, insurance companies and high-net-worth individuals to private equity" – Brian Wardrop, Arx Equity Partners

So far, it seems the Czech industry has had some success, as anecdotal evidence suggests GPs have seen much higher levels of interest than expected and have been able to attract those local pools of capital.

In August last year, Czech and Slovakia-focused GP Genesis Capital held a first close for its third private equity fund on €44.7m, which was also its first vehicle without EBRD backing. At the time, Genesis partner Jan Tauber told unquote" that LPs in the fund were mainly Czech and Slovak institutions – including local pools of bank savings. Like Wardrop, Tauber too noted the importance of attracting local investors.

Says Wardrop: "What we've seen in the Czech Republic over the past 12 months – and what has been quite motivating – is local money and local sources of capital showing substantially more interest in getting exposure to private equity."

Spreading the net
The increasing interest could partly be explained by local institutions having grown to a size where they need to explore more asset classes to effectively deploy their capital. Similarly, CEE is unlikely to have been uninfluenced by the global search for yield, which has seen institutional capital increasing allocations to alternative assets.

And that interest is a key part of developing and maintaining a healthy private equity ecosystem in the region. If Czech private equity can continue to make deals and deliver strong exits in 2016, it will further stimulate local interest in the asset class and should eventually help reignite interest from foreign LPs.

Says Wardrop: "Western institutions like to see local capital – high-profile, high-quality family offices and institutions – investing with the local GPs. It creates a huge signalling factor for outside investors that the smart money is investing locally with certain GPs."

For its part, the Czech private equity industry recently displayed a shining example of its capabilities: in March, private equity firm MCI made 11x money on the €76m exit of online travel agent Invia to Czech investor Rockaway Capital.