Central and Eastern Europe – A Continuing Opportunity

Private equity has been around in CEE for almost 20 years - while the early years were characterized by privatizations and first phases of commercialization and professionalization, for a number of years now the private equity opportunity has been dominated by late-stage expansion capital and buyout transactions. There is a large number of target companies that benefit from structural growth driven by emerging middle classes and the resulting increased consumption. Debt and mezzanine financing is available, and first-wave entrepreneurs are willing sellers, having built business for over a decade. On the contrary to many neighboring Western European countries, private equity is widely accepted as a financing option throughout the region.

A Solid Foundation

Although perceived as one single region, CEE is not a homogenous block. However, all countries are democracies and most of them EU members, so they have adopted their laws and regulations to EU standards, which ensures a reliable investment environment. Poland and the Czech Republic have led the economic development of the region and boast the largest economies - and with this private equity markets. These two countries are also the two least affected by the financial crisis. In fact, Poland was the only country in all of Europe to report GDP growth in 2009. In 2011 and 2012 all major CEE economies, including Hungary, are forecasted to grow at higher rates than the Eurozone, some of them more than double. Contrary to widespread perception, government and household debt figures are more solid in all CEE countries than the Eurozone average, and in Hungary lower than in Germany, the UK or France.

With a peak fundraising in 2008 at $5.5bn, the market of the entire region still only represents a fraction of single large buyout funds.

In private equity portfolios, pre-crisis investments have fared relatively well given low levels of leverage deployed in transactions, the underlying growth of portfolio companies and capital scarcity keeping competition and prices low in comparison to more developed markets. Fundraising in CEE and CIS combined peaked at $5.5bn in 2008, which represents only a fraction of some single buyout funds raised in the developed markets and compares to $40bn raised for emerging Asian private equity the same year. CEE never faced a capital overhang like Western Europe and the US, or China and India.

In terms of performance, over the past 10 years the CEE private equity market has outperformed not only developed Europe, but also all other emerging markets. According to the European Bank for Reconstruction and Development, ten year net horizon returns from PE in CEE are 16.9% in USD as of December 31, 2009.

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• Topics
• Fundraising
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• CEE
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