If you can't beat 'em join 'em

Success attracts followers. Nowhere is this clearer than the Central and Eastern European private equity scene. For more than ten years following the fall of communism the market grew steadily as a friendly place to do business, with expansion deals the norm and multiples at levels that made buyers further west salivate. Auctions were nearly unheard of and proprietary dealflow was the name of the game.

In 2004 the region joined the exclusive European Union, and nearly instantly – as most non-locals viewed accession as a magic wand that at once reduced the risk premium – a handful of Western buyout houses took notice of the seemingly idyllic deal-doing conditions. Naturally their mere presence changed things: Flying into the region to look at deals suddenly drove prices up as they reached deep into their pockets and applied their western ways – multiples and all – onto CEE.

Locals said it wouldn’t last; that “to succeed long-term you need a local presence”. Well the western GPs listened and started doing what they do best: paying high prices to get what they want. Though it may have suited if selling a target to them, it’s now biting in the backside to see investment professionals that cut their teeth locally get wooed by sky-high salaries.

Just a few weeks ago Istvan Szoke started with CVC Capital Partners in London. Szoke had spent nine years doing deals at Advent and is the latest in a string of veteran moves: at least eight in the last 12 months, indicating a staggering change in CEE.

Luring luminaries

Speaking to local players left high and dry by this wave of hiring, your correspondent is initially led to believe that sky-high salaries are the bait for local professionals. The amounts reportedly paid by the Big Bad Newcomers varies, ranging from 3x the local rate up to 10x. Supposedly they are bought out of carry arrangements, traditionally the hook that anchors key men to a firm.

When faced with such threats, there is clearly little a local GP can do – even tripling a colleague’s salary is tremendously difficult, let alone increasing it ten fold to match, if these figures are to be believed. Sounding helpless, native GPs say they “try to keep people happy by giving them interesting things so they are satisfied” but that in the face of such attractive counter offers “there is really very little we can do”.

From this comes the wishful logic that “if they pay that much above market rate for deals as they do for people, their model won’t be very successful”. In theory yes, but history has dispelled this attitude. Just three years ago the market loved to hate EMP – now known as Mid Europa Partners since the group bought themselves out of their parent. The then new-kids-on-the-block raised eyebrows when they hit the deal-doing ground running, paying top dollar for large assets. But locals were convinced the GP was overpaying. Then when Mid Europa notched up a few successes under its belt the market reacted by saying the GP was a one-trick-infrastructure-pony. Now, years later, the firm boasts the region’s largest-ever fund dedicated to CEE and was able to raise it by convincing LPs around the globe that it was worthy of their commitments. Clearly they have a sizeable fan base.

So perhaps it is a green-eyed monster and not a xenophobia that causes native GPs to mistrust newcomers. This theory is evidenced by some relatively new negativity towards even longstanding, local players that have hit the big time. Some accuse Enterprise Investors, truly a luminary of CEE private equity and a pioneer in Poland’s transitional success, of being overly reliant on the Warsaw Stock Exchange, since it achieved a number of huge successes on the market. Advent International, another long-term, local investor across CEE, has come under fire for “losing longevity as it loses its people”. Maybe. But despite some recent departures, LPs were happy to commit EUR 1bn to Advent’s latest fund, which just closed last month at more than 3x the size of its predecessor.

New, not always greener, pastures

Are these dynamic firms set for failure? Or are they simply changing with the times, leaving some static houses to count their sour grapes instead of keeping up? Until recently some local GPs mused that newcomers’ poaching would not suffice to help them succeed. “There are very few people in CEE that have bought a company, nurtured it and sold it successfully. So global houses hunting here are unlikely to get those that have seen an entire cycle.” And so it was for the first raft of hires. However in the last year a number of veterans have moved, taking their expertise with them.

Some of the dearly departed contest the notion that it is purely for the money – and laugh at the sums suggested by some of the peers they left behind. “I now have an opportunity to do more deals, as well as a chance to do more intercontinental work owing to (the buyout house’s) global network, so my experience will extend beyond local markets.” Indeed. “The notion that you have to more than double a salary just isn’t true. Western buyout houses are saavier than that; we don’t just open our checkbook since you don’t simply lure someone with salary.”

Testament to this is where some of the people are leaving from. Advent has lost its fair share of professionals. Though it is a truly CEE fund, it has the unusual benefit of having a large, successful, global parent. So salaries should not be wildly different between them and some other firms the people are defecting to. “The better the fund, the less the cash bump should be since they want you incentivised by performance (carry), not salary. They look at what the opportunity is.” Indeed to go from number two, three or four at a successful but CEE-only fund to number one for CEE at a larger global fund could prick the ears of many.

As could the idea of something completely new. A handful of new funds are said to be on the cards. One, already underway, involves two well-known GPs from different firms. Another is said to be a spinout of the traditional kind, whereby a layer of ‘lesser known but grafting’ deal doers decide to go it alone. The thought of a listed management company was even thrown around (admittedly before the markets took their nosedive). Whatever remains on the cards, the one thing that is certain is more change. The big boys aren’t done hunting in CEE just yet.

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