CEE: emerged, but still enticing

Many spectators have pointed fingers at the region of late, citing an influx of newcomers as a cause for concern as increased competition drives up prices and forces negative pressure on returns. However this myth is exaggerated – indeed new teams have sprung up, but the former triumvirate of three large buyout houses was never sustainable, said Craig Butcher of Mid Europa Partners. He pointed out that in their space the number now stands at around half a dozen players that can do large deals – hardly a number that will seriously impact lucrative deal doing. Especially since years ago, before the newcomers arrived, a deal would spring up every few months. Now the pipeline is more robust, meaning there is room to accommodate new players. To boot, there are more exit prospects nowadays, expressed Enterprise Investors’ Robert Manz, who pointed out that GPs can do a lot more with portfolio companies today than they could five years ago and therefore higher entry prices were justified.

The real concern is escalating fund sizes – an issue that raises eyebrows in Western Europe, too. Here the EIF’s Uli Grabenwarter admitted that LPs are largely to blame – with so many wanting exposure to the region – and that he hopes this does not prove problematic in the next 6-12 months. Adveq’s Andre Jaeggi concurred and urged GPs to be more selective in future, expressing that an LP relationship is for years, not just 12 months after committing. Thus as long as LPs flock to GPs producing handsome returns, fund managers will need to manage them effectively.

On a plus note, CEE is relatively insulated from the credit crunch. According to Peter Nachtnebel of UniCredit Group, the future will be bright but not easy: Poland, Russia and the Czech Republic have strong medium-term growth prospects owing to sustainable balance-of-payments situations. Bulgaria, Estonia, Latvia and Romania, however, run the risk of a “hard landing” of economic growth in 2008/9 given their unsustainable balance of payments. Hungary and Turkey have weak(er) near-term growth outlooks, which threatens to spillover into weaker FX and credit performance in 2008.

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• Topics
• Performance
• CEE