CEE: Under-marketed and overlooked?

As Europe remains mired in a slow-growth private equity backdrop – with total deal value for 2012 flat on 2011 and even that figure propped up by 17 mega-deals – CEE's mid-market rallied last year to drive activity.

It is not just the quantity of deals but the quality, and in CEE the lion's share of dealflow comes from family/private owners, while in western Europe this source constitutes just under half of dealflow, according to the unquote" 2012 Annual Review.

Buyouts are also leveraged more conservatively in CEE, with an average 3.1x EBITDA multiple, against 4.7x for western Europe. Perhaps most crucially, the region operates in a capital-scarce environment, in stark contrast to other markets where fundraising frenzies led to capital overhangs and resultant upward pricing pressure.

In fact, the level of investment between 2008 and 2011 was €7.4bn, substantially more than the €4.5bn raised, indicating a cyclical low for the level of available private equity funding. These figures come from a new report called Time for Another Look, launched today at the unquote" CEE Private Equity Congress.

Those with long-term exposure to the region are familiar with its merits. "Returns are more volatile in CEE, though they do outperform other benchmarks," says Wojciech Ciszek of EBRD. "The region's established GPs can indeed make money for investors."

George Swirski of Abris says: "There is positive news coming out of this part of the world, and that attracts the capital. The point is that the capital coming in reflects where the growth is perceived to be seen. For example, it is flowing into mid-market opportunities."

He continues: "It remains a tough sell though. LPs' eyes glaze over when you mention Europe, especially in the US. The message therefore must be very focused – a 30-second elevator pitch is all you've got for a very compelling story." Abris reached its hard-cap earlier this year on €450m. "We weren't just competing with other CEE GPs to raise, but with GPs everywhere."

"The region is overlooked, but that may be good for the region," says Franz Hoerhager of Mezzanine Management. "Recall the 2007 and 2008 period when a lot of hot money came in; it was not good for the region. The self-marketing of the region is what is missing – other countries are better at presenting themselves as investment destinations. Most CEE countries do not do this; the region is under-marketed."

The lack of domestic investment does not help. "We had only one LP from CEE in our three funds," says Hoerhager. "Why do we have to take money from the Sultan in Brunei to raise when we have all these local pension funds and insurance companies right here in Poland? It makes explaining the attraction of Poland to foreigners difficult."

Piotr Nocen of Resource Partners agrees: "Some view CEE as an emerging market; others see it as a developed one. For each investor we must present the positives about our sector in a different way.

unquote" wishes to thank the following groups for supporting the 2013 CEE Private Equity Conference: Ernst & Young, SJ Berwin, CMS, Coller Capital, CapitalFields, IPES, Bajorek Global Advisors and PSIK.

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• Topics
• CEE
• Industry
• Poland
• Abris Capital Partners
• Mezzanine
• Resource Partners Sp. z o.o.
• EBRD