A country-by-country guide to investing in CEE

Click here to read part one of our central and Eastern European focus, looking back at the region's relationship with private equity and detailing key deal drivers for the future.

 

Poland
Generally regarded in the industry as the gateway from western Europe to the east, Poland's private equity history stretches back longer than the rest of the CEE region. This is due to its size, geographical proximity to the west and a relatively more business-friendly environment.

"Size does matter," says Enterprise Investors president Jacek Siwicki. "Investors feel more comfortable with 38 million consumers rather than the 19 million consumers in Romania. Investors also feel more comfortable with Poland's €400bn GDP, when it is less than a third of that in any other CEE country."

More importantly, private ownership in Poland has been possible since the 1940s, meaning the country has a substantially larger number of private companies than elsewhere in the region. "In Poland, there are about 1,500-1,700 private companies with turnover of more than €35m, so that is the hunting ground for mid-market and upper mid-market buyout firms," says Siwicki.

While the bulk of dealflow has hailed from succession-driven buyouts due to a wave of entrepreneurship seen in the 1970s through to the 1990s, recent developments in the country, namely its pension fund reform, were expected to have an impact on deal-doing. However, this has not played out as expected. Says Siwicki: "There was an expectation that there would be a massive sell-out of the stock that the pension funds owned on the public markets, which did not materialise". And for exits, the reform made pension funds in Poland pickier, demanding lower valuations and higher quality, says Siwicki, "which is not surprising and should be a natural factor in any developing capital market".

Despite lingering uncertainty over dealflow, Poland remains one of the most prolific markets in the region. According to unquote" data, the country experienced the second highest number of buyouts in the region last year.

But the figures are not surprising. "GDP-wise, Poland is about 40% of the CEE region if you do not count Turkey, Russia and Ukraine," says Siwicki. "The strategic message that we have been conveying to investors for the past 15 years is ‘Poland plus'. Poland is where most of the action takes place – looking at our 2001, 2004, 2006 and 2012 vintage funds, almost 65% of our investment activity takes place in Poland by value and by number of investments."

In terms of prevailing sectors for investment opportunity, Siwicki points out that, alongside industrial manufacturing and outsourcing, another major continuing theme is the westernisation of Polish consumers. "When Poland joined the EU in 2004, the average GDP per capita was about 30% of the EU average," he says. "Now it is about 70%, so we have caught up, but there is still some room to manoeuvre."

Romania
According to Innova Capital managing partner Krzysztof Krawczyk, since the economic downturn Romania has made a concerted effort to turn around its fiscal policies and the outcome has been positive.

"Over the past two or three years, Romania's economy has started to accelerate and politically it has taken a significant step up with a huge effort to clean up corruption in the country. In the long term, that will provide very strong foundations for the country and it all results in a higher quality investment ecosystem and greater transparency."

Romania is forecast to experience year-on-year GDP growth of 2.7% in 2015 – one of the highest in Europe. And while the Balkan region may still be low on the radars of many GPs – accounting for just 13% of investment activity in the CEE region last year, according to unquote" data – Romania is leading the Balkan pace into creating a healthier landscape for private equity investment.

And it appears to be working. According to Krawczyk, the country is well on its way to becoming the darling of the region for investors.

"Romania is a country with an impressive cultural background and centuries of great history. Nowadays, it also has an excellent entrepreneurial spirit – Romania's entrepreneurs are very hard-working, well-educated people.

"Its debt and equity capital markets are gradually emerging with solid commitment from the government, as well as the financial sector, which long-term may create an alternative route for private equity exits," says Krawczyk. "As a whole, it is making all the right moves to excel as a target for private equity." 

Balkans
"The Balkan region is definitely not becoming more popular for investments," says Innova Capital managing partner Krzysztof Krawczyk. "It has been undergoing significant macro issues over the past years and some countries such as Bulgaria are still struggling."

The economic situation of many Balkan countries at the start of the financial crisis meant they have taken some time to regain their footing. "When the financial crisis began, a lot of Balkan countries had an overhang of structural problems, with some industries being in deficit and a burden to the government and the fiscal budget," says Krawczyk. "These countries were facing the crisis with significant debt on their shoulders and a lot of unresolved problems." However, this has led to real efforts to turn around fiscal policies and so far the outcome has been positive.

While some Balkan countries have experienced very limited dealflow to date, activity is beginning to pick up, suggesting the region is finally emerging on the private equity map.

Turkey's private equity industry is experiencing renewed vigour, having enjoyed a few good years of dealflow before activity began to ebb. Last year, the country saw a total of 10 deals, including six buyouts, which represented 25% and 200% increases on 2013 figures, respectively.

Growth has not been as extensive in the rest of the region, but pockets of opportunity have emerged. In January, Advent International and the EBRD bought the south eastern European banking network of Heta Asset Resolution, which comprises a 245-strong network of banks in Bosnia and Herzegovina, Slovenia, Croatia, Serbia and Montenegro. Advent acquired an 80% stake in the deal, which was valued at around €200m.

As EBRD managing director Jean-Marc Peterschmitt, points out, banks are one of the key target areas for private equity activity. "As well as the buy-and-build strategy that you see in the region, there are also a number of restructuring situations –assets that are over-leveraged or distressed in some way that need to change hands or have an equity injection," he says. "We also see activity in the remaining privatisations in the region – there are a few telecoms operations that are still for sale and there are banks that have been nationalised during the crisis and are now re-sold." 

Baltics
The Baltic states mirror Poland when it comes to the growth and development of the local private equity industry. The three Baltic countries have collectively made real efforts to create a favourable deal-doing environment by enforcing attractive tax regimes, property rights and laws.

Furthermore, the states experienced the fastest growth rates in the EU since the financial crisis – for example, Estonia saw its GDP skyrocket by 8.3% in 2011. And Lithuania's adoption of the euro in January has only strengthened the Baltics' position as a beacon for capital.

Mid-market abundance
According to Kaido Veske, an investment manager at Baltic firm Livonia Partners, there is large scope for investment. "In the Baltics, the addressable market is around €34bn with approximately 1,000 companies that have revenues between €5-50m," he says. "That is plenty of opportunity for mid-market private equity in the region."

This year, Lithuania, Latvia and Estonia are forecast to see GDP growth of 3%, 2.9% and 2.3%, respectively. Touted as the ‘new Nordics', the region's private equity industry is young and still finding its feet, but is fast emerging as another westernised target for investment in CEE .

Much like Poland, its strengths lie in manufacturing, exports, outsourcing and consumer convergence. "There are a fair number of consumer-orientated companies that have been slow to climb out of the recession, but are now showing strength," says Veske.

And much like other areas of the CEE region, entrepreneurship took off after the collapse of the Soviet Union in the early 1990s. This means there are a host of private business owners that could be facing succession situations, or are simply looking to sell after nearly 25 years of running a company.

Likewise, the first generation of GPs in the region are preparing portfolio companies for exit, which means a secondary buyout market could be close to the surface –something that the Baltics have yet to really experience.

In terms of deal-doing, a natural strategy for GPs in the region is buy-and-build, largely due to Baltic economies being much too small to run domestic champions. But as Veske points out: "The buy-and-build strategy has its positives and negatives. While it means that you can potentially build up big platforms quite quickly across multiple regions, it can be very time-intensive operationally, and show valuation escalation once the market knows what you are up to."

And the Baltic region's proximity to Russia has – on the surface at least – caused some to question whether its private equity industry is in danger of grinding to a halt. Veske points out that while economic slowdown in Russia has yet to make an impact on the region, it will with time: "There is not a high concentration of direct dependence on Russia, as many CEE countries have made a conscious decision to orient their economies toward the west. That has ultimately been a good decision. But we will see a longer-term, indirect impact on the CEE economies, since Russia is a large economy, after all."

Enjoyed reading this article? Listen to private equity firms and LPs discussed in this article at the upcoming CEE Private Equity Forum, held in Warsaw on April 16. Click here to find out more and to register your place.

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• Topics
• CEE
• CEE
• Top story
• Poland
• Romania
• Innova Capital
• Enterprise Investors
• Bulgaria
• Turkey
• EBRD
• Slovenia
• Croatia
• Serbia
• Lithuania
• Estonia
• Latvia