Buyout firms retrain gaze on central and eastern Europe


Bridges to prosperity: sentiment is changing as investors slowly return to CEE

Chris Mruck, managing partner and head of Advent International’s CEE team, noted: “The 2000s, up to the global financial crisis, was the golden period for CEE, with GDPs in the region growing enormously fast. It looked very dynamic compared to western Europe.”

However, aftershocks from the global financial crash, coupled with the economic slowdown that hit the region as a result of the broader eurozone crisis, have led to a “difficult few years”.

Dealflow through the first half to August 12 was down 91% on its pre-financial crisis peak, with 22 deals worth $ 553 million completed so far this year down from highs of 66 and 67 deals worth $ 4.41 billion and $ 6.03 billion in 2007 and 2008.

Alongside this, several global buyout firms that invest in the region, namely Advent International and EQT Partners, have shut their local offices, preferring instead to invest from London or Frankfurt.

Fringe effect

Matthew Strassberg, co-managing partner at one of the most active funds in the region Mid Europa Partners, said: “There has been a long lull, driven by the fact that there is an unfair perception that the region suffers from the taint of being a fringe Europe market. It has been disproportionately affected by perceptions arising from the Greek debt crisis and the whole PIGS situation a few years ago.”

There are signs though that investor sentiment is changing. The economic resurgence of two of the biggest private equity markets in CEE – Poland and Czech Republic – coupled with fierce competition for assets from strategic and foreign buyers in more established western European markets like the UK and Germany have pushed firms to look to CEE for deals.

Markus Lauer, a partner in Herbert Smith Freehills’ Frankfurt office, said private equity firms were likely to look at other “higher-risk” markets in the face of high prices and strong competition from foreign and strategic buyers, with CEE a possible beneficiary.

He said: “Germany, for example, is an interesting market for private equity, but if prices are too high, then private equity investors may look at other markets where there may be more risk but there is more upside. For me it would make total sense to look at [Poland]. If I would be sitting at a PE house, why would I want to pay a high price and go through a long auction process? I would also consider looking at a market like Poland to see if there are more assets around with less competition.”

GDP growth in Poland and the Czech Republic has outstripped that of more developed private equity markets such as the UK, Germany and France. Poland has seen annual GDP growth of more than 3% since 2015, according to European Commission data, against Germany’s at just over 1.5%.

A strong increase in GDP has enabled companies looking to come to market to demonstrate a good track record of growth over a few years, something Mruck described as being “very important” if they are looking at being sold.

Record prediction

Jarek Iwanicki, a partner in the Warsaw office of law firm Allen & Overy, predicted a record year for mergers and acquisitions in the region in 2016, citing an uptick in interest from global buyout houses.

He said: “I think this year and possibly the first half of next year could be a record one. There is a lot of activity and there is a lot of interest in CEE assets from large private equity houses operating out of London, which hasn’t really been the case for the last few years.”

Marek Sawicki, a counsel for DLA Piper based in Warsaw, agreed. He said: “One of the leading investment boutiques in Poland I was speaking to, the local office of Rothschild, said they had never seen such a number of big deals pending at the same time.”

Alongside this, a number of firms with a focus on investing in Europe have raised a huge amount of capital so far this year. Advent closed its latest buyout fund on $ 13 billion in March 2016, while Cinven and Apax also raised €7 billion and $ 7.9 billion, respectively.

Deploying this capital hasn’t been easy, with a lack of big assets and fierce competition for assets across Europe from strategic buyers, causing firms to revisit CEE as a potential region to invest in.

Strassberg said: “There is a scarcity of good assets on a global basis, there is a flight to quality and there are a number of clean, well performing businesses up for sale in the CEE region.”

European firm Bridgepoint completed a deal in the region in January, investing €247 million in Warsaw-listed toy maker Smyk, and several €1 billion-plus processes are slated for later this year.

The eastern European assets of brewer SABMiller, which include premium lager brand Pilsner, are on the block, with a number of private equity firms including Advent, BC Partners and KKR all rumoured to have expressed an interest, according to a person familiar with the matter.

The assets are likely to be worth between €4 billion and €5 billion, which alone would trump the total value of deals done in CEE in any six-month period since before the financial crisis.

The Mid Europa Partners-owned Polish retail chain Zabka is also up for sale for around €1 billion, attracting interest from global buyout firms including CVC, Advent, TPG and BC Partners.

Firms aren’t just looking at the more established markets like Poland and the Czech Republic.

Mruck said: “While Poland and the Czech Republic tend to be the first two countries people are drawn to, we’ve been looking at doing deals across the whole region. We have invested in the former Yugoslavia, buying Addiko Bank (formerly Hypo Alpe-Adria-Bank). We’ve also looked at telecoms assets in Serbia. It’s not just limited to Poland and Czech Republic, the usual suspects.”

In a sign that investors are becoming more comfortable with the region, the first Belarusian private equity firm has just been launched. Zubr Capital has raised $ 50 million to target investments in five to seven Belarusian companies in the region. The fund received a $ 12.5 million anchor investment from the European Bank for Reconstruction and Development.

Investments in the more developed CEE markets are not without risk, though. Strassberg said that big firms still have reservations about investing in the area, “bulge-bracket private equity firms do get nervous doing deals in the region. It’s always the question, ‘do I want to have a billion or so of equity in a less developed market where risks might be higher?’ They do tend to get gun-shy at the end.”

The actions of the ultraconservative Law and Justice Party elected in Poland last year have caused concern among some investors. The party, in a throwback to Soviet-style politics, has tried to crack down on banks and take control of the country’s media, placing it directly at odds with the EU.

Political concerns

Elsewhere in the region, a neo-Nazi party won almost a 10th of the seats in Slovakia’s parliament and Hungarian leader Viktor Orban, a Donald Trump supporter, has used a significant electoral mandate to implement a more authoritarian regime.

However, Robert Manz, a managing partner at buyout firm Enterprise Investors, said: “In the years since we’ve been investing, we’ve had many different governments and policies. What gives us a lot of comfort is that these markets, we’re talking central Europe, are within the EU, free market economies, democratic societies and it’s not under major threat.”

• Deals plummet in Russia and Ukraine over instability

While private equity firms are renewing their interest in Central Europe, the same can’t be said of the Ukraine and Russia. Dealmaking in the two countries plummeted after conflict over Russia’s annexation of the Crimea escalated in 2014. Just two investments have been completed across both markets so far this year, down from a high of 24 in the same period in 2008 and 14 in 2013, the year before fighting began, data from Dealogic said.

Sanctions imposed by the US and the European Union on Russia have heightened investor concerns. The sanctions have triggered an economic slump, with Russia’s annual GDP growth shrinking for six consecutive quarters since January 2015.

Unsurprisingly, fundraising in the region has dropped. DMC Partners, an emerging markets-focused private equity firm co-founded by a trio of former Goldmans Sachs executives, was the first to fall victim to the conflict. The firm pulled plans in 2014 to raise $ 2 billion to invest in sub-Saharan Africa, Turkey, China and Russia over investor concerns regarding ‘headwinds’ in Russia. And there has been little appetite for investors from outside the Ukraine and Russia with just one fund closing in the last two years that is looking to make investments in the countries.

The nature of investing in the region has also changed. Where buyouts used to be the norm, firms looking to do deals in the region are now targeting special situations-type investments.

Chris Mruck, managing partner and head of Advent International’s CEE team, said: “Investment is still going on in the Ukraine but it is typically special situations type investments. For the bigger funds it’s definitely not the first country you would be looking to make an investment in.”

While the economies in both countries are slowly improving, any uptick in investment in the region will need a period of prolonged stability. However, following the Ukraine president’s decision to put his country’s force son combat alert on August 11 2016, central Europe may remain a safer bet.

More from Private Equity

Let’s block ads! (Why?)

Alternatives – Financial News Online

You May Also Like