Building foundations in emerging Europe

While the buyouts business in the Central and Eastern European region continues to attract investors, efforts are also underway to foster the development of small and medium-sized local enterprises. By Judy Kuan.

Private equity firms from Western Europe and other regions have increased their presence in Central and Eastern European over recent years, with much of this activity driven by investors attracted to the strong exit potential and the growing availability and use of leverage in buyout transactions in the region.

Of particular note within the investment environment of the CEE region are the opportunities that have sprung up since the end of the Cold War. According to Petra Salesny, a partner and chief operations officer of Zurich-based funds of funds manager Alpha Associates, there are many “greenfield” opportunities for building viable businesses in Central and Eastern Europe to fill the economic vacuum left in the wake of command economies.

At the recent Emerging Markets Private Equity Forum in London, organised by sister publication Private Equity International and the Emerging Markets Private Equity Association (EMPEA), Salesny pointed out that, as of yet, there are limited best practices established in the region’s private equity markets – and its financial markets overall. Salesny said the region’s young legal and regulatory frameworks will need time to develop and investors will have to learn as they go until these frameworks have matured, although the process may very well be helped by the region’s proximity to the more developed markets of Western Europe.

To date, most of investors’ attention has focused on the larger buyout deals that have been taking place in the countries of Central and Eastern Europe that have recently joined the European Union – namely Poland, Hungary, Czech Republic, Slovakia, Slovenia and the Baltic States – rather than the smaller and perhaps less developed economies of the region. However, a number of development finance institutions in the region are now concentrating their efforts on fostering the growth of local small and medium-sized businesses in the smaller economies of the region as well.

One new effort on the SME side is the European Fund for Southeast Europe, which will initially target businesses in Bosnia and Herzegovina, Serbia and Montenegro, and Kosovo. The fund, to be managed by Luxembourg-based Oppenheim Pramerica Asset Management S.à.r.l., is aiming to raise €500 million ($591 million) over five years, with an expected first close of approximately €142 million.

Earlier this week the International Finance Corporation, the private investment branch of the World Bank, announced it would provide up to almost 21 percent of the total capitalisation of the European Fund for Southeast Europe. The fund, which will provide private capital to SMEs in the region via loans provided through banks and microfinance providers in the region, has also received backing from German development bank KfW, the Netherlands Development Finance Company, Bankakademie, and the governments of Germany and Switzerland.

The Southeast Europe fund is seeking to expand its investor base beyond the scope of development finance institutions and hopes to attract capital from investors in the private sector for its future closings.

The extent to which it is successful in doing so will depend on factors that impact other funds being raised across the Central and Eastern Europe region as well: regulatory harmony, capital market liquidity, and the performance of funds already active in the region’s markets.