CEE-focused funds break fundraising record – report

Funding from non-European investors accounted for close to 40 percent of total commitments for the region in 2018, according to a report from Invest Europe.

Private equity firms focused on Central and Eastern Europe gathered €1.82 billion in 2018, the largest haul for the region since 2009.

Capital commitments from non-European investors more than doubled in 2018 compared with the previous year and amounted to €698 million, or nearly 40 percent of fundraising for the year, driven mainly by investors from China, according to a report from Invest Europe.

Examples of Chinese LPs active in the region include the Export-Import Bank of China, which has backed Cyprus’s CEE Equity Partners, and China Investment Corporation, which committed capital to funds managed by Mid Europa Partners, PEI data show.

Robert Manz, chair of Invest Europe’s Central and Eastern Europe task force, told Private Equity International Chinese investors have been showing interest in the CEE markets for a number of years, for fund investments and direct investments, even accounting for some exits by CEE fund managers.

“The CEE region is seen by them (as among many other global investors) as interesting on its own accord and additionally as a gateway to larger EU markets,” he added.

Total fundraising last year saw a 10 percent increase from 2017 (€1.65 billion) and an almost four-fold jump from 2009, when it was €378 million.

GPs that held final closes in the last year include Ukraine-focused Horizon Capital, which closed on its $200 million hard-cap for its third growth fund in December, and Poland’s Innova Capital, which raised raised €194 million for Innova/6 according to PEI data.

Manz noted that recent LP interest in the region is a combination of macro-factors – in particular the continued outperformance of the region’s economies – and micro-factors including the performance of some transactions in recent years.

Government agencies such as the European Investment Fund and European Bank for Reconstruction & Development – similar to previous years – made up the bulk of 42 percent of capital commitments in 2018, followed by fund of funds (16 percent), banks and family offices (11 percent each). Pension funds, sovereign wealth funds and other asset managers accounting for the 20 percent remainder.

Central European family offices, high-net-worth investors and local investor groups have been increasingly active in private equity, Brian Wardrop, managing partner at Prague-based lower mid-market firm Arx Equity Partners, told PEI.

“The most notable dynamic we see is that competition for deals in the lower mid-market space is shifting, especially in the Czech Republic,” Wardrop said. “We view our primary competitors as distinctly local pools of capital rather than regional lower mid-market focused GPs.”

Over the last five to 10 years, lower mid-market players have also sharpened their focus geographically on a smaller number of countries, he added.

Private equity investment in CEE reached €2.7 billion in 2018, the region’s second highest annual result, but a 24 percent decrease from the 2017 record.

The number of PE-backed CEE companies, meanwhile, increased year-on-year by 50 percent to 398, the second highest level ever recorded, driven by a significant increase in venture capital-backed companies.

Poland was the most attractive destination for private equity investors, receiving 32 percent or €850 million of the region’s total investment value. The Czech Republic received 29 percent of the region’s total investment value, followed by Hungary (13 percent) and Romania (12 percent).