There is ample room for growth in Central and Eastern European private equity and venture capital, as fundraising and deal activity figures in the region still fall largely behind Western Europe despite burgeoning investment opportunities and top-quality tech talent.
The PE and VC industry saw the highest number of transactions in the region in 2021 at 134 deals, rising about 30 percent on the previous high of 105 deals in 2018, according to Bain & Co’s inaugural Private Equity and Venture Capital in Central and Eastern Europe report. By value of transactions, 2021 was its third-best year at $5.4 billion, after 2017’s $6.4 billion and 2019’s $6.1 billion.
Despite CEE’s growing potential, PE in the region has not kept up with the global boom, Bain noted in the report, as investments as a percentage of GDP trailed behind international benchmarks. Investments in PE in CEE are about 0.2 percent of GDP, compared with 0.8 percent in Western Europe.
Private capital, however, continues to flow into the region, with €900 million raised by dedicated funds in 2021. That compares with €600 million in 2020 and $2 billion in 2018.
Additionally, activity from local investors is intensifying. This is led by Poland’s PFR Ventures – the investment arm of state-backed Poland Development Fund – which has committed to funds managed by PAI Partners, Apax Partners, HIG Capital and Austria-based Syntaxis Capital, according to PEI data. Czech Fund of Funds, Croatian Growth Investment Programme and Slovak Investment Holding have also been active in the last five years, according to the report.
“This is a very important topic for the development of the market, and the situation has changed from zero domestic investors 10 years ago to having one very strong institutional investor [with] PFR Ventures,” said Barbara Nowakowska, managing director of PSIK, the Polish Private Equity and Venture Capital Association.
“Public funds of funds [are] investing in PE and VC and [this] attracts domestic capital… We still have a way to go to attract institutional investors to the asset class, and the primary target is pensions funds.”
Maciej Cwikiewicz, chief executive of PFR Ventures, also noted that PFR has created a working group in Poland that will work alongside pension fund managers, legislators and regulators on allowing more pension funds to invest in PE. They hope that changes to pension regulations will come into force in the coming months, he added.
Ukraine war impact and outlook
PE and VC managers in the region reported a negative impact on fundraising exit options with the ongoing war in Ukraine and macroeconomic disruptions, the report noted. They are confident, however, that this will be transitory. Co-operation with Ukraine is expected to increase after the conflict, mainly benefiting construction, industrials and business services sectors.
“In the longer term, the war is likely to lead to structural changes in the region’s economies, including greater military and security spending, which will benefit sectors such as cybersecurity, an accelerated transition to green energy, and the potential for long-term involvement in the post-war reconstruction of Ukraine,” according to the report.
Overall, key regional investment trends include manufacturing and services nearshoring; consolidation catch-up and cross-border integration among industries; emerging regional champions; disposable income catch-up with Western Europe; and the professionalisation of founder-led businesses. These trends align strongly with global trends such as scaling tech, the shift to online and the green transition, among others, according to the report.