Friday Letter When the growing gets tough

Amid all the pain, this crisis could be private equity’s moment, they said. The funds still have money to invest, they said. Just you wait: when there is no one else making funding available to businesses, private equity groups will step up and fill at least some of the gaps. That’s what they said.

So far it hasn’t happened. For a variety of reasons, private equity investment is still largely suspended. The flow of deal-related news remains a trickle.

Those looking carefully will nevertheless spot pockets of activity. Like this one for example: data unveiled this week on the emerging economies of Central and Eastern Europe (CEE) provided private equity industry observers with a small dose of optimism. Growth capital investment in the region, it seems, is, um … well … growing.

Research produced by the European Private Equity and Venture Capital Associations (EVCA) shows that CEE buyout activity dropped by over a third last year: €1.5 billion was invested in buyout deals in 2008, compared to €2.3 billion in the previous year. With the rapid contraction of the debt markets, this will come as a surprise to no one.

What should raise a few eyebrows, however, is what went on lower down the deal size spectrum. Growth capital, according to the EVCA data, didn’t just hold firm in 2008; it rocketed. Back in 2007, 21 businesses received a total of €132 million in growth capital throughout the region. In the following year 53 businesses received growth capital investments totalling €709 million. That’s an uplift in terms of value of more than 430 percent.

The most intriguing thing about these figures is that they should not be put down to decoupling. The explosion in growth capital investment has not happened because Central and Eastern Europe is in some way cocooned from the effects of the financial crisis. It happened because it is not.

With the availability of bank debt severely reduced, good companies in need of capital in the latter half of 2008 had few options in terms of raising cash for expansion or acquisition. Growth capital investors throughout the region – who together raised almost €700 million in capital in 2007 and 2008 – have been one of the few finance sources open for business.

While 2009’s numbers are likely to make less happy reading, this data supports the argument that even without abundant leverage, private equity has the power to play a vital role in helping Europe’s economies weather the financial storm. This is precisely what the industry’s advocates expect it do deliver in today’s environment. Sceptics and lawmakers take note.