Look East

Private equity firms are pursuing growth strategies in Emerging Europe, with Poland and Romania expected to take the lion’s share, writes Nicholas Lockley.

The Carlyle Group this week made its first investment in Turkey, paying an undisclosed sum for a 50 percent stake in shipbuilder TVK Shipyard.

Private equity activity in Turkey has been sporadic until recently as interest in the region has begun to rise. Until mid-2007, the largest Turkey-dedicated fund was $100 million raised by AIG Capital and Ata Invest. Last year, Turkish fund Actera Partners, established by Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board, closed its debut fund on $475 million.

Since 2006, activity in Turkey has accelerated. TPG’s 2006 acquisition of Mey Alcoholic Beverages was valued at approximately $1 billion and in 2007 KKR acquired shipping company UN Ro-Ro for $1.3 billion. This February, BC Partners led a consortium in the acquisition of Migros Türk, the Turkish supermarket chain, for YTL3.9 billion ($3.25 billion; €2.2 billion) from Koç.

Expect more activity from established firms like Carlyle. And not just in Turkey.

Mergermarket, an independent mergers and acquisitions intelligence service, published its Private Equity in Emerging Europe report this week, which said Poland and Romania attracted the most attention in terms of which countries would see the bulk of private equity activity in the region over the next year.

The sweet spot for buyouts in emerging Europe is expected to be in the sub-€100 million bracket in the next year. Some 84 percent of respondents believe that this deal bracket will witness at least the most or strong activity.

Emerging Europe is selected by 65 percent of respondents as the most likely region for Western private equity firms to invest in, while 32 percent each named Asia and Russia and other CIS countries. Meanwhile, only 11 percent thought that South America would be a prime location for Western private equity investment.

However, to boost private flows into the region, 71 percent of respondents said that national governments should implement favourable tax incentives. Likewise, 53 percent of respondents also thought that governments could reduce protectionist measures against foreign firms to encourage private equity investment.

This is the challenge the Turks have embraced. It is just a matter of time before their near neighbours follow suit.