The face of private equity investing in Poland and much of central and eastern Europe has changed dramatically since 1990, when private equity firm Enterprise Investors first began its investment activities in the region. At the time, EI was investing its inaugural fund, the $240 million Polish-American Enterprise Fund, which was backed by the US government and made direct equity investments and loans to Polish small and medium sized businesses.
Enterprise asserted at the fund launch that the turning point for the region’s private equity industry was the accession of several countries to the European Union. The Treaty of Accession 2003 brought in the first wave of the region’s nations, including Poland, EI’s main focus, as well as other markets of interest to the firm, including the three Baltic States, the Czech Republic, Hungary, Slovenia and Slovakia – all of which officially became EU member states as of 1 May 2004. Soon after, the Treaty of Accession 2005 was signed and is expected to bring Bulgaria and Romania, both also within EI’s investment mandate, into the EU fold in 2007. Two new investment areas for EI’s new fund are also primed for accession to the EU: Croatia is a current candidate and Ukraine is a possible candidate.
At the launch EI highlighted the main differences it has experienced between investing private equity in the region pre-EU accession and post-EU accession:
Deal types. Whereas the its Polish investments pre-EU accession were primarily expansion capital and start-up and early-stage financings, the firm has more recently invested more in buyouts and expansion capital. The firm’s 2004-vintage, €300 million PEF V has invested solely in buyout transactions to date.
Equity. The average size of its equity investments has more than doubled between its 2000-vintage PEF IV, when the average transaction size was €9 million and the 2004-vintage PEF V when it more than doubled to €20 million. For PEF VI, Enterprise Investors expects to increase its average equity stakes to €30 million to €50 million.
Leverage. In the pre-accession times, debt for financing deals was “rare, small, mostly used for recapitalisations”, according to the firm. However, since 2004, leverage has been widely available.
Exit environment. That the firm has been able to exit 85 companies to date, of which 24 were through the public markets, is a positive indicator of liquidity within the region’s markets. However, until the EU accession, exits were primarily through sales to foreign strategic buyers, while exits on the Warsaw Stock Exchange were few. However, since 2004, the exit possibilities have opened up to also include local strategic buyers, secondaries transactions, management buyouts and the exchange, enabling more rapid and profitable realisations on its investments since the EU accession.
What was once a region on the margins of private equity is increasingly looking like its mainstream big brother.