Parting the CEE

In the first 10 months of 2010, funds dedicated to Central and Eastern Europe deployed $1.8 billion in capital, according to the Emerging Markets Private Equity Association. The figure is on pace to represent a drop from 2009, when roughly $3.3 billion of capital was deployed in the region, and still well below the $8.3 billion peak posted in 2007. 

It should be noted, however, that perceiving CEE as one homogenous bloc is disingenuous. In 2009, GDP growth figures across the region varied from modest expansion in Poland of 1.4 percent to cataclysmic contractions of as much as -18 percent in Latvia, according to data from the European Bank for Reconstruction and Development.

Private equity houses too played favourites. Continuing a 2008 trend, investment activity in 2009 was highly concentrated in five countries: the Czech Republic, Poland, Romania, Hungary and Bulgaria. More specifically, this bloc comprised 93 percent of total investment value, according to EMPEA. 

It’s therefore important fund managers recognise each country in the region carries its own individual risks and rewards for investment says Brian Wardrop, co-managing partner at CEE-focused private equity firm Arx Equity Partners.

“People like easy and simplified models for seeing the world”, explains Wardrop, who added this meant when the financial crisis hit CEE, “investors tended to lump Central and Eastern Europe in one basket”. The perception meant GPs during the crisis would look at more severe recessions occurring in Hungary or the Baltic states for example, without fully appreciating the deal opportunities still present in countries like Poland or the Czech Republic, elaborates Wardrop.

Indeed, the crisis would push some firms to pull teams dedicated to the region out, such as when Carlyle shut down its Warsaw office in 2008 due to CEE’s “difficult investment climate”, as the firm said in a statement at the time.


Today, however, the private equity climate in CEE is perhaps more favourable than ever, says Wardrop, who adds the region’s first generation of entrepreneurs is beginning to hit retirement age, which is opening the door for private capital to step in.

“It was back in the early ‘90s with the fall of communism that entrepreneurism began to flourish in CEE. A proportion of the individuals who started up a company or who privatised existing companies, following the fall of communism are now in their 50s and facing succession issues”, elaborates Wardrop, adding the trend is not being seen anywhere else in the world.

Unlike Western Europe, where more businesses have traditionally been owned by a family or an individual, in CEE there are a number of firms jointly owned by three to five managers who originally came together 20 years ago to take advantage of the new business environment, says Wardrop. As these partners enter retirement age, there is typically one partner who wishes to continue managing the business and private equity has been able to provide the necessary capital to buy out the other partners.

For example, in August Arx worked with 40-year-old Robert Seifert, chief executive officer of Czech Republic-based Krkonošské vápenky Kuncice (KVK), a producer of mortar and adhesives, in the €20 million leveraged buyout of the company’s other owners, all of whom were in their 60s.

Aside from succession issues, the new era of entrepreneurship in CEE is also producing deal flow from executives who look to private equity as a way of securing growth capital without ceding control of their business, according to a 2009 regional report from PricewaterhouseCoopers.

Many fund managers question whether CEE should still even be considered an emerging market at all: a legitimate question, when one considers emerging markets are often characterised as lacking GPs who hold track records spanning multiple decades or suffering from unstable political and legislative environments.

The region’s association with emerging markets becomes even more weakened when considering the rapid and volatile growth rates of Brazil, India, and China, says Wardrop. “While CEE may not grow at the same rate, the region’s long-term economic growth rate should outpace Western Europe,” he explains, adding “on a risk-adjusted basis the CEE region offers LPs good value combined with a more stable and predictable investment  environment as compared to more volatile emerging markets”.


Private equity firms CEE-bound should, however, respect the importance of developing a tangible presence in the region. That was the main theme stressed at an Emerging Europe- and Turkey-focused panel discussion at the Emerging Market Forum held in London in November by PEI and EMPEA.

“Being there really counts, because being there means you’re closer to management so you can hold their hands when they’re scared or twist their arm when they need to do something,” said the roundtable’s moderator, Memet Yazici, managing director and head of private equity at Turkey-based Rhea Asset Management.

This means GPs can’t just periodically fly in from London or Washington DC to monitor a CEE investment, said Jan Dewijngaert, who was also on the panel and works as the director of buyouts and growth in CEE for European private equity investor Gimv.

At the very least, a firm not willing to set up shop in CEE should partner with a local private equity firm and co-invest into deals, Dewijngaert warned, adding that this will, however, come with costs. “The local GP will then have the difficult task of keeping the foreign GP, who is a co-shareholder in the investee company, informed and make sure he agrees,” said Dewijngaert, adding “if the foreign GP is ready to accept that the local GP plays a leading role, this might work.”

Agreeing with the sentiment was Alpha Associates partner, Henry Potter, the third member of the panel. As a fund of funds investor, Potter emphasised the importance that the local and foreign GP share the same objectives, or that at least “one of them is very clearly in the driver’s seat”.

All three members of the panel further expressed consensus on the ample amount of opportunity available for private equity players in CEE and Turkey.