Political risk and private equity: Autocratic for the people

Few believe Marine Le Pen and her National Front will win the presidential elections in April, barring a major shock. Experts expect the centre-right François Fillon to prevail over her and independent centre-leftist Emmanuel Marcon.

Fillon has close ties to Russian President Vladimir Putin and would foster a cosier alliance with him. Fillon supports remaining in the EU, but has shifted right on immigration.

“If the National Front doesn’t win but fares well, it may argue for reforms that further distance France from the EU,” says Christopher McKee, chief executive of The PRS Group, a political and country risk rating and forecasting firm.

In December, Italians overwhelmingly voted against constitutional reforms put forward by Prime Minister Matteo Renzi, who promptly resigned.

Paolo Gentiloni took the top job and looks set to continue Renzi’s programme to address a banking crisis, political gridlock and corruption.

Most observers expect the country’s technocrats to stay in power, but after the Brexit and Trump shocks, it’s possible the opposition led by stand-up comic Beppe Grillo could snatch a win.

Grillo’s high-profile populist Five Star Movement has backed staging a referendum on whether the country should still use the euro, and is faring well in the polls.

Eurosceptic Geert Wilders may have been convicted of inciting discrimination, but his anti-Islam Freedom Party leads in the polls ahead of elections in March. That said, he might not have free rein even if his party claims victory. “Even if the Freedom Party maintains its strong lead, they will fall short of a majority, and will face governing within some kind of a coalition,” says Hans Witteveen of Benelux law firm Stibbe.

And if Wilders can launch a referendum on the EU, he’s also unlikely to win – the same polls showing support for his party display little desire to leave the bloc. However, there remains scepticism towards the nature of that membership, with the Netherlands striking down an EU trade and diplomacy deal with Ukraine last April.

While most leaders here are relatively new to the big stage, Hungary’s Viktor Orban has been prime minister since 2010. His anti-EU and anti-immigration rhetoric grabbed headlines in 2016, but it’s his tenure that may serve as a model for what to expect from other populist movements.

Hefty taxes on banking and retail seem to target international investors, but long-time investors in Hungary are well aware of such policies. “There have been, and will continue to be, private equity successes in Hungary, particularly for those investing in export-oriented businesses, where downside risk is mitigated, while taking advantage of a highly skilled and relatively low-cost workforce,” says Anthony O’Connor of law firm Kinstellar.

The Law & Justice Party in Poland may be the best measure of how autocratic populists may lead.

Winning the presidency and a parliamentary majority in 2015, they capitalised with an agenda that defies easy categorisation. It launched a generous social welfare programme with requisite taxes to fund it and nationalised some industries. However, it’s right-wing on social issues in an overwhelmingly white Catholic nation.

Poland remains the most popular destination for private equity in Central or Eastern Europe, and investment has only grown since the election.

The good news is that most onlookers expect Germany to continue its place as champion for the EU and democratic values.

There is a eurosceptic party, Alternative for Germany, but few see it as a big player in the autumn elections.

Most experts think Angela Merkel will win, to preside over a coalition of her party, the Christian Democrats and the Social Democrats, or one with some combination of the Green or the Liberal Party.

“All these likely scenarios are expected to have, at least in the short- and medium-term, only limited impact on the country’s stable business environment,” says Ulrich Blech, a partner in the Berlin office of Hengeler Mueller.

But Merkel won’t be able to stifle the anti-EU sentiment that seems be spreading among member countries. Whether those populists will welcome private equity into their economies, or reject it, is still unclear.


In August 2016, the president of Brazil, Dilma Rousseff, was impeached for manipulating the budget. Her replacement, interim President Michel Temer, faces his own scandal-ridden administration, made even more unpopular due to recession and a harsh austerity programme.

Maurizio Levi-Minzi of the law firm Debevoise & Plimpton recently co-chaired a private equity conference in the country and found overall attitudes were bullish. “The most experienced firms are making good deals while the currency is weak,” says Levi-Minzi. “There are motivated sellers facing real challenges from high interest rates, inflation and low consumer demand.”

Matthew Posthuma, a partner at law firm Ropes & Gray, adds: “What makes the investments worth the risk is faith in long-term macro trends, such as a young population, vast natural resources and western culture as key advantages over other emerging markets. Most of all, these investors see the wave of scandals as a commitment to transparency.”

Recent reforms by President Xi Jinping have not solely been concerned at preventing corruption. “Many people believe it’s a matter of exerting greater control,” says Michael Baker, of the investigative firm Diligence, which advises clients active in China.

Experts cite the tendency to enforce laws on convenient targets, such as Xia Lin, a lawyer who often represented clients against the state and found himself sentenced to 12 years for defrauding clients to pay gambling debts.

One diligence expert views the reforms as evidence that the authoritarian wing of the ruling Communist Party is on the rise, bolstered by public unrest and an economy losing steam.

Not everyone is so pessimistic, but few expect a massive leap forward in transparency or regulatory oversight. Baker explains that the country still doesn’t have a consistent rule of law. “In the event of a conflict, foreign investors will have to find some way to move forward without running afoul of their domestic bribery and corruption laws, which isn’t always easy.”