Romania’s potential

As Central and Eastern Europe continues to draw the attention of private equity firms, one country within the region that has been receiving particular attention is Romania. One of the events that highlight Romanian private equity’s returns potential was last year’s $523 million (€414 million) sale of mobile phone company Orange Romania back to parent company France Télécom, which earned the private equity consortium backing the company a 4x money multiple on its investment.

AIG’s Mellinger: success with Orange

More recently, Dubai-based private equity firm Scimitar Global Ventures also wrapped up a trade sale of one of its holdings in Romania. In April 2005, Scimitar had acquired a 40 percent stake in Monopoly Media, a business that installs flat screens in areas of high retail traffic – such as shopping centres, large supermarkets, and banks – and then sells advertising space on the screen. Almost exactly one year later, the private equity firm exited the company when it was acquired by a Romanian media company and, as a result, wrote up a net return for Scimitar’s investors of roughly 60 percent, net of carry.

“We had planned to be in this for three years, but at the beginning of 2006, [Monopoly Media general manager Gabriel Faflei] was approached by two of the media companies in Romania that are active in more traditional advertising venues because they saw what we were doing around the country and liked it,” says Scott Ogur, a partner based at Scimitar’s Stamford, Connecticut office. “We spent some time talking with both parties and ended up entering into exclusive discussions with one of them, and closed the deal in mid-April.”

Within the Romanian marketplace, private equity GPs – and corporate buyers – are identifying a number of investment opportunities, and many of the most lucrative involve growing a local company as part of developing a regional platform. The investment potential of Romania is in large part founded on the country’s impending accession to the European Union in 2007, its stable macroeconomic environment in recent years, as well as the country’s highly educated workforce – owed in part to Romania’s Communist legacy – that possesses strong quantitative and foreign language skills.

“We are very excited about Romania and have been there for about two and half years,” says Ogur, whose firm started off investing in Romania and Northern Iraq, and has since moved into Morocco. “We identified it early and got it right, in terms of a good place to be investing. When we first talked about going there, our investors were wary and uneducated about the country. Now it’s not an issue, because we have proven that we can go in there, and find, execute and exit a good deal.”

Within the Central and Eastern Europe region in general, deal flow is “solid and robust”, says Pierre Mellinger, who heads the CEE affiliate of AIG Capital Partners. “The current investment environment for private equity is extremely good. There are a lot of companies and a lot of people who have an understanding of corporate governance and who have an understanding of what are the key elements that have to be respected to do a proper deal,” he notes. “I have been working in the region for more than twelve years, and there has been a lot of progress.”

Mellinger’s group led the consortium that had invested in – and reaped the benefits of – the Orange Romania deal back in 1999. AIG Capital Partners’ Central European arm announced earlier this week that it has also wrapped up its acquisition of security services provider UTI Group, in a $19.5 million transaction made through the 2005 vintage, $259 million AIG Global Emerging Markets Fund II.

Other new private equity funds are sprouting up too, to engage in investment opportunities in Romania and its neighbouring countries, including GED Capital Development – which recently received a €20 million commitment to its new Romania- and Bulgaria-focused fund from the European Bank for Reconstruction and Development. SGAM, the private equity investment arm of French financial services group Société Générale, is also raising a new €150 million fund targeting the Baltic countries, Central Europe, and the Balkans, to follow up on its 1997 vintage, $42 million SG Romania fund.

As the investment landscape continues to improve and the country’s private equity industry continues to mature, it seems likely that more jackpot returns will be springing from Romania in the near future.