CEE roundtable: A foot in both camps

The Central and Eastern European region offers LPs emerging market potential in a developed market framework.

It seems fitting that Private Equity International is sitting down with a panel of experts for our annual Central and Eastern Europe roundtable as we prepare the shortlists for our 2017 Annual Awards. Last year, in a break from the traditional fixation on Northern European companies, the Deal of the Year in Europe Award went to a transaction in Poland.





Matthew Strassberg
Co-managing partner
Mid Europa Partners
Strassberg is a 15-year veteran of Mid Europa Partners and sits on the buyout firm’s investment and management committees. Prior to joining, he served as vice-president in the leveraged finance team at Merrill Lynch in London and the M&A department at JPMorgan.





Jacek Siwicki
Chairman and president
Enterprise Investors
Siwicki joined EI in 1992 following a stint as Poland’s deputy minister of privatisation. He manages the firm’s operations and is responsible for implementing its strategy across the whole CEE region. The recipient of Poland’s Commander’s Cross of the Order of Polonia Restituta has led 20 direct investments at the firm.





Marco Natoli
Head of lower mid-market, Northern, Eastern and Southern Europe
European Investment Fund
Natoli served as principal at the EIF for six years before reaching to his present role in 2015. He is responsible for managing the lower mid-market investment team in northern, eastern and southern Europe, with a focus on private equity, mezzanine or hybrid and debt funds in the regions.





Grzegorz Zielinski
Regional director, Poland and the Baltic States European Bank for Reconstruction and Development
Zielinski joined the central Europe and Asian international finance institution, in 1991, having overseen the bank’s activities in the Polish power sector. He holds a postgraduate certificate in European Integration from the EC Research Institute and is a member of the Association of Chartered Certified Accountants.

In October 2016, Mid Europa teamed up with global giants Cinven and Permira to acquire Polish online supermarket Allegro for $3.3 billion, one of the five largest transactions in the EMEA region last year. The deal helped push CEE investment to its highest year since 2009.

The deal cemented Poland’s place on the private equity map – and in the sights of some of Europe’s biggest and most powerful players.

Of course, compared with more established markets, CEE is still relatively shallow and dominated by a few key players. This is reflected in uneven fundraising numbers. Buyout funds targeting the region raised €445 million in 2016, up from just €94 million in 2015 but down from a high of $1.1 billion in 2014, when Mid Europa closed its fourth fund on €800 million.

Regional giant Poland is still attracting the majority of that capital. Of the €1.6 billion invested in 2016, €725 million was invested in Poland, Invest Europe data show.

Jacek Siwicki, president of Enterprise Investors, notes the CEE markets have grown at different paces. Although Poland now boasts a broad spectrum of investment banks and intermediaries to facilitate exit routes, he believes other regions, such as the Balkans, are still a “question mark”.

“It is not completely homogeneous,” he says. “There are still countries where certain segments of the investment chain are not as well covered as in Poland or the maturity of the exit market is not there yet.”

However, Matthew Strassberg, co-managing partner of Mid Europa Partners, believes some markets have developed under the radar. GPs that are quick to identify this growth could benefit from a head start on the competition.

“[There’s an] arbitrage between the perception, which is that Central Europe is still an emerging market, and the reality that with the EU accession or pre-accession trends, there is a convergence in terms of regulation, legal frameworks [and a] reduction in corruption, which results in a supportive macro without the volatility that tends to be associated with traditional emerging market environments.”

Nowhere is this lag more evident than Romania. Immediately after the 2007 EU accession, Mid Europa was cautious about investing there as it felt “euphoria” over its new status was leading to mispriced assets.

“The EU accession was more of a political decision to let them in, but it didn’t fully reflect the societal readiness to embrace EU values,” Strassberg says. “Now, we think the time has come for Romania to deliver on the benefits of this arbitrage gap where a lot of people still think of it as an emerging market, but in fact the operating environment is beginning to be consistent with the rest of EU.”


Alongside more established players, a new breed of ‘hungry wolves’ has arrived on the scene to feed on the gaps left by larger firms, says Grzegorz Zielinski of the European Bank for Reconstruction and Development. There is room for these firms within CEE’s private equity landscape, he argues.

“The upper end or the middle end of the market seems to be served better. Development of that lower end of the market seem to be lagging behind a little bit,” he says.

Marco Natoli, head of lower mid-market for northern, eastern and southern Europe at the European Investment Funds, adds that he is seeing new faces in the sector. “In the lower end we see now a lot of interest also from new teams trying to enter because they recognise an opportunity there. They need to prove themselves. Obviously, it is normal to expect that not all of them will succeed.”

Many of these new firms came about through management transitions at established firms. Strassberg himself became co-managing partner at Mid Europa in August 2016, reflecting an infusion of ‘young blood’ in the upper ranks and the emergence of a self-sustaining ecosystem developing at firms across the region.

But effecting a smooth succession plan is not without its challenges, Natoli says.

“Succession can be indeed the turning point in the sense that if it’s properly managed it provides fresh motivation. If it is not appropriately managed it can be also a disruption which is going to have dramatic consequences.”

One of these consequences, of course, is talented executives – perhaps overlooked for the top job – striking out on their own.

“Instead of getting a corporate job with Enterprise Investors, they want to start a fund on their own,” Siwicki says. “So the aggressiveness, [or] at least the optimism is definitely there.”

Although an influx of new fund managers could prove beneficial for the market, Zielinski says the maturation has caused a headache for some LPs.

“There were very few managers to support 20 years ago. It was easy, in a way, to take a gamble and support whoever was new in the market, because everyone was new. Making a decision to invest in a new fund and support a new team is a little bit more difficult [now].”

On the other hand, Strassberg believes the newfound depth of the market makes less established players a more appealing proposition to LPs than during CEE’s infancy. The relative youth of the private equity market in the region 20 years ago meant new entrants were “improvising” due to a lack of experience.

“A corollary to the maturation of the region is that the people who are now in or are getting into the industry can get the experience very quickly,” Strassberg says. “The advisory community [and] the investor community are much more professionalised in how they approach investments. In the past, the whole idea of portfolio construction, the discipline of diversification, was kind of an afterthought rather than a conscious way to approach it.”


As the market matures, international LPs are playing an increasingly major role. Funding from non-CEE European investors tripled to €363 million in 2016, accounting for 58 percent of the total capital raised, according to Invest Europe data. Funding from investors outside of Europe also rose nearly ninefold in absolute terms to €133 million, according to Invest Europe.

As well as providing competition on the fundraising front, a greater number of players in the region will likely reduce the availability of proprietary deals, says Siwicki.

“Talking to LPs, a lot of them are very, very surprised that there are still proprietary deals in the region, because they are used to the hotly contested auctions everywhere else they find in developed Europe.”

Strassberg, however, questions whether the region still boasts truly proprietary deals. He suggests it’s “myopic” for asset sellers not to involve intermediaries and advisors in the sale process.

“They’ll still have somebody watching their back and that person typically will then approach the market to see if there is a better deal out there,” he says.

“Even transactions that are nominally proprietary tend to be priced to fair market value through some sort of process. Frankly, it’s helpful to have expert advisors who can help founders by explaining to them the market norms and therefore facilitating a constructive ‘price check.’”

More players contesting more deals could be pricing some firms out of the market. Buyout and growth exits in CEE totalled €994 million last year, down 20 percent from 2015, according to Invest Europe. The number of companies exited also dropped from 65 to 61.

But with more players in the region comes more exit routes. Sales to other private equity houses became the most popular CEE exit route in 2016, accounting for 46 percent of the region’s total divestment value at historical cost, according to Invest Europe. This compares with 29 percent for the whole of Europe.


The maturation of the CEE market should be accompanied by less volatility in its return expectations, says Natoli.

“In the last couple of years, the returns realised in the region are standing at a comparable level as the returns that we achieve from our portfolio funds in the rest of Europe.”

The GPs in the room are more optimistic about the region’s ability to outperform. Strassberg believes CEE’s “unique market structure” – in which the corporate top players control a smaller share of the sector than in other parts of Europe – lends itself perfectly to a buy-and-build model.

“There is still a tremendous opportunity arising from the inefficiency in the overall way many sectors of the economy operate,” he says.

“The upside from consolidation reflects the availability of businesses that are not really viable on a standalone basis. Therefore, we are able to pick up those targets at attractive valuations and over time through the combination of synergies and accretive acquisitions, create a surplus of return that wouldn’t be available if our portfolio companies simply grew at market rates. Over our firm’s history, our portfolio companies have done nearly 90 add-on acquisitions.”

Siwicki shares Strassberg’s optimism. “Over the next couple of years we should be able to find businesses which grow very fast – surprisingly fast,” he says, pointing to less “sexy” industries, such as retail spending, as having strong potential for growth.

Some growth capital-backed businesses are enjoying EBITDA growth of up to 50 percent each year, he adds.

“Even if we have to pay somewhat higher valuations because of the development of the ecosystem [and] the stock market alternative, which is becoming a viable alternative for many of these entrepreneurs, I think we should be able to keep the returns at a comparable level. Maybe even now and then improve them beyond what we’ve been achieving so far.”

The market is developing at pace, and clearly a new breed of managers is ready to capitalise on the next big growth opportunity.

With the UK Poland’s second largest export destination, according to the United Nations Statistical Division, are our roundtable participants concerned about the potential fallout from Brexit?

“Managers don’t seem to be concerned [whether] this market shuts down completely or there’s tariffs,” Siwicki says. “There are family concerns: how about our family that emigrated, how about our goddamn plumbers that are going to finally come back and fix apartments over here.”

A “total mess” of a Brexit could even prove beneficial for the CEE markets as it will deter potential copycats, Strassberg adds.

“While [CEE] may be grateful for the GDP boost that it gets from the EU … [it] tends to be very resentful about the loss of sovereignty to Brussels, particularly on social and cultural issues. But I think if the Brexit process becomes a cautionary tale on the negative consequences of shaking off the yoke it [might] actually calm down some of the nationalistic zeal in the rhetoric.”

A more prominent fear weighing on the minds of CEE and European investors, Zielinski says, is the threat of a multi-speed Europe. Under this system, markets within CEE could be viewed as having different levels of appeal depending on whether they rely on the euro or their own currency. As Siwicki points out, some EU member states, such as Poland, have retained their national currency as evidence of an existing contrast.

Strassberg is less concerned. “It would effectively allow for a longer transitional period, which would give these countries a little more flexibility to manage their currency and other economic variables,” he says.

“Relaxing some of these impositions could make them potentially more competitive and more [able] to absorb shocks, which is really the big defect of the current system where everything is effectively plugged back to Germany to the extent that many weaker economies can’t keep up. A two-speed Europe could actually be a good way to reflect the reality that there are material differences in how these different countries are ready and equipped to cope.”