This article appears as part of Private Equity International’s December/January Emerging Markets special supplement.
Private equity activity is heating up in Central and Eastern Europe – and GPs looking to invest there are finding a fresh crop of competitors.
Family offices in certain CEE markets are tough competition for private equity firms, says Helen Rodwell, a managing partner at law firm CMS.
“They have cash, they can hold assets for longer periods, they don’t have the same requirements for internal rate of return and sometimes they buy based more on emotion, which makes them more keen to invest in an asset,” she says.
The number of PE-backed CEE companies increased year-on-year by 50 percent to 398 in 2018 – the second highest level ever recorded. This was driven by a significant increase in venture capital-backed companies. Private equity investment levels were highest in Poland, with companies there receiving €850 million last year. The Czech Republic was close behind with €767 million of investments, while Hungary had the highest number of PE and VC-backed companies last year, at more than 190, according to data from Invest Europe.
Robert Knorr, co-managing partner of Mid Europa Partners, says: “Although the region started full development later than Western Europe, CEE is catching up very quickly and has somehow jumped over certain stages of development.”
Knorr adds that the region has become more integrated into the rest of Europe and investors can find interesting companies in growth sectors such as e-commerce and tech services that can compete on the global stage.
The shift of focus on to the rapidly expanding mid-market has resulted in the creation of new players, says Brian Wardrop, managing partner at Prague-based lower mid-market firm Arx Equity Partners.
“The most notable dynamic we see is that competition for deals in the lower mid-market space is shifting, especially in the Czech Republic,” he told PEI earlier this year. “We view our primary competitors as distinctly local pools of capital rather than regional lower mid-market focused GPs.”
Rodwell says these family offices and cash-rich domestic investor groups have played to their strengths in local knowledge and networks. However, their activity can also distort the market and drive up valuations.
“They are now serious competition with PE firms, and they have over the years been buying, building and selling assets either in the region or abroad,” she says.
Penta Investments: the Czech/Slovak financial conglomerate has been operating in the CEE region for 25 years.
It traces its roots to the early 1990s, when Marek Dospiva and Jaroslav Haščák founded a small company importing Chinese textiles into what was then Czechoslovakia. At the end of 1993, the pair teamed up with Jozef Oravkin, Martin Kúšik and Juraj Herko and founded Penta Brokers. Penta rose to prominence during Slovakia’s 1996 privatisation boom, when it acquired the country’s largest investment fund VÚB Kupón for less than its market value.
In the following years, Penta made further investments in pharmacy and real estate, and expanded beyond Slovakia and Czech Republic, primarily into Poland through the acquisition of Żabka, the country’s largest independent food retail chain.
“The market is now very different compared with the late 1990s. After the Berlin Wall fell, a new frontier period opened in CEE: the most successful companies were the agile, well-connected risk takers,” says a spokesman for Penta.
Due to the changing economic landscape in the region, Penta shifted its strategy around 2010 to a more long-term approach and honed in on sectors including healthcare, financial services, retail, manufacturing, media and real estate, the spokesman adds. The firm has also been known to team up with Chinese investors that want a foothold in the region.
Penta, which invests from its balance sheet, made nearly €800 million-worth of investments in 2018, says its spokesman.
Polish Development Fund: State-backed Polskim Funduszu Rozwoju (Polish Development Fund) was set up in 2016 to back SMEs in the country.
In the last three years, PFR has invested around 21.6 billion zloty ($5.7 billion; €5.1 billion) for the development of Polish companies; 800 million zloty was invested in venture capital, according to its website.
It has ramped up dealmaking and served as a viable exit strategy for CEE-focused firms, including Mid Europa Partners. Its investments span rail manufacturing company PESA Bydgoszcz, cable car and ski lift provider Polskie Koleje Linowe, as well as container terminal DCT Gdańsk.
It has also backed Warsaw-based venture firm Cogito Capital’s debut fund, which held a first closing on €55 million in July, and Innova Capital’s €271 million Fund VI. The same month, PFR established a 2.2 billion zloty co-investment vehicle that will invest alongside private equity and venture capital firms.
PPF Group: the Czech investment firm, owner of Chinese consumer finance company Home Credit, is another LP to watch.
From Slovakia to Montenegro and Vietnam, its investment activities span banking and financial services, telco, real estate, engineering and biotechnology. The firm also made a bid for assets sold by Anheuser-Busch InBev following its takeover of SABMiller’s European beer brands. Rival bids for the beer brands worth over €5.5 billion came from private equity giants Bain Capital, Advent International and KKR. Japan’s Asahi Group Holdings eventually won the deal.
In October this year, PPF agreed to pay $2.1 billion to acquire multinational media conglomerate Central European Media Enterprises from AT&T.
PPF is headed by Czech billionaire Petr Kellner and dates to the early 1990s when it was established as an investment fund and participated in the privatisation of the country’s economy following the collapse of the communist system. PPF’s assets exceeded €45 billion as of end-December last year, according to its website.