FUNDS: A succession of private equity deals in Central Europe

By bne IntelliNews August 4, 2010

Nicholas Watson in Prague -

Prague-based Arx Equity Partners' latest deal, a leveraged buyout of the largest independent Czech producer of mortars used in construction, is one of a series of succession-related buyouts that are becoming a prominent feature of Central Europe's private equity market.

On August 4, Arx said it has completed an LBO of about three-quarters of Krkonosske vapenky Kuncice (KVK) and its subsidiary Parabit Technologies for an undisclosed amount (KVK's annual sales exceed €30m). KVK has been owned by a group of Czech-Canadian shareholders since the late 1990s, only one of whom, the chief executive, still had anything to do with the running of the business. With those individual investors now reaching retirement age and keen to exit their investment, Arx worked with the CEO to take over the company.

How this deal differs from similar succession deals in Western Europe is that of course it's not a family-owned business. Rather, like many businesses in Central Europe it was started (or privatised) by a group of entrepreneurs in the 1990s after the collapse of communism, who have since grown the business and are now in their 50s and approaching retirement age.

In most cases, the past 15 to 20 years has not panned out the same for all the partners in these businesses: some are more committed to the running of the company than others; some have fallen out with the other founders; some have moved on to other ventures, which may themselves need funding; some have died and passed on the stakes to family members. "By definition, these companies have a slightly dysfunctional ownership/management structure in what are otherwise highly successful businesses," says Brian Wardrop, managing partner of Arx, who has worked in the region for the past decade and a half. "What we do is try to find a solution that benefits all the parties - there might be some owners looking for a full exit, while others are looking to partially exit but remain partially invested with us."


This is not Arx's first, nor will it certainly be the last, of such succession-related transactions in the mid-market, which in this part of the world typically means an equity target size of €3m-15m. Arx's third fund, the Arx CEE III fund, which it closed in the fourth quarter of 2008 at around €102m, did an LBO in April of 2009 of three partners in the Czech Republic's largest eye surgery business, Lexum, and will now take the business forward with sole remaining founder Professor Martin Filipec. In January, the fund did a bolt-on acquisition, buying a major player in Poland's eye surgery business called Intermedica. "The other shareholders in Lexum weren't interested in taking the risk, putting in the work or any other aspect of trying to create the Central European leader in this sector," says Wardrop.

Nor is Arx the only private equity house to be targeting such deals. Genesis Capital, another Prague-based private equity firm which completed the first closing of its second fund at €40m on June 30, is also active in this area. "Our second fund will take advantage of the more difficult environment for companies to access long-term debt and also these succession-related situations," says Jan Tauber, managing partner of Genesis Capital. "We're a bridge to help most founders cash out, while leaving one or two to stay on in an advisory capacity and to cash out at the exit in three to five years."

While competition amongst the region's private equity players for these succession deals is sure to grow, the number of available opportunities also looks set to proliferate as more and more company founders hit their 50s. Looking at the Czech Republic, in 2003 the number of companies with annual revenues of over CZK200m (£6.64m) and at least one owner older than 50 years old was 323; in 2008, this number had grown to 1,080, a compound average growth rate of 27%. "This, I think, tells the story of what will really drive private equity over the next decade in Central Europe at deals sizes of up to €50m," says Wardrop.

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