Nicholas Watson in Prague -

Fortune favours the brave, but it helps to be quick too. That's why Italian insurer Assicurazioni Generali and the Dutch-based investment group PPF Group are already working on their second private equity fund, just days after officially launching their joint venture PPF Partners.

On June 1, the two firms announced that PPF Partners, a private equity firm investing in Central and Eastern Europe which is 72.5% owned by PPF and 27.5% held by Generali, was already up and running with initial investments made in the waste management, oil and gas, leisure and media industries in the Czech Republic, Romania and Ukraine. "We've already invested $300m mostly in secondary deals that PPF already had made through its outfit PPF Investments," Mel Carvill, president and chief financial officer of PPF Partners, tells bne in an interview. "For the moment it's fairly defensive - 70% is invested in the Czech Republic and it has a fairly defensive industry spread."

Those assets, worth about half of the €615m committed to the fund PPF Partners 1 LP, include the Czech waste management firms Termizo and Prague Services, Ukraine Cable TV, and Romania's largest business hotel owner Continental Hotels.

The second fund will differ from the first in that it take in money from outside investors. Carvill says the existing investors have already committed just over €1bn and they are targeting "a few billion" euros for the fund in total. "The aim is to have about €5bn in assets under management in about five years - this would make us one of biggest private equity players in the region."

The sectors that succeeding funds will invest into will primarily be consumer-driven areas such as cable TV, retailing and financial services - as the economies return to a growth path and people's salaries start rising again.

Opportunity knocks

The driving force behind the venture is the feeling shared by many private equity players that the global economic crisis has opened up huge opportunities in a region that, while certainly suffering in the short term, will enjoy faster growth once the troubles have past. "We are pretty optimistic about the region. Of course, there are issues today, but in one sense that's a positive, it means prices are cheap. But in the medium term we think the region is going to do well," says Carvill.

Even so, few argue the situation will return to how it was before the crisis, when virtually all the countries of the region were growing at a blistering pace as they hurtled toward western levels of prosperity. If there's one lesson investors have learnt from the crisis this year, it's that phrases like "Central and Eastern Europe" and "emerging Europe" are as much a hindrance as a help. The crisis has exposed weaknesses in some of the region's countries that weren't immediately obvious when things were going well, meaning the recovery, when it comes, is likely to be patchy. "A modest improvement in the outlook for Western Europe means that some countries in emerging Europe - notably Poland and the Czech Republic - could see a return to positive growth in the first quarter of next year," says Neil Shearing, emerging market economist for Capital Economics. "Elsewhere, a recovery is unlikely much before the second half of 2010 or, in some cases, even 2011."

Carvill agrees that the convergence story, while still intact, will also now be one of differentiation. "People have lumped everything in the region in together, but it's clearly not the case. We think those countries that don't have big external funding requirements, for example, are going to be very successful," he says.

That's not to say PPF Partners won't look outside the more mature markets of the Czech Republic, Poland and Slovenia - after all, countries like Albania, Moldova and Kyrgyzstan have been sheltered from the worst of the crisis by the very fact they aren't integrated with the global economy and have little debt. "We are certainly interested in those frontier markets and part of the funds will be invested there," he says.

Private lessons

This foray into CEE private equity by Europe's third-largest insurer is not as curious as it may first appear. Back in 2007, Generali announced a strategy paper in which one of the main decisions was to diversify its asset base of government bonds and equities. Not only is there plenty of evidence that over time private equity provides a better return than public equity, but also that traditional buyouts - ie. not the highly leveraged type that became typical in the years leading up to the crisis - suits the type of liabilities insurers have. "As an insurance company, our average liability duration is about 11-12 years. PPF Partners is not a leveraged buyout firm, we're not going put a lot of debt on these firms and then flip them, we're talking about genuine old-style private equity, so it matches our liabilities quite well," says Carvill.

This longer-term strategy also suits the current conditions, since exits via IPO and even trade sales are notoriously difficult to pull off right now, and the environment for them is not expected to become more conducive for some time yet.

The choice of PPF as a partner was also obvious. Generali and the investment group founded by the Czech tycoon Petr Keller in 2008 set up an insurance joint venture in the region, which has more than 9m clients in 13 countries. It is this client base, connections and existing personnel that the two firms want to leverage in its private equity business.

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