Rob Smyth in Budapest -

Central and Eastern Europe is currently a focus of the global private equity firm The Riverside Company as the region's entrepreneurs consider how to either move their companies on to the next level or to retire with no natural heir in sight.

With its €420m Riverside Europe Fund IV, the mid-cap private equity firm expects to make two acquisitions in the region in 2011, to add to the two made earlier from its €320m Riverside Europe Fund III, and the nine investments from earlier funds. "We see good opportunities and an uptake in deal flow, we'll hopefully be closing two deals this year in the region," Balazs Tahy, vice president, tells bne. "Our vision is to acquire small leaders, make them bigger, better and make a profitable exit. Companies we'd consider investing in need to have a well-defined niche and a leading market position."

Riverside focuses on acquiring growing enterprises valued at up to €200m. "We are not a turnaround or restructuring firm," adds Tahy.

Tahy wouldn't disclose which sectors or countries these deals are likely to occur in. However, he says the private health sector is particularly attractive in Poland and Romania, though adds that in the former private equity is competing with a powerful stock exchange as a source of capital, while Romania is struggling with its economy, which has reduced deal flow.

The global economic crisis, which had a particularly harsh impact on CEE, has served to bring very high valuations on companies down to more reasonable levels. However, it also led to owners holding on to their companies rather than selling at those cheaper levels, which had had the effect of slowing the deal flow.

Now a general economic recovery is underway and so many entrepreneurs are looking for capital to expand their businesses to take advantage of the improved conditions. "Many companies are limited by management, who are afraid of venturing out and don't have sufficient experience of foreign markets in moving their companies forward," says Tahy.

While it is good that some companies often want to grow beyond what are often limited local markets, Tahy also urges caution in jumping too far, too fast. "Everyone is out to get global dominance, but we have to be realistic. We are set up to help companies expand their current economic footprint, the question is whether a company is ready for that leap," he says.

Looking for the exit

Riverside's strategy is to grow the firms it invests in through organic growth and bolt-on acquisitions. He also mentions that Riverside is looking to take on well-established businesses built by some of the region's entrepreneurs. "CEE has a very strong entrepreneurial segment, some of these people have built up companies from scratch and are looking to exit and retire, and don't have a natural successor to hand the business over to."

For Riverside, CEE also includes Turkey, where last year it invested in Istanbul-based Tropikal, which it describes as the leading distributor of international pet care brands, and the first domestic pet food producer in Turkey. This marked the company's first investment in the region from its €420m Riverside Europe Fund IV, and was its 11th acquisition of 2010 and 234th overall. It was also its very first investment in Turkey. "The Turkish pet food market is relatively young, but growing at an exciting pace," says Adam Pietruszkiewicz, Riverside principal, adding that his firm plans to reinforce Tropikal's market leadership position and expand its product offering and further brand development in the years ahead. The founders of Tropikal are continuing as minority investors, while the CEO and other top management have remained with Tropikal.

In December, Riverside exited Computer Press, a Czech book and magazine publisher that it invested in from its Riverside Europe Fund II, after five years. Its other exited Czech investments are: Carborundum Electicrite, an abrasive products manufacturer; SpofaDental, a dental products manufacturer; and Primalex, a paint manufacturer.

In Poland, Riverside has held and exited four other investments: KFM, a manufacturer of thermostats and gauges, which it held for just a year; Megachemie, a manufacturer of construction materials and chemicals, Mifam; a manufacturer of disposable needles; and Zetkama Producer of industrial valves, fittings and iron castings. The latter was exited after eight years.

While the owners may be prepared to sell on, it's the people in the company that Riverside is buying into every bit as much as the product, emphasizes Ferenc Vidovszky, senior partner and head of Riverside's Budapest office, which coordinates regional investments. "We like to work with strong management teams and help the companies realize new opportunities," he says.

Riverside began its activities in CEE in 1988 when founder Bela Szigethy, himself an American of Hungarian descent, contacted his cousin Vidovszky.

Riverside's sole active investment in Hungary - Diatron Group, which develops, manufactures and markets compact hematology analyzers for the human medical and veterinary markets - acquired Metrolab of Argentina in 2008, has a presence in Vienna and sells its products in 60 countries. Riverside made its majority investment in Diatron in December 2005 from its Riverside Europe Fund III. With the same fund, Riverside also became majority owner of MK Chimney Systems in Poland.

Riverside typically invests 10-15% of the equity of one fund into a single company and looks to generate a rate of return of around 20%. It has generated an internal rate of return for investors of over 50% from its 50 exits. Riverside takes a majority stake and usually holds firms for five to seven years, but its previous investment in Hungary spanned nine years.