Matthew Day in Warsaw -

Gather a crowd of private equity people together in Central and Eastern Europe (CEE) and smiles are thin on the ground. The champagne confidence that once dominated a sector enjoying heady growth has gone, replaced by the sobering realisation that it faces a hard slog with casualties along the way.

At a July conference on the state of the CEE private equity market held in Warsaw one expert started his presentation with a slide of a gravestone bearing the stark motif, "R.I.P. the Good Times"; hardly surprising, given that worldwide, according to research by the mergers and acquisition department of the monitoring company ISI DealWatch, buyout and venture capital activity in emerging markets fell by over 40% in the first half of 2009 to 276 deals, while deal values slumped by 60% to €7.47bn.

In the first half of 2009, CEE deal volumes and their value fell by around 50% in comparison to the same period last year. Poland, one of the region's biggest markets, saw a "dramatic drop in the number of deals done," Dealwatch's Jakub Siekierzynski said in a presentation at the conference.

Marcin Hejka, senior director for strategic investments in CEE at Intel Capital, points out that the factors that once drove growth in the region have disappeared. "The good times came courtesy of massive amounts of cheap debt, rising profitability across all industries, escalating asset prices and allocation of funds from all players," he says. "Now all these factors are going in the opposite direction."

With the private equity market in the doldrums, Hejka believes that, "we're about to face a major shake-up, many funds will go out of business."

Debt disappears

In particular, the problem of raising money has become acute. "It's pretty ugly out there," says Robin Hubbard, director of CB Richard Ellis. "You don't want to be raising money. Twelve to 24 months is a very realistic timetable to raise funds. You need an 'X-factor' to get money, as the criteria is so high amongst investors."

All this comes, he explains, as a remarkable turnaround from a couple of years ago, when "investors lowered their standards and couldn't say 'no'," and raising capital took as little as a month. Experts point out that investors have taken to sitting on their cash and still have little incentive to part with it.

To make matters more complicated for private equity funds trying to raise capital for the region is that the neatly holistic concept of CEE as a region may no longer exist. The global recession has affected economies across the region to such varying degrees that it has become almost impossible to address the region as a whole. With Latvia's economy seen crashing about 16% this year, but Poland still expected to post marginal growth, CEE private equity companies have had to adopt an every-country-for-itself approach as they adjust to the new economic realities. This has raised the need for funds to have boots on the ground in various countries in order to understand just where the pitfalls, and opportunities, lie.

Chuck into this the difficulty that experts now have when it comes to mapping out the economic future, and the continued currency fluctuations, the situation leaves little to smile about for the industry.

Pick and choose

Despite all this, there could be some light at the end of the tunnel. Figures from ISI DealWatch show that Russia and Poland remained attractive destinations for buyout and venture capital developments in the first half of 2009, occupying third and fourth place on the global list with 30 and 20 deals done respectively. Experts point to predictions showing higher GDP growth potential in emerging markets than in the established G7 economies, which should attract the attention of investors. And attention is a good thing, as it appears money is still out there. At a spring conference on CEE private equity, Michael Tojner of Global Equity Partners Beteiligungs-Management claimed that some $3bn to $4bn in "dry powder" - money committed but not yet accessed - was ready for investment opportunities in CEE.

Others in the sector are keen to stress that private equity has the advantage in being elastic and flexible, and so should adapt to the new economic landscape quicker than other industries. The days of large leveraged buyouts in CEE, for example, may have become a thing of the past as funds, governed by a greater sense of caution, invest in smaller firms carrying no more debt than they can pay off. But with a conservative approach, and operating in a market that is not only expected to rebound well but also remain under-penetrated by the private equity sector, Hejka struck an optimistic note at the Warsaw conference. "The long-term future is good," he said at the end of a presentation. "The market will be smaller, but the survivors should do well."

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