Nadia Damon in Sofia -

Fund activity in Bulgaria has typically centred on mutual funds, real estate investment trusts and IPOs in recent years. With the stock market plummeting to five-year lows, private equity funds are coming to the fore.

The dwindling confidence and liquidity in the country's stock exchange is illustrated by Bulgaria's main stock market index, the Sofix, falling from an all-time high of 1952 points in October 2007 to 260 points in February, bringing it to its lowest level since 2003. Throw a gas supply crisis into the mix and it's little wonder then that larger investors have been reluctant to dip too many toes in the water, and have instead been looking at the opportunities afforded by private equity instead.

Deloitte's most recent Central European Private Equity Confidence Survey (December 2008) took the opportunity to point out that 2009 could actually prove to be a key year for this type of fund. "Many private equity professionals in Central Europe see the current environment as a great opportunity and believe that seeds sown in 2009 may reap great rewards," comments Garret Byrne, M&A Transactions Services leader for Deloitte in Central Europe. "Despite the overall current lack of optimism and cautiousness, private equity sees Central Europe positively as one of the regions which will be less hit by a global economic downturn."

The consultancy outlined that some private equity funds are choosing to sit on the sidelines, while others are prepared to do equity-only deals and wait for the debt market to improve for refinancing - and emphasised that portfolio management is now a key focus.

Eastern growth

One private equity fund that has been busy consolidating its interests in Bulgaria is East Growth, launched in 2006 by P&S Luxembourg, and mainly composed of large investors and financial institutions. After investing in the telecommunications sector via its East Growth private equity fund - which focuses purely on this market in Bulgaria (but extends into pharmaceuticals, marketing and other services in other countries within the region such as Romania and the Ukraine) - the fund underlined its plans for expansion by recently completing a deal to merge Bulgarian telecom firms Bol.bg and Powernet.

"We are looking to develop this offering [which is currently restricted to Sofia] into a national telecoms operator - and this was the first step in order to achieve that," states Joze Robeznik, P&S investment director for Bulgaria, who explains the merged organisation will be competing with the likes of BTC, cable operators and smaller firms. "The next step is to gradually move in to other cities and build a strong brand name, and we plan to do this by being really aggressive in terms of acquiring new customers." Robežnik concedes, however, that as yet P&S cannot tell whether this growth will be done through small acquisitions or organic growth - and is simply going for a mix of both.

Unlike the other financial instruments in play in Bulgaria, Robeznik insists the nature of private equity funds makes them a perfect fit for the current financial environment. "When it comes to comparing investments, the big difference here is that our valuations prepared before acquisition are made on cash flow," he explains. "Even if everything else goes down, we still have that - most other investments don't. Also, with East Growth, we barely use any financial leverage, which is a very good thing these days."

This move away from a leverage-based model is something that Deloitte also highlights, stating that the current private equity model may have to adapt, or rather step back, to the model used in the early 2000s, ie. buying at comparatively low multiples, focusing on improving operations, bringing in expertise, realising synergies and selling on again. "To a large extent, this correlates with the overall shift of investor focus from new acquisitions to portfolio management, which will require more managerial and industry expert skills to survive the storm in the short run," Byrne says.

P&S' interest in Bulgaria is also set to increase by the launch of a second private equity fund for the region - East Growth II - for which the company has raised more than €100m to date. That will continue to focus on the areas already developed by the original fund.

Robeznik reveals his goal is to get as large a piece of the cake as possible for Bulgaria - specifically for further investment in the telecoms sector. "Prices are really low right now. We are mainly focusing on telecoms because we have big story here - it's definitely a strongly unconsolidated area and one big opportunity. I am looking to develop this story further."

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