Private equity firmly establishes itself in Central Europe

By bne IntelliNews May 25, 2007

Patricia Koza in Warsaw -

After years of struggling to establish a foothold in Central Europe, it looks like smooth sailing for private equity for the foreseeable future.

Three factors have been primarily responsible for the rapid expansion of private equity in Poland and the rest of Central Europe. First, there's more capital looking for investments worldwide. Secondly, managers who previously avoided Central Europe are taking a second look, drawn by the impressive growth rates of New Europe's economies. And lastly, private equity funds have shown themselves to be good performers,

Another change is that the market is so hungry for IPOs that PE funds are choosing to exit their companies earlier and sell a larger stake - sometimes even 100% - on the Warsaw Stock Exchange, by far the most active bourse in the region.

The favourable factors have attracted some of the bigger PE players. Bridgepoint has opened an office in Warsaw and the UK's 3i has moved a new team into the region. The influx, and the added competition, is expected to help boost both deal size and valuations.

Aside from external factors such as a worldwide recession, there appears to be nothing to stop the advance of private equity.

"We're going to see more players, bigger deals and good exits," says Krzysztof Kulig, partner with Innova Capital, which was founded in 1994 and manages €500m in four investment funds. "We're also going to see private equity getting into more niche-oriented industries that previously were too small."

Robert Manz, managing partner of Enterprise Investors, gives as an example the level of interest last year in his firm's sixth fund, which at €658m is more than twice the size of its predecessor. Since 1990, Enterprise Investors has managed the largest group of private equity funds in the region. Total capital committed to its funds exceeds €1.6bn.

"We closed in three months and we were twice oversubscribed, so it was a huge success," says Manz. While interest came mostly from Western Europe, 35% of the investors are from North America.

"From our perspective, the [PE] market is booming," he says. "You have fundraising which is clearly very strong. And on the investment side, some large deals are being done in the region."

Key to success

The buyout market is the key to the booming private equity market. The equity gap is bigger in the region than in Western Europe, so it's clear the buyout segment is where the activity is happening.

Enterprise Investors' Funds V and VI recently scooped up floor coverings retail chain Komfort in a buyout for €64m, with half the transaction financed with acquisition debt provided by Poland's Bank Zachodni WBK SA. It also recently announced a buyout of Jaan Autoglas, one of the European leaders in windscreens.

Part of the impetus for the emergence of a strong buyout market is a growing acceptance by local entrepreneurs in Central Europe to part with their home-grown businesses.

"There's much less of a mentality that 'I want to keep the business for five generations,'" says Jacek Pogonowski, partner at SGAM AI (Société Général Asset Management Alternative Investments Private Equity), which manages a €160m mid-market fund that seeks expansion and buyout opportunities in the €15m-€40m range in Central Europe as well as the Baltic states and Ukraine.

"I think you will see strong growth in the buyout segment, like in the West," Pogonowski says.

If PE managers in Poland have any complaint at all, it's that valuations are on the high side – significantly higher than 18 or 24 months ago.

"That's a sign of the times," says Innova's Kulig. "You can't buy cheap any more. You have to look to other ways to make your money."

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