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It is over three decades now that CEE enjoys continued growth and development since it started picking up in the early 1990s, and private equity has been a part of this restart since the early days. As CEE and Europe as a whole have continued to develop, investment themes and strategies have evolved, and the region has responded with innovative and appealing opportunities. The investment and value creation strategies that private equity is employing today in CEE present an exciting phase of growth and innovation in the next three to five years.
Positioned in the heart of Europe, the CEE region offers easy access to the EU single market and its market of continually increasing consumer demand. Well-educated, skilled professionals are supported by experienced local general partners (GPs) in an environment where innovation is embraced by the government.
Source: S&P Global Market Intelligence. Data based on reported transactions completed between 2015-2021 with targets based in the CEE region.
While the COVID-19 pandemic continues to impact business around the globe and potentially accelerate trends such as digitalization that will open up new opportunities for private equity, some of the key themes that are expected to continue to dominate in the region for years to come will include the following:
Many CEE establishments are great businesses but are not yet great companies. They often lack the structure, processes, and resources to rapidly capture emerging opportunities. In such cases, private equity can act as the impetus for them to capture new markets, better serve existing clients and strengthen management teams. CEE GPs are experienced in unlocking the potential of these businesses to capture the underlying value and accelerate their portfolio companies’ growth and development.
Whether it is the need for new ownership as the founder ages in a region without a family succession culture or a corporate child created from shifts in global strategies, CEE private equity has proven expertise in managing ownership transitions. For the many founders who have built successful businesses, teaming up with one of the region’s experienced GPs is often the preferred way to crystalize their first fortunes and ensure future prosperity. For private equity, successfully managing the transition process raises the company’s chances of a higher multiple and a wider range of potential buyers at the exit.
CEE is also increasingly home to venture, technological investment, and innovation. The region’s traditionally strong technical education and skills, available human resources in areas such as programming and development, dynamic local environments, and government support programs that recognize the importance of developing innovative businesses have changed the investment landscape. Experienced GPs are now supporting these businesses and raising even more capital targeted to venture investment. The growth trend is expected to continue going forward due to the record level of VC fundraising over the last 2 to 3 years.
Increasing pressure from global competition and greater market complexity is demanding many CEE businesses reconsider the advantages of independence, creating opportunities for portfolio companies to be successful consolidators. Private equity’s ability to provide capital, acquisition skills, and, importantly, integration expertise can unlock these opportunities and lead to the creation of clear market champions, improving growth and margin dynamics while enhancing exit values.
S&P Market Intelligence data shows that from 2015-2020, the majority of sponsors YoY in CEE deals were domestic PE/VCs at 61% on average. However, in 2021, foreign sponsors accounted for 56% of the total number of investors participating in transactions, which is a 168% growth over 2020. 2021 also marks the first year when the number of foreign PE/VCs participating in CEE transactions exceeded the number of domestic sponsors.
Source: S&P Global Market Intelligence. Data based on reported transactions completed between 2015-2021 with targets based in the CEE region.
When it comes to reported deal value, foreign investors were clearly in the lead in the period 2015-2019; however, in 2020 domestic sponsors started bringing more money into the transactions, which increased the value of mixed transactions. As plenty of fresh capital is eagerly awaiting to be deployed, Market Intelligence data shows that the CEE region is gaining momentum with GPs on the lookout for new opportunities which can yield higher returns. However, it is no denying that investing in an economically and geopolitically unstable location requires skill, expertise, and the right data to circumnavigate the different cultures, structures, and business activities in the vast region of CEE.
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Deputy Vice-President at OakNorth Bank
Sourabh has close to 14 years of experience, working extensively with private equity, investment banking, and corporate clients in the areas of M&A, deal origination, commercial due diligence, and value creation.
