EXPERT'S VIEW Romanian market in 2022 - M&A and the domestic specificity

Romania is among the CEE region’s fastest growing economies with an estimated GDP growth rate of 4.2% in 2022. In 2021, the country also saw a steady increase in the M&A activity similar to that of the neighboring countries, but not without local specificity. We asked Bogdan Chirita, Investment Director at Value4Capital, to share his outlook on the Romanian M&A and describe what V4C – as a private equity fund – focused on in the post-pandemic market reality.

According to public sources (EY) the market grew to 6.2 bn USD (from 5.2 bn USD in 2020), a 38% increase, and totaled 178 transactions. A good portion of these deals in 2021 are atypically large deals (such as the acquisition of ExxonMobil’s participation in the Neptune Deep gas project by Romgaz for 1.1 bn USD, the 46% acquisition of the remaining Globalworth shares by the Luxembourg vehicle CPI Property Group for 0.85 bn USD). The majority of the deals (>90%) were strategic purchasers, while approximately 15 were driven by financial buyers or private capital.

A couple of trends should continue to dominate the M&A landscape in Romania for 2022, caveated obviously by the recent invasion of Ukraine, which may significantly disrupt activity in the short and potentially medium term:

• Globally: post-Covid-driven demand rebound and growth, dampened somewhat by inflationary pressures, should provide a good backdrop to deal activity across many sectors;
• Romania – and EU – specific: investment in infrastructure – the EU Resilience Plan, where a good portion of the funding would go green energy transition and digitalization, should continue to support deal making in these areas
• Romania – and CEE – specific: the trend to re-shoring of some manufacturing capabilities from SE Asia (and of late the CIS region) may create opportunities for production platforms to sell out to incoming strategics.

In terms of sector consolidation, most businesses are feeling the pressure to scale and achieve economies of scale in an increasingly competitive environment. Few sectors are immune. In the framework of what V4C is looking at, we see the following:

• The medical space continues to consolidate with the leading players, and especially MedLife, leading the charge to add local or specialized players to their network;
• Agriculture, both in the operation of farms and among input providers space, grows in sophistication, necessitating greater scale;
• Green energy, where acquisitions or other development moves are expected to evolve in 2022 as the sector matures; and
• The tech sector (digital enablers of the economy or process automation) either as VC or growth capital investments, as the winners emerge and portfolios of services are built under one umbrella.

In our recent CEE Expert Report we wrote that a new trend was observed in Romania in 2021 of entrepreneurs staying as companies’ managers even after 100% buyouts, not only for a determined handover period, but for the long term. Can you refer or elaborate on it?

The answer is more nuanced, and it depends on the size of the company, the maturity of the sector, and the type of purchaser (Private Equity or Strategic).

In theory, for Strategic players and 100% buyouts a handover period is customarily linked to some form of earn-out. Cooperation can continue if targets are met or the business is specific enough that Founder Manager is important for the stable growth of the company. We do often see a natural change in the focus of the Founder Manager as she continues: with their own money from the sale, thoughts often return to not having to report to someone and the freedom to pursue one’s own ideas. Once an entrepreneur, always an entrepreneur.

For PEs there are a couple of specific cases:

1) The Founder Manger is present in the business, has not delegated day-to-day management and there is no structure below him. In this situation, in a 100% buyout the entrepreneur would be kept for a longer period of time, until the structure is built, a successor is identified and she/he gradually phases-out of daily operations. If the buy-out is partial (majority/minority buyout), the Founder is probably viewed as essentially and would be kept (barring underperformance, etc.) throughout the holding period (medium term 3-5 years).

2) Founder Manager has built the structure and processes and is less involved in the daily management. In this case, the replacement of the Founder is easier and the time can be shortened. In the case of 100% buyouts, immediate replacements might be identified and brought in as a key part of the PE’s value build plan. In other cases, more often, there is a transition period and the Founder Managers move into a more Strategic, board-like role fairly quickly.

For all of the above, the size of the company (which equates in many cases with the presence of a real management structure) matters and will drive the decision to keep or not the Founder Manager on board for a longer period of time.

Looking from the perspective of Value4Capital, we rarely take an Founder manager fully out. For PE, it is a transition, which is often lasts through the PE’s holding period. We also see and are ready to support many founders who want to use PE as a stepping stone to longer term ownership. They need capital or want to take some money off the table now but have no intention of ceding control or ownership in the mid-term.

Medlife, in many ways a family business, is an example where PE was a bridge to a listing and continued ownership by the Marcu family. Especially in younger, tech oriented companies, the now second generation founders (the first being business founders/owners of the 1990s/2000s) want to stay and minority stakes are more and more on offer to PE. We are looking at these actively — going back to more growth deals with founders inherently involved.

We split our time between portfolio and new deals.

Last year, we worked on doing deals to finish investing our current fund, V4C Poland Plus. We still have capacity to do between 2-4 deals and keep some money in reserve for follow-ons. We looked at a range of opportunities, both in Poland, Romania and other neighboring markets, but did not find a target that met our criteria. That criteria includes price, where last year, in retrospect the top of the cycle, was in our view very pricey.We now have a couple of deals which are progressing, and we aim to sign one Romanian deal in the first quarter of 2022.As well, the Romanian office was busy managing the investment we did before Covid-19 in Hungary, Doktor24, by supporting the integration of acquisitions done in 2020 (March and August) as well as signing and closing two acquisitions in 2021 and early 2022.