Forbes.com

Central and Eastern Europe are complex but attractive for private equity

Many of the trends unfolding in the region are reminiscent of the early days of private equity activity in the West.

By Hugh MacArthur, Graham Elton, Bill Halloran and Suvir Varma

Published on June 08, 2011
min read


As we discussed in our previous post, private equity (PE) investors are increasingly turning to target markets outside of North America and Europe. And while China, India and Southeast Asia top the list, PE interest is not limited to those regions. As we describe in our recent private equity report, Latin America is also attracting attention, particularly Brazil. So are Central and Eastern Europe (CEE), which we explore here. A diverse region made up of former Soviet satellite states from Poland to the Balkans and including Turkey, CEE will continue to benefit from strong economic growth, closer integration with the EU, favorable demographics, and rising consumer and retail demand. As countries across the region continue to harmonize their economic and legal systems, business and consumer confidence is improving. Across industries, major investment themes in the region include the privatization of formerly state-owned industries, consolidation by small and medium-sized enterprises (SMEs) and carve-outs. Another potential area for investment is the increased presence of PE firms’ non-CEE portfolio companies in the region. With regional governments more open to foreign ownership, privatization opportunities are likely to continue, albeit at a slower rate, and could provide scale investment opportunities. Ongoing SME consolidation provides PE firms the opportunity to build scale and add management capabilities. Finally, as many conglomerates across the region move to streamline their portfolios and divest businesses, carve-outs become an attractive investment opportunity for PE investors going forward. Many of the trends unfolding in CEE are reminiscent of the early days of PE activity in the West. As such, lessons learned two decades ago in the US and Western Europe are relevant to investing in the region today. Not surprisingly, the promising macro view of CEE is complicated by several challenges. The business environment still lags EU standards. Investment protection, regulatory red tape, and political and economic volatility remain persistent problems. Also, competition for the larger acquisitions will be fierce, as corporations trying to penetrate these fast-growing markets will be drawn to these large companies as platforms for expansion. Most PE deals will likely involve midsize and smaller companies. Another bottleneck for PE deals in the region is the lack of availability of deal exits through IPOs. Finally, with their different languages, currencies, and political and economic dynamics, CEE and Turkey are by no means homogeneous markets. Thus, PE firms will need to develop localized playbooks to increase the odds of success. Building a network of local advisers and industry experts, as well as having knowledgeable people on the ground, will be critical for getting into the deal flow and successfully managing portfolio companies.

As we discussed in our previous post, private equity (PE) investors are increasingly turning to target markets outside of North America and Europe. And while China, India and Southeast Asia top the list, PE interest is not limited to those regions.

As we describe in our recent private equity report, Latin America is also attracting attention, particularly Brazil. So are Central and Eastern Europe (CEE), which we explore here.

A diverse region made up of former Soviet satellite states from Poland to the Balkans and including Turkey, CEE will continue to benefit from strong economic growth, closer integration with the EU, favorable demographics, and rising consumer and retail demand. As countries across the region continue to harmonize their economic and legal systems, business and consumer confidence is improving.

Across industries, major investment themes in the region include the privatization of formerly state-owned industries, consolidation by small and medium-sized enterprises (SMEs) and carve-outs. Another potential area for investment is the increased presence of PE firms’ non-CEE portfolio companies in the region.

With regional governments more open to foreign ownership, privatization opportunities are likely to continue, albeit at a slower rate, and could provide scale investment opportunities. Ongoing SME consolidation provides PE firms the opportunity to build scale and add management capabilities. Finally, as many conglomerates across the region move to streamline their portfolios and divest businesses, carve-outs become an attractive investment opportunity for PE investors going forward. Many of the trends unfolding in CEE are reminiscent of the early days of PE activity in the West. As such, lessons learned two decades ago in the US and Western Europe are relevant to investing in the region today.

Not surprisingly, the promising macro view of CEE is complicated by several challenges. The business environment still lags EU standards. Investment protection, regulatory red tape, and political and economic volatility remain persistent problems. Also, competition for the larger acquisitions will be fierce, as corporations trying to penetrate these fast-growing markets will be drawn to these large companies as platforms for expansion. Most PE deals will likely involve midsize and smaller companies. Another bottleneck for PE deals in the region is the lack of availability of deal exits through IPOs.

Finally, with their different languages, currencies, and political and economic dynamics, CEE and Turkey are by no means homogeneous markets. Thus, PE firms will need to develop localized playbooks to increase the odds of success. Building a network of local advisers and industry experts, as well as having knowledgeable people on the ground, will be critical for getting into the deal flow and successfully managing portfolio companies.