| Chris Mruck, director of Avent International's CEE fund, says buyouts financed with pure equity have hampered returns. |
THE CENTRAL AND eastern European private-equity market set out in the early 1990s with high expectations. They were not met. Rob Conn, managing director at Innova Capital, which manages about $300 million in three CEE funds, says: "Since 1994, in Poland, Hungary and the Czech Republic, probably 65 funds were established. As of this April, only 20 have available capital. Most fund managers raised one fund, and are no longer in business."
He adds: "Emerging-market private equity in general has been a disappointment. The primary reason is FX losses. During the life of our first fund, the Polish zloty halved in value, so we had to double our money just to get our cash back."
In CEE, another key problem was lack of access to leveraged finance. The CEE banking market was privatized late, towards the end of the 1990s, and the countries' state-owned banks were not interested in providing leveraged finance to private-equity funds.
The banks were, however, prepared to provide extremely cheap financing to local management for management buyouts, because they had personal connections to the management.