At first glance the private equity market in central and eastern Europe appears to be in rude health. Funds focused on investing in the region raised more than $3.6 billion in the first half of this year, according to the Emerging Markets Private Equity Association.
That’s already more than the amount raised for any of the previous four years. If the present pace of fundraising is maintained, double the amount of money raised that was dedicated to CEE in 2006 could be raised in 2007. Most of the attention is focused on Russia and the CIS, which account for $2.1 billion of total commitments.
Interest, though, is high across the entire region. At the end of August, for example, Mid Europa Partners, a London private equity house, raised €1.5 billion, with much of its focus on the EU accession states. The fund is a record for a buyout vehicle concentrating on central and eastern Europe. The Mid Europa Fund III is nearly twice the size of the previous biggest dedicated fund, and raised €250 million more than was originally intended, a tremendous achievement given the market turmoil at the time. Commitments have been drawn from the US and Europe.
Other financial sponsors have been equally busy. In May, AIG Global Investment completed the region’s biggest buyout when it acquired Bulgarian Telecommunications for €1.7 billion. 3i, Carlyle and Advent International are also making moves in the region through key hires and new offices in important markets such as Poland and the Czech Republic.
What could detract from the general jubilant mood? Well, at the same time that the leading global and regional private equity firms are raising money, another type of investor, CRG Partners, has just received commitments for a €150 million fund, also dedicated to central and eastern Europe.
CRG is a crisis management firm that focuses on underperforming and distressed equity investments and debt instruments. It turns around entire funds as well as specific companies, in the middle-market segment (firms with revenues of between €25 million and €125 million).
Some of CRG’s senior partners reckon that despite the strong levels of fundraising, a much more worrying trend is emerging. They say that although 5% of an economy is always distressed, even during good times, that level is now rising to between 10% and 20% in emerging Europe. On the back of mounting economic problems, especially in the Baltic republics, the Balkan states and central Europe, and an oversupply of capital over the past decade, they argue that exit strategies are becoming more difficult and that assets are languishing.
The firm has already taken over one failed fund in the Baltic republics, and another based in Vienna with a central Europe focus, and is running the rule over a Turkey fund too.
CRG is confident that it will extract plenty of value from stressed assets and so has set a minimum internal rate of return target of 30% for its new fund, almost twice the average return being made by conventional private equity investors in the region. The worm could be turning.