CEE private equity: Back to basics

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Central and eastern Europe is attractive for private equity houses. But they need to get their priorities right.

Central and eastern Europe is not an obvious location for private equity. Nevertheless, the region offers decent deal flow. Even in Russia, with its slowing economy, private equity players point to some excellent stories in the retail and e-commerce sectors.

Last year there were several encouraging exits in the region. Take the €400 million sale of Polish healthcare provider Lux Med to UK healthcare firm Bupa, or the $1 billion-plus sale of Serbian cable television and broadband firm SBB to US private equity firm KKR. In both cases regional specialist Mid-Europa Partners was the seller.

October’s $1.09 billion IPO of Russian consumer finance bank Tinkoff was also a private equity story. Goldman Sachs’s private equity arm, which has backed Tinkoff since 2007, reduced its stake via the IPO, as did three eastern Europe-focused private equity firms: Baring Vostok, Horizon Capital and Vostok Nafta.

As these stories show, there are some interesting and effective private equity firms working and specializing in the region.

Private equity is vital for the region today, as even the best-run and best-managed small and medium-sized enterprises find it hard to access bank funding. But with some exceptions (notably Poland) local banks also have scant means to finance private equity transactions.

Private equity fund managers complain that regional banks are becoming little more than fixed-income funds investing in sovereign bonds. One answer for regional private equity deals is to tap the credit arms of global fund managers.

In terms of exits – and as banks continue to deleverage and struggle under the weight of non-performing loans – local capital markets are key. But these are constrained by ageing populations. In some cases ( Hungary, and now Russia and Poland) politicians are undermining development of local funds to plug pensions deficits.

For private equity funds, this means that achieving returns means going back to basics. Professionals with structured-finance expertise are less in demand. Private equity in the region is more than ever a game of finding and developing the best business stories.