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Private equity investment in central and eastern Europe recovered last year after the prolonged hiatus caused by Russia’s financial collapse in August 1998. According to Kurt Geiger, head of financial institutions at European Bank for Reconstruction and Development (EBRD), between December 1998 and September 1999 the bank was unable to close a single fund because an insufficient number of investors were willing commit. “The last 12 months has seen the return of blue-chip investors such as US pension funds, endowments, private companies, funds and individual investors,” notes Geiger.
There is little consistent data available for the region. EVCA and Pricewaterhouse
Coopers included the Czech Republic, Hungary, Poland and Slovakia in its half-year study for 2000, and performed pilot studies for 1998 and 1999, which are not directly comparable. According to mid-2000 data these four countries raised E159.3m of which 73% went to Poland, but as the survey is based on responses many transactions have gone unreported, while many of the region’s private equity and venture capital associations are not active. The Hungarian Venture Capital and Private Equity Association is an exception. According to data for January through November 24, 2000 from member firm Venture Capital Partners, based on responses from 33 companies, $74m (e80m) was invested in Hungarian private equity, into 31 companies, compared with $41m into 11 companies in the whole of 1999. With 39 transactions in 2000 against 12 in 1999, the deal sizes were inevitably smaller. By value, media and entertainment accounted for 24%, Internet businesses 23%, medical 19% and telecommunications 13%.
The total size of the market, including countries such as Romania which have generated some significant deals, is also open to speculation. Joanna James, managing director of Advent International in London, estimates from published funds, that in the five years up to September 2000, $4.25bn of private equity capital was raised in central and eastern Europe. This figure includes Poland, Czech Republic, Hungary, Slovakia, Romania and Croatia, and some regional funds covering Bulgaria and the Baltics. At EBRD, whose remit includes Russia and the CIS, Geiger believes anything between $8bn and $10bn has been raised. EBRD itself, as the region’s largest single private equity investor, has committed o2.4bn in total equity investments, and is the largest Fund of Funds with o1bn in commitments.
By country Poland continues to attract the largest amount of all the former communist countries, followed, in central Europe by Hungary. With a population of 39m, Poland has an obvious advantage of market size as well as a geographically dispersed economy and consistent economic growth since 1993. Along with Hungary, Czech Republic, Slovenia, Slovakia and the Baltic countries, it is deemed a front-runner for European Union membership, and this so-called ‘EU convergence play’ is becoming the dominant trend for all types of investment in the region. “All convergence countries will have economic policies that bring them closer to the EU regardless of when they become members,” says EBRD’s Geiger.
Meanwhile Romania languishes at the end of the queue for EU accession. As the second largest country in the region (population 22.5m) it nevertheless generates the occasional private equity deal and many funds have established offices in Bucharest. One of the most successful private equity transactions last year involved the sale (for an undisclosed amount) by Advent International and Jupiter Asset Management of Romanian Brewing, a group of three breweries, to BBAG, Austria’s market leader in beer sales.
Within central Europe the funds are getting bigger, $150m-200m compared with $50m three years ago, and regional funds are displacing country-specific ones. “This is driven by the desire of investors to diversify their risks and maximise their abilities to find the best investment,” explains Advent International’s Joanna James. Advent itself, which has been investing the region since 1995, has offices in Budapest, Bucharest and Warsaw, and works with affiliates in Bratislava and Prague to cover the activities of its $200m regional fund set up in 1998.
“The funds are also looking for companies acting in more than one country,” adds Viktoria Zombory, portfolio manager at Raiffeisen Private Equity in Vienna and chairman of the Hungarian Venture Capital Association. Raiffeisen Private Equity, along with GE Equity and ABN-Amro Capital and founder Andy Vajna participated in Hungary’s largest private equity deal in 2000: $25m of development capital for InterCom, the country’s leading film and video distributor, and multiplex cinema developer with operations in Hungary, the Czech Republic, Croatia and Romania.
This, observes Janusz Heath, head of central and east European private equity at Dresdner Kleinwort Capital in London, is a far change from the initial private equity approach in the region when investors looked for cheap assets that they could then nurture and sell on to foreign companies looking for a presence in the region. “The private equity market has matured. It is looking for truly well managed, high-growth businesses which have the capacity to be globally competitive.”
One of the highlights of last year’s private equity business was the decision by California Public Employees’ Retirement System (CalPers), the US’ largest pension fund, to invest in the region’s private equity fund. Calpers invested $150m into Dresdner Kleinwort Benson Emerging Europe Fund, which had its first closing towards the end of last year at $215m, and is doing rolling closings until June 2001. Regionally it will focus on first and second wave EU accession countries. Calpers put a further $50m into Polish Enterprise Fund IV, the largest and most recently established funds managed by Warsaw-based Enterprise Investors (EI) which closed at $300m in October 2000. Although Polish oriented, this fund expects to invest up to 20% in Romania, Czech Republic, Hungary and Bulgaria.
Calpers has still to set a trend for investments of a similar magnitude. Meanwhile the domestic institutional investment market is still in its infancy. Local private pensions funds, which in any case only function in a handful of countries, have stayed out of private equity primarily for legal reasons, although Hungary is expected to legislate this year to allow its funds to invest in the sector.
Technology ventures inevitably attracted a disproportionate amount of capital and included dedicated regional vehicles such as E-xcell Communications, set up by Central Europe Trust of the UK and AIG Capital Partners, part of the US American Insurance Group. The central European telecommunications market has its own dynamics: PC and, in some cases fixed line penetration is lower than in western Europe and North America, and telephone charges relatively expensive. At the same time mobile phone uptake is high, partly compensating for the lag in fixed-line services. “You have to look at central European telecoms businesses in the context of business and regulatory cycles,” notes Janusz Heath. The Czech telecommunications market, for example, only became fully deregulated at the start of this year.
Two of Dresdner Kleinwort Benson Emerging Europe Fund’s investments have involved new technology. The first, completed last November, involved $50m of equity injection into etel Group, a corporate telecommunications service provider in Czech Republic, Poland, Hungary and Slovakia. Argus Capital, Greenhill Capital Partners and Intel Capital were co-investors. A month later the Dresdner fund invested $6m into Iskon Internet, Croatia’s second largest ISP and leading content provider.
The region’s private equity industry is taking advantage of other reforms, such as environmental improvement and healthcare overhaul. Following the Polish health reforms at the end of 1999 pharmaceuticals and healthcare provision have become two of the most popular investment sectors. For example, EI has committed up to $10m in a chain of private clinics, and is investing in an information database start-up, according to EI managing partner Jacek Siwicki.
Divestment trends remained geared towards trade sales, as elsewhere in Europe. Only two exchanges in the region, Warsaw and Budapest, are capable of handling IPOs of any description, but even they remain highly volatile, reflecting global trends more acutely than their domestic economies. There were no Warsaw private equity IPOs last year, and only two Hungarian stock market sales in both 2000 and 1999. Other exit routes such as management or leveraged buy-outs are still not feasible because most of the companies concerned lack stable cash flows.
Last year’s biggest deal in the region as a whole was a divestment: the $220m sale to Telekom Austria of Czech On Line, the republic’s biggest domestic Internet provider, by venture capital fund DGB Osteuropa Holding. The company was set up in 1995 and acquired by the fund three years later while the transaction was signed in April, just before the technology bubble burst. The technology boom may be over for the time being in central Europe and elsewhere, but new records continue to be broken in the region’s private equity market. In February 2001 France’s Credit Agricole agreed to pay $262.5m for a 75% stake in Lukas Group, a leading Polish consumer credit company, from Polish Private Equity Funds I and II, both managed by EI. According to Jacek Siwicki, while EI investments over the last eight years have generated an average return of 33% on an IRR basis, the Lukas transaction returned 60-70%.
Krystyna Krzyzak is a freelance journalist

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