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Challenges equal opportunities for CEE private equity

While the central and eastern European private equity market may face a more challenging fundraising environment, the opportunities are all for the taking for established GPs. Alice Murray reports from the unquote” CEE Private Equity Forum

The biggest challenge facing the private equity industry globally is the changing nature of LP bases, with many institutional investors committed to reducing and streamlining their number of GP relationships. On the surface, this poses a huge challenge for private equity firms operating in central and eastern Europe – often seen as being a peripheral market for LPs, rather than a ‘must have'.

Speaking at the leader's debate panel at the unquote" CEE Private Equity Forum today in Warsaw, however, local GPs expressed the advantages the current conditions can bring. Neil Milne, managing partner and co-founder of Abris says: "We are in a happy space at the moment. We're seeing an increasing number of mid-market deals (those valued at between €25-60m), pricing is very reasonable (typically around 5-7x EBITDA) and we don't see the number of opportunities reducing; the number of potential targets for us is increasing all the time. However, the challenge would be for new GPs trying to establish themselves in the region."

Milne highlighted further difficulties in the fundraising market beyond the changing nature of LPs, including increased regulation, but went on to say: "For those of us here now, we have for the first time a great buy environment as well as a great sell environment; IPOs are back and trade sales are also open."

Krzysztof Krawcyzk, managing partner of Innova Capital agreed with Milne: "The last few years has given us more breathing space on valuations."

Tomasz Czechowicz, managing partner and chief investment officer of MCI, pointed out how the market has changed in the region to better support private equity deals: "The biggest competition for private equity used to be companies listing on alternative markets. But now, pension funds reforms have changed that and pension funds don't want to be invested in illiquid assets."

Milne concurred: "The public market used to be our biggest competition but the reforms have helped us on the exit side; pension funds are more focused on investing in businesses that pay out regular dividends and with predictable cash flows. So if we're listing a company that has grown into the upper mid-market space, which pays out a decent dividend and has predictable cash flows, then the pension funds really like that combination of growth and yield."

Despite the increasing advantages for local, established GPs, the region has a whole is facing a challenging fundraising market. Anne Hutton, senior banker for equity funds at the EBRD, said: "Central and eastern Europe is a difficult sale for those not familiar with the region – it isn't homogenous – we need to step back and draw out the advantages. For those LPs not invested in the region, expectations are mixed. The region can be contaminated by stories that come out of CEE. It is very important for GPs to grow businesses and deliver good returns."

Indeed, while conditions appear to be improving for local players when it comes to deal-doing, the CEE region still needs to prove itself to investors, in what is becoming an increasingly difficult fundraising market.