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Bonds across Europe survive the toughest test to grow stronger

The strong ties between emerging Europe and its neighbours to the west have become clearer than ever during 2020. Despite the disruption to deal-making, Europe has remained the bedrock of investment into the region, reflecting changing perceptions of it as a place to do business.

As in the rest of the world, M&A activity in emerging Europe was hit by the economic crisis that followed Covid-19. But the headline numbers do not tell the whole story and disguise the fact that Europe remained a mainstay of investment into the region.

Neighbours across the continent, to the south and west and in the Nordic countries, accounted for nine out of the top 10 investors by volume of deals and seven of the top 10 by value. The Netherlands, France, Austria, Spain and Denmark, saw values increase significantly. The crisis showed that the bonds with the rest of Europe survived the toughest test.

Alexander Rakosi, CMS partner in Vienna, said: “Central and Eastern Europe has been and will continue to be a region of focus for investors from Austria and beyond. I don’t think Covid materially affected how we look at the medium and long-term perspective. The attractiveness of the region stays the same.

The past year has highlighted how perceptions of emerging Europe as a place to do businesses have changed over the past decade or so and are still evolving. As geographic neighbours with long historical ties – and for many a shared membership of the EU – European countries know and understand their counterparts to the east better than most. They can see the attractions of the region as a cost-effective place to locate business, with a well-educated workforce and as an appealing market in its own right.

Getting to know the neighbours

But they are also close enough to recognise that it is not a homogenous region, from small and still developing economies at one end of the scale, to Poland, the sixth largest country in the EU, at the other. Although the region is far more stable, politically and economically, than it was, there are still challenges from potential instability and although legal regimes are more reliable some are still a work in progress as they work towards harmonisation. Alexander Rakosi said: “There are real efforts across the board in making the legal framework more appealing to international investors.

Economic development, aided by foreign investment and an increasingly sophisticated M&A market, has helped to grow domestic businesses of world-class scale and create an eco-system of investors and advisers who can work alongside their peers abroad. Central and Eastern Europe is no longer uncharted territory for foreign investors who are increasingly comfortable and at home in parts of the region.

Stefan Brunnschweiler, global co-head of the CMS Corporate Group based in Zurich said: “In the early years, visiting CEE was an adventure. Now it’s a well-established place to do business. It used to be regarded as somewhere to set up production sites because of the lower cost base, but today it’s somewhere companies consider shifting R&D and other back office services.” In more mature markets, such as Czech Republic, disposals and acquisitions could feel like standard transactions. But in some jurisdictions, he added, the more widespread use of arbitration, the inclusion of material adverse change clauses in contracts and more time spent on due diligence were a symptom of a more cautious approach and one where local expert advisers were relied on.

Small can be beautiful

Albania illustrates how perceptions have changed and continue to evolve. With a population under four million, it is going through a programme of wide-ranging reforms that has seen progress on tackling corruption, financial stability and economic competitiveness. It became an official candidate for EU membership in 2014 and is working towards harmonisation. Mirko Daidone, CMS partner in Tirana, says that as recently as two decades ago, many foreign companies were suspicious of a country they knew little about. He said: “It is no longer unknown. It is a place where business is developing and there are many interesting opportunities especially in energy, telecoms, transport and tourism.

Vodafone of the UK is well-established in Albania and in 2020 it received competition authority approval to buy cable operator Albanian Broadband Company (AbCom). Hungary’s Wizz Air set up a new base in Tirana last July, bringing the total number of Wizz Air destinations from Tirana to 25 including Brussels, Paris, and Berlin. Mirko Daidone said: “I am optimistic about the future. Countries like Albania offer big opportunities. If Wizz Air decided to invest during one of the worst periods for international transport and tourism, I have to be positive about 2021.

The Luxembourg link

If anything illustrates how perceptions are changing, it is the growing relationship with Luxembourg, one of the world’s largest and most sophisticated financial centres. A hub for investment funds, it is seeing a growing appetite in alternative investments such as real estate, infrastructure, venture capital and private equity and increasing interest in and from Central and Eastern Europe.

Institutional investors and family offices from the region are using Luxembourg as a springboard to invest internationally. Investors in emerging Europe are also using Luxembourg as a jurisdiction from where to invest back home, while international funds are seeking out opportunities in the region. Aurélien Hollard, CMS partner, Luxembourg, said: “It is a market that is seen as under-served and under-invested. We are seeing more and larger funds investing in the region and this capital is needed to develop companies and grow the economies.

One example of a fund targeting the region is the Three Seas Initiative Investment Fund, which is sponsored by 13 countries in the region and was created under Luxembourg law. Its goal is to finance key infrastructure projects in transport, energy and digital infrastructure and it has set an ambitious target of raising up to EUR 5 billion in both public and private funding to unlock EUR 100bn of investments in infrastructure in the Three Seas region.

Luxembourg is not a low-cost option for investors. Its appeal lies in its political and financial stability, as an EU member, with favourable tax rules and regulation that provide clarity and certainty for investors. It has developed a multi-lingual eco-system of experienced and skilled service providers and advisers.

Benjamin Bada, CMS partner, Luxembourg, said investors turned to Luxembourg because it was able to provide a high level of assistance on all aspects of setting up and managing funds. That would give it an important role in responding to the pandemic. He added: “As well supporting long-term development, funds can be set up and deployed quickly, providing a flexible way to respond to the current crisis.

Ready to bounce back

Charles Currier, CMS Partner in London, said: “The interest in sectors that are leading M&A markets in western Europe, such as energy, infrastructure, technology and financial services, is mirrored in emerging Europe. For infrastructure investors, the region has a huge appeal that goes beyond individual country boundaries."

Although we talk about emerging Europe, many of these countries are fairly mature markets compared to those in Asia and the Far East and some are seen as relatively safe harbours.” 

The momentum that has seen investors in Europe push eastwards over the past decade may have stalled temporarily in 2020. The fundamentals that make central and eastern Europe attractive have not gone away and neither has the appetite from neighbours across Europe.

Alexander Rakosi believes the scene is set for a recovery in M&A, saying: “The first half of 2020 was categorised by wait and see, but activity has increased and will carry over into the new year. Private equity still has a lot of dry powder to invest and on the corporate side we expect to see a lot of activity from those companies and industries that were beneficiaries of, or not negatively affected by, the crisis and those on the distressed side looking to focus on their core business.

Key contact

Charles Currier
Senior Partner
Chair of the Board for CMS UK and its international offices
T +44 20 7367 2736