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Taking business to a new level

Private equity
Feature 5: Private equity
Developments and trends in private equity in emerging Europe.
Viktoria Habanova
Viktoria Habanová, Principal, Mid Europa Partners
Lenna Koszarny
Lenna Koszarny, Founding Partner & CEO, Horizon Capital 
Joanna Simonowicz
Joanna Simonowicz, Non-Executive Director, Innova
Andrea Ferancova Bartonova
Andrea Ferancová Bartoňová, Founding Partner, ESPIRA

Private equity is playing an ever more important role in emerging Europe’s economic success. It has helped transform companies into more competitive businesses and to create regional champions across several industries. In this article, some of the region’s leading women and rising stars in private equity—emerging Europe’s Level20 if you will—share their views on market trends, opportunities for growth and the competitive investment landscape.

Private equity deal volumes continued to increase year-on-year as funds carry on building their portfolios. With record levels of new funds dedicated to the region and global players continuing to acquire sector leaders at the top end of the market, private equity’s share in overall deal volume, and thus its impact on local businesses, is set to increase.  

Viktoria Habanová, Principal at Mid Europa Partners, said: “Private equity activity here has been strong over the last three years. We expect it to remain strong as a result of two key trends: the growing number of founder-led businesses seeking to address succession issues or the need for external capital to accelerate growth, and limited public market liquidity.

International funds are showing an increasing appetite for large deals in the region, while those based there are most active in mid-sized and smaller deals. Across real estate, telecoms and IT, manufacturing, retail, services, finance, food and energy, there are barely any sectors that have not benefited from private equity investment.

The value of local networks

Although they often specialise by country, sector or deal size, emerging Europe’s funds are linked by common threads. Having offices and staff on the ground enables them to build networks and forge relationships that lead to investment opportunities, often where vendors had not previously considered private equity. Typically, they look for local or regional champions with the potential to grow not just in the region but internationally.

As one of the longest-established firms focused on emerging Europe, Mid Europa Partners has raised EUR 5.2bn since its launch and has 41 investments in 18 countries, typically investing up to EUR 200m. During 2019, Mid Europa Partners bought bakery retailer Mlinar, with 220 stores in Croatia and Slovenia and franchises in ten countries, and a software services group intive. After stepping up investment in Romania it also opened a Bucharest office. Its core markets are Poland, the Czech Republic and Slovakia, although recently it has been most active in Poland, Romania and the former Yugoslavian countries where companies are now of a size to be on the radar of investors at home and further afield.

Habanová added: “Pan-European and global funds tend to focus on large transactions. More often than competitors, we see them as buyers when we look to exit or occasionally as partners for sizeable transactions.

One of the reasons private equity is becoming better understood and more widely used is that it gives vendors the opportunity to retain a stake in the business and benefit from any increase in value from subsequent sales. However, the relationship is not purely financial and private equity firms can tap into their experience and networks of industry experts to support management teams and drive transition.

Building strong relationships

Joanna Simonowicz, until recently Managing Director at Innova Capital and currently non-executive director at two Innova portfolio companies, said: “If you sell to a corporate, you cash in once and that is it. With private equity, the advantage is benefiting from the upside. It is important to have a good relationship and to have like-minded owners who believe in the business plan and are aligned on the best way to develop the business.

Innova is a mid-market private equity company operating in CEE, acting as an advisor to six investment funds with a total asset value of almost EUR 1.2bn. It has invested in 60 companies in ten countries, typically between EUR 50m and EUR 150m. Its deals in 2019 included the purchase of CheMeS, a specialist label printing company in Poland, CS Group, an image building and internet marketing company, and two of Romania’s leading optical retailers, Optical Network and Optiplaza.

Simonowicz added: “Succession is a very common topic and it is an area we like. The region is quite attractive to private equity players. One reason it is attractive is that there is a broad spectrum of businesses ready for a succession-related transition and there is less competition than in western Europe. As Poland is our base, we see lots of opportunities. Other countries where we see interesting opportunities are Romania, Slovenia and the Czech Republic.

Other deal drivers include corporate disposals, distressed sales and the opportunities that can be created by bolting together two businesses: the buy and build approach.

Aside from larger and faster-growing economies providing a fruitful hunting ground for funds, significant opportunities are likely to be created in Ukraine thanks to the ambitious reform agenda set out by new president Volodymyr Zelenskiy. Among those likely to benefit is Kyiv-based Horizon Capital, whose four funds are backed by over 40 institutional investors and have invested nearly USD 700m in 150 Ukrainian companies. A landmark deal in 2019 was the sale of the pharmaceutical business of Biopharma, an investment held since 2012, to German generic strategic STADA. Acquisitions included the purchase of smart security systems provider Ajax, and a stake in the leading private healthcare services provider Dobrobut.

Lenna Koszarny, founding partner and CEO of Horizon Capital, believes the political reset under Zelenskiy and the acceleration of structural reforms provides significant, long-term growth potential. She compares Ukraine not to its neighbours but to Columbia, Indonesia and the Philippines as these economies enjoyed double-digit growth over ten or more years, unlocked by reforms.

She said: “We believe Ukraine’s political reset offers a historic opportunity to implement long-awaited reforms. There are very exciting times ahead and, in our view, we are only on the ground floor. We are the leading firm in the country with deep and long-term relationships across Ukraine. From a private equity point of view, competition is limited with local players focused on niches and companies typically choosing between an equity partner or taking on higher leverage. Our sweet spot is growth equity with a focus on fast-growing export champions in IT, light manufacturing and food and agro, as well as leading domestic champions in e-commerce, pharma and healthcare. We back visionary entrepreneurs whose companies have established revenues and profits and are competing and succeeding regionally as well as globally.

The nature of the competition, be it from private equity funds, family offices or strategic buyers, depends on the size of company, sector and country involved, noted Habanová, adding: “We often see strategics among competing bidders, but they are not always fully committed or as well positioned as local private equity firms.

For private equity to be successful, there needs to be a healthy eco-system that also takes in corporate and institutional investors as well as public stock exchanges, not least to provide an exit route for funds that have taken a portfolio company to the next level, whether that is growing from local to regional level or regional to international. With the market for public listings subdued, deal activity has tended to focus on secondary sales to other private equity firms, financial investors or trade buyers.

Financial and social returns

ESPIRA Investments is a private equity firm specialising in small and medium-sized enterprises, mainly in the Czech Republic and Slovakia, but also in other CEE countries. In April 2019, it invested in ICON Communication Centres, an award-winning provider of multilingual contact centre services and six months earlier it took a stake in educational group JK Education and schools operator American Academies. One of the fund’s unique features is that it invests in companies managed by a balanced team of men and women on the grounds that diverse management delivers better returns. It also adopts a “double bottom line” approach, seeking out companies that deliver a financial return and have a positive impact on society. 

ESPIRA founding partner Andrea Ferancová Bartoňová said: “We welcome interest in the region from a wide range of investors, both strategic and financial, and we are very excited about increased activity from regional family offices of entrepreneurs who have made a successful exit and are now looking to invest their capital. Central and eastern Europe lags behind western Europe in both fundraisings as well as the number of investments relative to the size of the CEE economies, and we hope more local as well as international investors will be attracted to these markets in the near future.

Valuations have been relatively high, particularly where there is strong bidder interest in areas such as technology and e-commerce, but that trend could end if the broader economic outlook weakens and vendors may have to lower their expectations. Simonowicz remains optimistic, saying: “We don’t see a big correction in the near future, but we could see fewer deals for cyclical businesses. For cycle-resistant companies, prices are likely to stay the same.

Even if the global economy falters, private equity is now well-rooted in emerging Europe. As markets become more sophisticated, its impact and value is becoming better understood, not just in providing funding directly but also in unlocking finance from other sources to enable portfolio companies to grow.

For those firms based in the region and the international funds seeking out larger deals, there is a recognition that emerging Europe offers a pipeline of attractive companies with the potential to grow at home and abroad. That fuels optimism about another busy year for private equity transactions in 2020.

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