Middle East investments growing in CEE

SWFs are funded by state revenues, predominantly oil and gas. “The price of oil has been pretty high for a while, so the coffers are well stocked,” says John O’Connor, a CMS partner in Dubai. “That, aligned with the fact that asset prices have generally been pretty soft and the euro has dipped, means that there are opportunities in CEE for SWFs to deploy at a more attractive price point, particularly if there is a relative lack of investment from traditional PE funds that might otherwise be competing for the same assets.”

Seeking to invest in food and food security, technology and innovation-driven companies, together with high-priority sectors such as healthcare, renewables, logistics and digital infrastructure, CEE countries have considerable appeal in these areas for Middle Eastern investors. Perceived as a favourable investment destination, they see a region of stable economies that benefit from an educated workforce and relatively low operating costs.

Ivan Gergov, partner at CMS Bulgaria, says, “The CEE region’s strategic location at the crossroads of Europe, its skilled workforce, investment-friendly policies, and vibrant entrepreneurial ecosystem make it an attractive destination for Middle Eastern investors.”

CEE countries also offer a relatively easy access point into the EU’s diverse markets for assorted industries, as well as providing a well-established community of business people and advisors who are able to help investors navigate their way through transactions. CMS partner Eva Talmacsi points out, “There is a sophisticated business ecosystem in place across the whole of CEE and investors feel relatively comfortable doing business in the region.”

According to O’Connor, different sovereign wealth funds have different objectives, which drive a variety of investment strategies, and unlike traditional PE investors, there is less pressure to exit investments within a traditional 5-7 year cycle.

He explains, “Some SWFs invest domestically, while some specifically seek outbound investments to diversify the State’s portfolio away from domestic markets. Often investments will be passive/indirect investments via funds or co-investment vehicles, while others may take a more direct investment strategy. Typical assets include infrastructure, energy, utilities (including telecoms), real estate and hospitality. Investment into specific assets tend to have a minimum ticket, which often makes investments into the CEE market more challenging.”

As SWFs and other Middle Eastern state-owned entities often require a relatively high minimum amount per investment , finding target companies of the right magnitude in CEE means that they tend to focus on areas such as infrastructure and logistics projects. Telecoms-related investments from the Middle East to CEE have been a notable trend. The largest such deal in 2023 was Etisalat , which recently paid EUR 2.2bn for a controlling stake in Czech PPF Group’s telecom assets in Bulgaria, Hungary, Serbia and Slovakia.

In addition to SWFs, Middle Eastern investors in CEE are comprised of local (often family-owned) conglomerates and state-owned enterprises. Dynamic growth and dramatic structural change means that the investment landscape can change fast; e.g., International Holding Company (formerly International Fish Farming Holding). In 2020, IHC was best-known for seafood, as well as food and real estate development, but it employed only 40 people. Four years later, the Abu Dhabi-listed group has a market capitalisation of USD 245bn, the second largest listed company in the Middle East after Saudi Aramco, with a very diverse range of operations involving more than 500 subsidiaries and over 107,000 employees.

Real estate and retail (including automotive) form a key part of the outbound strategy for Middle Eastern conglomerates, which are also diversifying into other sectors, such as agritech, fintech and autotech. Across the region, such acquisitions are invariably strategic, according to Patrik Daintry, a partner at CMS in Dubai.

The extensive impact on supply chains caused by the Covid-19 pandemic accentuated the Middle East’s over-reliance on imports for food sources, leaving them in a potentially vulnerable position when trade becomes disrupted. A food security strategy has therefore become a more prominent feature of outbound investment. Some Middle Eastern countries, such as the UAE, are looking to acquire farmlands and food/water technologies (including in CEE) to bring that technology and captive supply of food and water into the Middle East.

“Anything food security related is a big theme for Middle East investors,” says Graham Conlon, partner at CMS in the UAE. “In order to feed the population in the region, they need to secure the underlying resources— food resources, raw materials—and ultimately bring them back to the Middle East. We’ve seen quite a lot of interest from SWFs in the Middle East—their portfolio companies with a mandate—in acquiring food security- related businesses and agricultural businesses in various forms. They are not always successful, but they are bidding significant amounts, often well above market value, to try and secure those assets.”

For food security, the minimum investment threshold becomes much less relevant because it is typically more of a strategic play than capital deployment. Bespoke vehicles may be used in food security transactions to acquire agricultural assets in CEE. “Abu Dhabi and the sovereign wealth funds, particularly, seem to be quite opportunistic,” notes Daintry. “They will get involved if they see an opportunity, but not everything will be channelled through to one particular fund, instead whichever has the appetite will go in.”

Through SWFs and state-owned enterprises, he suggests that governments in the region, “want to bring know-how to the Middle East, know-how on the ground to localise production of whatever good or product it may be, or the delivery of local services,” he says. “Ultimately, they want all of that to be locally generated in order to give the local population jobs and professions in the future as they diversify away from being oil and gas economies.”

In order to manufacture products locally, the acquisition of know-how is particularly important to some Middle Eastern countries, such as Saudi. “An easy way to achieve this objective is to acquire an existing company that already has a manufacturing operation, and use the relevant know-how back home to industrialise their own country,” says Conlon. “By taking a major stake in a big company, they can also have influence at board level to be able to steer the building of factories and the rolling out of making products on the ground.”

State-sponsored investors tend to have a high minimum size of investment and focus on more defined sectors, such as ports, transport, energy and defence. “Middle Eastern countries are spending a great deal on defence, and there are a lot of interesting defence tech companies in CEE,” says Daintry. “We’ve recently seen a few examples in the firm. It’s an active market and very much goes to the heart of what they are trying to do to become self-sustainable and self-sufficient. They want to bring the tech home to Saudi or the UAE, for example, and develop it further and not have to worry about supply chains from the West. They’re only going to be able to do so by building up their own know-how and capabilities.”

As the CEE region continues to develop, the opportunities for investment are expected to grow even further. According to Saša Sodja, partner at CMS Slovenia, “The potential of the region to continue attracting US and Middle Eastern investments will also depend on how well it navigates the current uncertainties while capitalizing on its inherent strengths and emerging opportunities “The current trend clearly indicates that the relationship between the CEE region and its foreign investors is set to prosper, which will fuel economic growth, spur technological innovation, and foster the ongoing evolution of the local business landscape.”