Class of 2020 | lirich@wharton.upenn.edu
Ten years ago, private equity investors knew where the most secure investment opportunities existed. Countries like the United States and the United Kingdom provided stable governments, existing investment networks, and strong laws. Yet, in the past few years, we have seen private equity begin to migrate elsewhere. Yes, private equity investments have steadily increased in Southeast Asia and Africa, but one area of the world that remains relatively untapped is Central and Eastern Europe. Whereas countries like Poland and Austria were previously dismissed as having weak institutions, nowadays, investors are scrambling to get in. This is a large pivot, with institutional investors overcoming the post-WWII view that Eastern Europe was a place where nobody would funnel money into. Events like Brexit and the crash of the sterling have certainly not helped the cause of Western Europe in any way.
Just last week, three of Europe’s most prominent private equity firms--Cinven, Permira, and Mid Europa--bought Polish auctioneering website for $3.25 billion. This marks one of Poland’s largest takeover deals to date, and deals like this are only expected to continue. Although the Allegro deal is Cinven and Permira’s first deal in the region, all three firms have announced intentions of increasing investment in the region over the next five years. Even the recent election that brought the conservative Law and Justice Party (PiS), who have opposed privatisation, to power have not deterred private equity investors. In fact, a number of global firms are looking at purchasing SABMiller’s central and eastern European assets for over $7 billion.
These two deals are only the tip of the iceberg. According to Invest Europe, 2015 marked the highest amount of private equity and venture capital investment in Central and Eastern Europe since the Great Recession. Between 2014 and 2015, the total investment amount increased by 25% to nearly $1.8 billion. Not only has investment increased dramatically, but so have the number of exits. In 2015 alone, a record number of 97 companies exited to the tune of over $1.3 billion. This indicates that there is relative liquidity in the private equity market in Central/Eastern Europe, and it also suggests that firms believe they can exit with a profit. Most exits occurred through trade sales, with public exits accounting for 17% of all total exits.
It is not just private business as a whole that is flourishing. Startups and new enterprises are seeing more and more venture capital. Out of more than 200 companies in the region that received some form of venture capital investment, nearly 130 were early-stage, growth startups. Most of these startups are in the energy/environment, consumer goods, or retail industries.
This is a common trend, especially considering that many of these countries are resource-based, export-driven economies. It is expected, however, that over the next 25 years, these companies will begin to develop the same kind of innovation-driven economies that exist in Western Europe and North America today.
So, what are the most popular destinations for private equity and venture capital? Poland, Serbia, Hungary, and Romania accounted for 85% of the total investment activity in the region by value. Poland, Hungary, the Baltic States, and Slovakia, on the other hand, account for 91% of the companies that received investments in the past year. Combined, the countries of Central and Eastern Europe have a total population of 170 million and registered a GDP of $911 billion.
With slowing growth in Asia, political instability in the United States, and fears of a decline in the United Kingdom, investors should begin to search for opportunities in less common regions.
Figure 1: Investments and Exits Summary