Central, Eastern Europe PE Volatility

Poised to experience a double-dip of its own this year, the private equity market in Central and Eastern Europe (CEE) has been ebullient one minute, gloomy the next.

A strong Q1 in 2011 prompted commentators and players to proclaim the return of PE fundraising to the region along with the rebirth of the IPO market.

Private equity investments in the region (including the Commonwealth of Independent States) totaled $1.2 billion in the first quarter of 2011, compared to $2.4 billion for all of 2010, according to the Emerging Markets Private Equity Association.

“Leverage is moving up and the willingness of the banks to underwrite is back,” Craig Butcher, of private equity investment firm Mid-Europa Partners, told The Financial Times in May. “I think it’s going to be a great year for the region.”

Yet the green shoots of springtime had wilted by summer, when second quarter results showed that only 10 buyout deals worth a total of $126 million had been completed in the region, just one-tenth of the $1.2 billion completed in the first three months.

A high degree of fragmentation in Poland, Hungary, Czech Republic (and the smaller surrounding states) means that there is abundant opportunity for consolidation, but the immaturity of the private equity and venture capital markets, together with reluctance among the region’s entrepreneurs to engage with buyers, has depressed activity.

Part of the problem is underlying concerns over the general investment climate in the region, particularly in Russia, where corruption fears, along with anxiety over the rule of law and uneven bureaucratic treatment of foreign companies, continues to dissuade some investors.

In March, Russian President Dmitry Medvedev launched a $10 billion state-backed private equity fund to make investments alongside global private equity groups to reassure investors that the state would stick up for their interests.

“Russia is a different ball game, but I think the government is serious in trying to attract private equity capital,” says Heinrich Pecina, founder of Vienna Capital Partners.

U.K. Prime Minister David Cameron visited Moscow in mid-September in an attempt to kick-start economic relations between Britain and Russia, taking with him a large trade delegation and speaking of the wealth of opportunities that lie ready for the investment community in both countries.

Certainly the vast size of the Russian economy, in financial, geographical and human terms, makes it attractive to all kinds of investors.

The largest recent deals in Central and Eastern Europe are all Russian-based, including the search engine Yandex.ru, which went public in May, raising nearly $1.4 billion for its private equity backers. Meanwhile, ecommerce company OZON.ru completed a $100 million funding round with a consortium of investors, including London-based Index Ventures, Baring Vostok Private Equity and Swiss equity fund manager Alpha Associates.

OZON is seen as the local version of Amazon.com, with a large and growing consumer base in Russia, buying goods and services online in sharply increasing numbers. The company could easily provide a role model for many similar operations in Russia and elsewhere in CEE countries, supported by private equity funding and helping to popularize the industry.

In Poland, the other major regional economy, telecoms, media and large infrastructure companies have attracted heavy investor interest so far this year, although the regional handicaps of regulatory overload, political and economic volatility and the relative lack of investment protection continue to cause a drag on private equity activity.

Even though many issues remain, Kurt Geiger, chairman of Thunderbird Global Private Equity Center and a former executive at the European Bank for Reconstruction and Development, says: “Private equity will enjoy many opportunities. Central and Eastern Europe may not be the most popular area globally, but now is the time to think in counter-cyclical terms.”

David Nicholson is a London-based contributor. He can be reached at dn@davidnicholson.com.