When Franz Muntefering, chairman of Germany's governing Social Democrat
party, earlier this month likened private equity firms to "swarms of locusts sucking the substance" from German companies, he tapped into a popular sentiment in the heart of Europe. Hostility towards the firms – which buy companies, turn them around,
and sell them for a profit – runs deep in Germany, where many communities are
struggling under the weight of near-record unemployment. Foreign buyout firms, it seems, make an easy target.
While the rhetoric in Germany, the continent's wealthiest nation, may have taken an ugly turn, the tone in some of Europe's most impoverished regions couldn't be more different. Governments across south-east Europe, for example, have set about vocally courting foreign private equity firms in the hope that foreign capital and management will bring a much needed boost to their developing markets.
"There's a strong recognition that there's good, positive, value-added [in private equity]," says Robert Manz, a partner at Enterprise Investors, a Polish private
equity firm with $1.1 billion investments under management across the region,
making it the biggest private equity player in central and eastern Europe. "We haven't seen negative backlash [in our region] and I think so far the private equity industry has a relatively positive image." Countries such as Romania and Bulgaria are keen to emulate the success of their central European neighbours – Poland, Hungary and Czech Republic – who have seen the volume of private equity deals skyrocket in recent years.
Their success has been driven largely by improved economic fundamentals, but also, over the years, by the promise of EU accession. Since enlargement last May private equity activity in the accession countries has increased, and now accounts for 75% of all such investment activity in the broader central and eastern Europe region. "We have actually been surprised at the extent of the reaction we have seen," says Neil Milne, managing partner at Copernicus Capital Partners. "There has undoubtedly been a real pick-up."
Romania is leading the charge in non-EU Europe. "From a private equity perspective it looks like Poland did eight years ago," says Manz. "It's very interesting because it's the next largest [after Poland] in terms of population. We're becoming more and more comfortable about doing business in these countries," he adds, referring to the "second-wave" accession countries. Last month Enterprise Investors fully exited Orange Romania, the country's largest mobile telephone operator. A consortium of investors including funds managed by Enterprise Investors sold its stake to France Telecom, Orange's strategic investor and majority shareholder for $523 million.
Rather than the standard leveraged buy-out (LBO) model that's prevalent in more developed markets, where funds raise large amounts of debt to take control of companies, most of the activity in south-east Europe involves expansion capital – with firms pumping equity into businesses to fuel their rapid growth.
"The big change [in the accession countries] has been the availability of debt, which allows for the LBO model," says Thierry Baudon, chief executive of AIG Emerging Europe Infrastructure Fund, a private equity fund with more than $550 million of total capital commitments in central and eastern Europe. "Is that equally true in south-east Europe? Probably not. It's much easier to do an LBO in Poland than in Romania," he adds. Nevertheless Baudon says his firm's next fund will focus on Romania, Bulgaria, Croatia, and some of the less developed parts of eastern Europe.
like-minded investors
Enterprise Investors is just one of many like-minded investors in the region. Spanish private equity group GED recently closed its investment fund, launched last year to invest in eastern European companies, with commitments of more than e50 million. Half of that sum is targeted at Romanian companies.
The GED Eastern Fund II, as it's known, comprises several other big Spanish players including Caja Madrid, as well as Austrian financial group Bank Austria. The fund will also target other countries in the region such as Bulgaria, Croatia and Hungary.
The firm has operated in Romania since 1996 through its subsidiary GED Capital Development, which manages Romanian Post Privatization Fund. The fund has already invested more than e50 million in Romanian businesses, including internet service and communications provider PCNet, drug maker Sicomed and the Continental hotel chain. "Because of impending accession, there will be an accelerated timetable for Romania's private equity industry," says Manz, who reckons that it will probably reach Polish standards within the next five years. Poland is widely considered to be the most mature market in central Europe, with a robust stock exchange with a market capitalization of nearly $50 billion.
But these are early days yet. "Private equity is still at a very early stage here," says Garrett Byrne, director at Deloitte's private equity desk, and author of the consulting firm's Central European Private Equity Confidence Survey. "The local legislative set up is not always ideal for private equity investors, and it's often difficult for firms to raise money from domestic institutions because of legal and tax impediments."
"The problem with the region is that it's a very fragmented market," adds Baudon. "It affects deal-flow." But deals do happen. Last year, Bulgaria was host to the region's biggest-ever private equity transaction: a e1.2 billion cash buyout of MobilTel, the country's top phone operator.
landmark deals
Seven investors participated, led by ABN Amro Capital, Citigroup Investments and Austria's Communications Venture Partners Limited. The consortium also included Sandler Capital Management of the US, Poland's Innova Capital, Greek firm Global Finance, and 3TS Venture Partners Oy of the Czech Republic.
In another groundbreaking deal last year Advent International, one of the world's biggest private equity firms, snapped up a 65% stake in Bulgarian Telecommunications Company, for e300 million. "These are landmark deals," says Manz, whose firm was a financial partner in the BTC transaction. "It indicates just how serious investors are about doing deals in this region."