2012 Interview CEE


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2012 Interview CEE

  1. 1. CEE Roundtable the panel Michal Rusiecki, Enterprise Investors Michal Rusiecki is managing partner at Warsaw-based mid-market private equity group Enterprise Investors. He is responsible for investments in the food retail, consumer goods, healthcare, renewable energy and cleantech sectors. He also oversees the firm’s activities in Slovenia and Croatia. He has completed 15 transactions, including those in Polish Energy Partners, Harper Hygienics, DGS, Dino, Wento and UOS. Before moving into private equity, he worked at the Polish Ministry of Privatization and at the University of Warsaw.roundtable MatthewAvoiding contagion Strassberg, Mid Europa Partners Matthew Strassberg is aPEI’s recent trip to Warsaw to gauge market sentiment partner at CEE-focused buyout firm Mid Europa Partners.found three local industry heavyweights relatively bullish Formerly an investment banker with Merrill Lynch in London and with JPabout Central and Eastern Europe’s prospects. By Oliver Morgan in London and in New York,Smiddy and an executive at US buyout firm TLC Capital Partners, he joined Mid Europa in 2002. He was involved in Mid Europa’s investment and recapitalisations of Invitel, and the financing of the BitéIf the wretched weather in London as year, especially in light of what’s going on buyout. He led the series of four acquisitions which constitute the LuxPrivate Equity International left for Poland elsewhere in the Eurozone? Med Group, the acquisition of Kentin early May (torrential rain, with dark Strassberg: If you read the Western media Hospital Group and is responsibleclouds overhead) seemed symptomatic of reports and other publications of that sort, for the on-going consolidation of the Diagnostics Platform. Most recently heWestern Europe’s economic gloom, the you probably think the world is coming to led the exit from Aster.blazing sunshine in Warsaw – where three an end. Frankly it has been coming to anlocal industry luminaries gathered for our end since 2009 – but it is 2012 and none Richard Seewald,annual Central and Eastern Europe round- of the banking failures that were predicted ALPHA Associates Richard Seewald is atable – was equally fitting for a region that have happened.There has been turbulence, Partner at ALPHAhas generally weathered the storm rather but most of the countries in the region Associates, a Zurichbetter than some of its peers to the West. have done pretty well, and actually had based global private equity investor with over USD 2 billionWe asked three local experts for their view reasonably robust domestic consumption. under management. He is responsibleon the current state of play. They have very pro-growth tax regimes and for direct investments, secondary they have much lower debt-to-GDP levels. transactions and primary fund commitments and is a member of thePEI: From a macroeconomic perspective, The level of fiscal resilience and flexibility firm’s Investment Committee.how has the region fared over the past is therefore much greater. ›› SPONSORED BY Enterprise Investors, Mid Europa Partners and Alpha Associatesj u n e 2 0 1 2 private equity international 39
  2. 2. cee roundtable We are very big believers in the fact thatthe region still has a lot ofintrinsic growth from allthese trends in consumer-based convergenceMatthew Strassberg›› Seewald: In comparison to theEurozone, the economic environmentin the region has been resilient with anaverage GDP growth rate of 4.4 percentin 2011 and a forecast growth rate of 3percent in 2012. Poland,Turkey and Russiahave performed especially well and this isexpected to continue in 2012. In Q1 ofthis year we have seen softening in someof the export-dependent economies in theregion like the Czech Republic, reflectingthe challenges of trade partners in WesternEurope. That said, consumer sentiment has consumer resilience, but the crisis has Poland matters so much to what you seeremained positive and is an important undeniably brought the economic cycle in the overall region.driver of private equity performance. to Central Europe. Before that, with theLooking at some of the fundamentals of exception of Russia and the 1997 crisis, PEI: Poland may be the standout performer,the region, almost all the CEE countries the Central European region and new EU but this is a diverse region – how does thefulfill the Maastricht criteria or are closer members more or less benefited from picture differ across the board?to fulfilling them than many members of strong growth irrespective of what was Seewald: The region’s economies are asthe EMU, and with the exception of Hun- happening elsewhere. The current crisis diverse as the various opportunities forgary have lower debt as percentages of has ended that and brought the economic private equity capital to be deployed inGDP than the key Western economies of cycle to the region. CEE. They are by no means homogenous.France, Germany and the UK. So, in light You see it most acutely with cyclical A good starting point is Russia, whichof what is going on elsewhere in the Euro- businesses exposed to the construction will become the largest consumer marketzone, on balance, CEE has fared better. I say market – there’s been a lot of pain there in Europe in many key segments and sub-this with caution, however; the Eurozone and it is not going away. So I think if you segments over the next five to ten years,crisis clearly presents potential hazards to invest in cyclical businesses, you need to ranging from automobiles to householdthe region should its contagion effects spill start being much more mindful of the goods and the services sector. It alreadyover into greater Europe in a more pro- downside. Where we have a consumer- is the largest internet market, overtakingnounced way. focused business or a business which Germany last year. Private equity investors is not cyclically exposed, it’s done well. in Russia, in aggregate, have done very well,Rusiecki: I totally agree with the positive Our export-led businesses have done well, outperforming other BRIC markets overnotes, so I’ll add some negative items, obviously helped (especially in Poland) by the last ten years and with reasonably goodjust for the full picture! I agree with the the weakening of the currency. Generally prospects going forward. ››40 private equity international june 2 0 1 2
  3. 3. cee roundtable Where we have a consumer- focused business or a business which is not cyclically exposed, it’s done well Michal Rusiecki›› Rusiecki: I think it is increasingly Strassberg: You see, on that we differ, thoughtful asset selection – but again, wedifficult to justify investments in many of because we actually see the former find opportunities in that market. As thosethe smaller markets of the region. Yugoslavia as an attractive place to invest – countries have traditionally been neglected in terms of their pro-business attitude, good by investors, there is low-hanging fruit inStrassberg: There has definitely been a growth prospects and where they stand on terms of the availability of transformationaldecoupling. In the golden days of 2006/07, issues such as the corruption index. transactions, and the ability to add valueyou had a lot of investors who became less very quickly by improving processes anddiscriminating, despite obvious signs of Rusiecki: I think the former Yugoslavia is corporate governance. In places like Poland,differences within the region. Investors still a market marked by a long history of things are at a different level of sophisticationwent into places like Romania and debt-fuelled high valuations paid by local and it therefore requires a more consideredBulgaria and showed effectively no price investors.The bubble hasn’t completely burst approach to value creation.discrimination on assets, relative to what – expectations still remain high. When thethey were prepared to pay for Polish or debt is worked out, expectations go down PEI: What is your perception on Russia,Czech companies. Now people have learned and assets can be picked up at reasonable which always seems to come in fourth inthat there is a difference.There’s the unique prices, then it will be attractive. There are conversations about the BRIC countries?case of Hungary, too, which for a long time many strong manufacturing businesses in the Seewald: Our perceptions of Russia arewas among the good countries and then for formerYugoslavia which would be interesting founded on experience gained investing inthe last few years has been in the doldrums. if the sellers’ price expectations were in line the country, and on balance this has been with valuations elsewhere in Europe. good to date. In aggregate, private equityRusiecki: Then there’s the formerYugoslavia, returns in Russia over the last 10 yearswhich we are much less enthusiastic about Strassberg: Particularly Slovenia and Croatia have outperformed places like China, India,– it’s one of those places that remains in a have shown good indications in terms of Western Europe and the US. For casualworld of its own. convergence trends. Serbia requires more observers of the market, there is often ››42 private equity international june 2 0 1 2
  4. 4. cee roundtable›› a less flattering perception which isdriven in some cases by faulty assumptionsand in other cases by actual risks presentin all of the BRIC markets. If what you say is true – that Russiaseems to come in fourth in conversationsabout BRIC countries –then implicitly thetype of inefficiencies that private equitythrives on should remain in place, and posi-tion the market well for investors familiarwith the opportunity.PEI: How about your portfolio companies?Have they been affected by the widermalaise in Western Europe?Strassberg: If I look at our portfoliocompanies that are exposed to the consumerend of the Central European market, by andlarge they have done very well. If I look atinvestments in regulated sectors such asalternative energy or telecoms, the driverfor performance has frankly been less aboutmacro statistics and more about regulatoryshifts. But ultimately nothing that has The main in contact since then and appear to behappened to the companies in the region maintaining their level of interest.seems to be directly correlated with the concern [is] how There are some investors who, for theireurozone crisis. By and large, we think the the Eurozone own reasons – either because they don’tregion has been sheltered to a large extent. crisis may affect the have the capital or because of regulatory constraints – will have some hurdles. But region and derail some ofSeewald: Across our portfolio, including I don’t think that LPs have fundamentallyunderlying fund investments and direct the opportunities in the walked away from the region. The noiseinvestments, on balance we saw both top short to mid-term emerging from all the issues around theline and EBITDA growth come back over the eurozone has made LPs, particularly those Richard Seewaldlast two years. So it has been resilient.We had from the US or Asia, more concerned iftwo direct portfolio companies go public on they are considering Central Europe forthe New York Stock Exchange in February the first time.2012, namely EPAM Systems, a Russian IT Rusiecki: Investors recognise that even if yououtsourcing business and AVGTechnologies, a are performing better than many European Seewald: Most investors implicitlysecurity software developer that was founded countries, if the eurozone collapses then understand the opportunity for privatein the Czech Republic. Both companies are obviously there’ll be a knock-on effect. equity here – the concept of convergenceexamples of businesses built by scientists and European investors obviously have a slightly with core Europe, the consumer drivenengineers from the region. different perspective – but encouraging growth, the growth buyout market in the investors from outside of Europe is a challenge. region and the inefficiencies that usuallyPEI: How do LPs perceive the region? present investors with good opportunities.Are they still enthusiastic about the Strassberg: We have had some investors The main concern comes from the questionopportunities here, or are concerns about who for various reasons did not come into of how the eurozone crisis may affectEurope clouding the issue? our last fund in 2007, but have remained the region and derail some of the ››44 private equity international june 2 0 1 2
  5. 5. cee roundtable›› opportunities in CEE in the short to yourself rooting for a delay in convergence.mid-term. We believe convergence is a good thing, and want to benefit from it, rather thanPEI: What about local LPs? How has that hoping it slows.market developed over the last few years?Is there capital to be found? PEI: Has your approach to investing changedStrassberg: We haven’t seen any. One of over the last few years in terms of howthe attractive features of the region from operationally engaged you are with youran investment standpoint is the relative assets?scarcity of domestic capital competing Strassberg: We have ended up spendingagainst funds like ourselves.There are very more time on buy-and-builds – which isfew investors in the region that are willing more labour intensive because the onus onand able to allocate to alternative asset M&A falls on more on our teams ratherclasses. There is limited understanding of than on the management teams.the non-traditional asset classes, and there Also, we’re seeing the creation ofare some regulatory-driven constraints. regional platforms. Historically, it was less common; it seemed dangerous, givenPEI: Across the region, which sectors do management teams typically didn’t have theyou see as most attractive at the moment? requisite expertise and were absorbed byRusiecki: It’s consumer-driven. I think we the challenge of managing growth withingenerally assume that the underlying level of their domestic confines. Now, we’re seeingmarket growth is going to be much slower situations where there’s an explicit oppor-than pre-2008, so the real growth has to be tunity created, as the business has grownmarket share driven – as with food retail as much as it can in its domestic marketand healthcare. and is now looking for expansion. That’s Renewable energy is interesting, but could where private equity investors are able Managementbe a victim of the crisis.A lot of the activity has to help – but it also means more labourbeen driven by investors from Eurozone coun- intensity from us, in making introductions, teams aretries with perceived zero cost of capital. And bringing in incremental management teams, becoming morethat source has dried up, which actually cre- financing locally, and so on. sophisticated, and theates opportunities. On the other hand, there involvement in settingis also a regulatory risk, as governments look Rusiecki: Management teams are becomingat the cost of supporting renewable energy. more sophisticated, and the involvement in up the basic systems isSo we’re very careful about how we structure setting up the basic management systems is getting smallerdeals in this area. getting smaller and smaller. Also, the new Michal Rusiecki generations of entrepreneurs are 35 to 45Strassberg: Our investors want exposure years old and they are more sophisticatedto the GDP growth profile of the region. So and understand the need to build teams. – because at this point, with valuationswe have consistently sought opportunities So I think that involvement is actually less that have come down somewhat, you arethat give us exposure to anything that’s in basic tasks, which leaves more time for finding that with the 45 to 50 percentconsumer-driven, plus service sectors like helping companies grow. equity cushion requirement, you can fullyhealthcare, telecoms and cable television. finance with senior debt only.We like sectors where the fundamental PEI: Have debt-to-equity ratios changedtheme involves benefiting from the growth at all? PEI: What about competition? Is there tooin disposable income of the local population. Strassberg: Dramatically. In effect, much capital chasing too few deals? We avoid themes based on labour cost the equity cushion requirement has Seewald: I wouldn’t say there is a capitalarbitrage, because then you suddenly find marginalised mezzanine, to some extent overhang in the region. Quite the opposite.46 private equity international june 2 0 1 2
  6. 6. CEE Roundtable enough. As long as you have the money and PEI: And what are the biggest clouds on the will, you can buy a company. It’s what the horizon? you do afterwards – your ability to follow Seewald: Aside from Eurozone concerns, up day-to-day, working with the manage- the CEE region must accelerate innovation ment teams, speaking their language, meet- across industry sectors in order to position ing the regulators, meeting the relevant itself as not only a lower cost region, which counterparties – that’s quite operationally for the most part in the core countries it no hands-on for most of the big pan-European longer is, but also a high value, productivity guys to get involved in. driven business environment.Without this, economies will become stagnant over time Rusiecki: Quite honestly, the difficult and the region will lose its edge. Private competition has not so much been equity can play an important role in from private equity players – although achieving this and already has accomplished there have been auctions where we’ve a great deal, but the human resources competed against each other head on. A needed going forward for fund management lot of competition has been from strategic will be different. investors, who are willing to pay a very high price for growth. If you look at the Rusiecki: Will companies move from the food companies sold in Poland in the last model of offering reasonable quality at few years, there have been exceptionally a lower price to offering some sort of high valuations placed on them by innovation and value-add? Will they move investors willing to pay for any growth from being just component suppliers whatsoever. to being suppliers of complete systems? If they don’t, I think the threat is that PEI: Looking forward then, what’s your Central Europe will end-up similar to manyIn the mid-market and lower mid-market, prognosis for the region? parts of Southern Europe: no longer fullywhere we believe the sweet spot is for Seewald: I like the private equity competitive as just a subcontractor, butprivate equity in CEE, we are seeing opportunity in CEE and Russia but I am lacking enough inherent innovation.imbalances of supply and demand of capital concerned that the Eurozone crisis will Where I think Central Europe is quitethat favour investors. Given the challenges cause further disruption in the near to weak – and where the likes of Sweden, Ger-to raise new private equity funds in the mid-term. Assuming no protracted market many and so on excel – is in innovationcurrent market, I believe these imbalances disruptions in the mid to long term, the around manufacturing. There is not verywill remain in place over the next five region remains well positioned to benefit much worthwhile research being done inyears and a shakeout will occur where from the tail winds driving the convergence the technical universities of Central Europesome managers unable to raise will exit the with western markets, especially the CEE – and if it is done, it’s often very theoreti-market. This type of shakeout is a natural, consumer and the deep pool of human cal, with no link to the commercial world.healthy evolution of the market. capital in the region. But I think this is something that will cure itself. There are quite a few serialStrassberg: One of the things we’ve seen Strassberg: We are very big believers in entrepreneurs that are redeployingis that some of the pan-European players the fact that the region still has a lot of their capital from some straightforwardwho have made forays into the region have intrinsic growth from all these trends in consumer business into supportinghad their fingers burnt in some instances. consumer-based convergence – demand innovation and breaking down this There are still quirks as to how the for things that they don’t even know they barrier. So time will deal with that; I thinkregion operates, and you really need to have need yet. It’s not just about GDP growth the challenge is: will that happen fastthat local know-how – hiring two freshly- being slightly at a premium; it’s the overall enough to provide an additional boost tominted MBAs from Ivy League schools who dynamic of being able to roll out a lot of productivity? I am positive but I see it as aspeak whatever local language is just not incremental services. major challenge. njune 2012 private equity international 47