PRINT THIS PAGE Further, faster. Lower risk and higher returns in Central and Eastern Europe27/07/2005. Source: Robert Conn, Innova Capital.
Over the last two years, the private equity market has seen a number of successful exits from deals put together since 2000, says Robert Conn of Innova Capital. These exhibit very different qualities, by and large, to the 1990's deals that were profiled in EVCA's CEE Success Stories. The '90s deals typically were generally either start-ups, early-stage, or privatisations. Deal sizes have grown significantly since then and positive EBITDA is now the norm. Innova's average enterprise value (EV) now falls somewhere between €25 million and €100 million compared with less than €5 million when we began investing our first fund.
The '90's deals were, in the main, expansion capital, with no leverage and the PE fund often took minority stakes. That has all changed. Now the focus is very much on buyouts (six of the seven deals in our last fund were buyouts, and five of them used leverage), with investors taking controlling stakes.
As companies mature, so they are increasingly capable of generating the levels of cashflow needed to support leverage. And at the same time, changes of ownership (including corporate restructurings and entrepreneur succession) are creating more and more buyout opportunities.
The biggest buyout to date has been Mobiltel, a €1.2 billion deal structured with €650m debt. Other recent deals include EBCC, a buyout by Innova, subsequently recapped with €20m in debt, and DGS, a €100 million buyout structured by Enterprise Investors including 40% debt. A sure sign of the maturing of the market is the presence of a number of senior lenders (including PeKaO, BPH and Erste Bank), and mezzanine lenders (including Mezzanine Management and Darby) that have committed themselves to developing a buyout practice.
Exit routes were, until quite recently, unclear and remote in time. Now multiple exit routes are on offer. Trade sales continue, buoyed by heightened FDI post-EU accession (examples include the sale of Orange Romania to Orange by a consortium including Innova, Enterprise Investors and AIG-CET and the sale of Mobifon/Oscar to Vodaphone by Advent - both transactions for at least four-times money).
A new development, however, has been the emergence of the Warsaw Stock Exchange as an attractive exit route, via IPOs and secondary placements (examples include Comp Rzeszow, and later this year, Opoczno, anticipated to be a €450 million offering).
Also, in a welcome new development, we are seeing greater activity from local strategic investors buying into deals (for example, a consortium including Innova recently sold our stake in STK Cable to Vectra). Last of all, secondary purchases are starting to come through as viable exit routes in some cases, the purchase of Fibernet by Warburg Pincus, and of Aster City by Hicks Muse are both good examples of this trend. Looking ahead, trade sales and the Warsaw Stock Exchange will continue to be the most fruitful exits routes. Increasingly, though, western European mid-market buyout shops will be buying from local players, as deals edge into their size range.
As exit routes have opened, so holding periods have come down dramatically. Average holding periods for our 1998 fund were over five years. For our latest fund, the average has dropped to three years, with two deals likely to clock in at 12 months (at the same time generating over 2.5-times returns). This trend is graphically illustrated by the fact that this year alone, Innova expects to generate exits in an amount equal to our entire invested basis in our last two funds.
Back in the 1990s, there was a limited local chief executive (CEO) pool. Now, with 15 years since transition, there is a sufficient supply of high-quality, experienced Central European CEOs. Instead of everyone - investors and CEOs - being on a tight learning curve from day to day, it is now all about selecting the best talent from a number of competent candidates. Indeed, there are now a number of Polish CEOs heading up significant European companies (including, for example, major divisions of Danone and Wrigleys).
When we first got involved in this region in the mid-1990s, the market was highly fragmented, with around 65 fund managers active in Poland, Hungary and the Czech Republic. Our common denominator was a lack of experience. Now, with 10 years and 25-plus deals under their belts, the leading players present a very different profile.
As a result, deal making capabilities have grown increasingly skilful and, inevitably, the market has consolidated quite dramatically, to the extent that the 65 pioneers have been whittled down to eight players commanding between 80% to 90% of the uninvested capital. Competition and entry valuations are, therefore, now very 'rational'.
'Further, Faster' really does sum up the way this market is heading. Whatever we saw coming out of the 1990s can only be improved upon from now on. With lower risk and higher returns achievable in less time, the future for mid-cap private equity in Central and Eastern Europe will be exciting.
Robert Conn
Managing Partner, Innova Capital
Innova Capital is one of Central Europe's leading private equity firms. Our objective is to help build companies into market leaders, able to compete with the best in their fields worldwide. By achieving this, we will deliver consistent above-average returns to our investors and establish our leadership in the private equity industry.
A version of this article was originally published at the EVCA Symposium 2005.
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