PRINT THIS PAGE Central and Eastern Europe - just a geographical expression?18/07/2007. Source: Advent International. Joanna James 
In this article, Joanna James, managing director, Central Europe, at Advent International, argues that 'being local' is key to making successful private equity investments in Central and Eastern Europe. Advent established local offices right from the beginning of its activity in the region 13 years ago.
It was the Austrian diplomat Metternich who once famously described Italy as merely 'a geographical expression'. Whether this was a fair description of a country that had not yet become a nation need not be debated here, but one may reasonably wonder whether the term 'Central and Eastern Europe' should be applied to the area from Latvia to Serbia in anything other than a geographical sense.
National identities were never lost
Fifty years of Soviet domination has failed to erase the national cultures and characteristics of these countries any more than the much longer rule of the Hapsburg and Ottoman Empires.
The importance of 'being local' has become accepted in most regions of the world: having nationals on the ground is essential for sourcing investments as well as for being accepted in the business community.
European accession
One thing that has been consistent across the whole region, however, is the unifying effect of entry to the European Union. This process started almost as soon as the Berlin Wall ceased to cut Europe in half, was boosted by the two waves of accession in 2004 and 2007, and continues as the EU itself searches for a new identity. This unitary framework of law and regulation provided the degree of predictability required for private equity to succeed in areas that were just emerging from the command economy.
The great attraction of the region for private equity is superior growth rates which, whilst not as high as those found in Asia, are more attractive than the Euro area. The early private equity investments tended to be growth equity deals, with buyouts emerging only five years ago, as leverage first became available. Today it is not uncommon to have four or five banks pitching for a single mandate with terms similar to those in Western Europe, though levels of leverage are generally rather more conservative.
This benign environment is attracting more private equity funds into the region in the search for superior returns. Finding capital for even the largest deals is no longer an issue.
Types of investment
The largest deals - €250 million plus - are now auctioned by London-based investment banks. Most deals, however, continue to be sourced locally, from smaller intermediaries representing the first wave of entrepreneurs and managers wanting to cash out their shares. Secondary buyouts are also becoming more common.
With a good supply of skilled cheap labour, Central Europe has attracted export-driven companies since the early 1990s, but these have not generally offered private equity opportunities. Telecoms and media have been fruitful for private equity funds, but with rising incomes the opportunities are now predominantly in other consumer-related businesses, especially financial services - in their infancy - and in a wide range of construction-related companies.
In a reversal of the usual trend, we are also beginning to see Central European companies acquiring Western European businesses - particularly those located in countries close to Germany and Austria.
East is East and West is West?
In recent months a number of Western-based private equity groups have announced the opening of offices in Warsaw. As Poland becomes more competitive, the pioneers of the industry are beginning to look further east and south. One of the issues apparent to anyone who looks at the map is that within our 'geographical expression' there are a lot of small countries, which do not really justify a full-time local presence for a regional fund.
The exceptions to this rule are the Ukraine and Turkey, which are now attracting a great deal of interest. These countries are large enough to host national businesses of real scale. But can they really be considered part of 'Central and Eastern Europe'? The Ukraine was part of Russia from tsarist times, and some observers dispute Turkey's right to be considered European at all.
Once again, the unifying factor is the influence of the EU. Both countries have expressed their desire to become EU members, and whilst this is unlikely to happen anytime soon, they are making their economies and regulatory systems compatible with the EU and attracting foreign direct investment.
The limit of this expansion appears to be Russia itself. Most market practitioners agree that it would be unwise to regard Russia as an extension of the CEE region, and those who have been successful in Russian private equity have established dedicated funds and local offices.
Looking ahead
Only a decade ago, many people would have been sceptical about the ability of private equity, which is a fairly advanced expression of capitalism, to take root in a region used to central planning and state control. Now there is a track record of deals and exits. One can expect that more funds will be raised and more deals will be done. The average size of deal will no doubt continue to be smaller than in Western Europe, reflecting the relative size of the economies. The management deficit will be filled slowly, as a new generation of managers acquires experience of the globally-competitive market economy. And the countries of Central and Eastern Europe will continue to develop their own specific identities, and may one day cease to be defined by their geography.
Founded in 1984, Advent International is a global buyout firm with offices in 14 countries on four continents. The firm has built a global platform of over 100 investment professionals across Western and Central Europe, North America, Latin America and Asia. Its focus is on cross-border, strategic restructuring and growth opportunities in five core sectors, employing a highly active ownership approach to drive earnings improvements in portfolio companies. Since inception, Advent has raised $10 billion in private equity capital and completed more than 200 buyout and private equity transactions valued at over $27 billion in 35 countries. For more information, visit www.adventinternational.com
Joanna James has overall responsibility for Advent's investment activities in Central and Eastern Europe. She has over 20 years of private equity experience, with a strong focus on buyouts and growth equity investments. James led Advent's investments in The Bulgarian Telecommunications Company (BTC), Terapia, Synergon, Elender, Mobifon and Cesky Mobil.
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