PRINT THIS PAGE Institutional Investor Profile: Dr Petra Salesny, Partner, ALPHA Associates28/02/2005. Source: AltAssets. 
Dr Petra Salesny on the challenges and opportunities that ALPHA Associates have faced as an investor focussed on CEE. As a limited partner with seven years of CEE investment experience the firm has built long-standing relationships with fund managers in the region.  One of ALPHA Associates' core competences is private equity investing in Central & Eastern Europe. The firm is currently raising its second multi-manager private equity fund dedicated to CEE. It is the continuation of the threefold investment strategy successfully deployed in 5E Holding, the firm's first diversified CEE private equity fund: Firstly, make primary commitments to private equity funds in the region; secondly, acquire fund interests in the secondary market; and thirdly, make selective direct investments alongside strong local partners. The fund will focus on investment in the eight new CEE EU member states, primarily Poland, the Czech Republic and Hungary; secondly, the second-round accession countries - Bulgaria, Romania, and Croatia; and selectively in Russia and other CEE countries.
Where about are you in the investment process of your first CEE fund?
5E Holding, initially set up as an evergreen vehicle re-investing proceeds, completed its investment period for primary fund investments at the end of 2003 and will continue to make secondary fund purchases and direct investments until the end of 2005. Then the company will enter into harvesting mode and distribute proceeds to the investors. We are very pleased with the performance of the fund although it was launched at a time when the legal and regulatory frameworks of the economies in the region and the banking and currency environment were far more challenging than today.
The risk-return profile of transactions in the region has developed favourably. The early 1990s saw mostly privatisations, restructurings of state-owned enterprises and start-ups built on 'imported' Western business concepts - which often failed. Today the market is moving towards late-stage expansion financing and buy-and-build strategies. Investment targets are profitable and growing businesses managed by local entrepreneurs.
The increasing availability of leverage and mezzanine financing spurs the buy-out market. Industry diversification is broad, including consumer products and services, financial services, GSM operators and alternative telcos, life science and healthcare, and IT. Certainly the sector spectrum that is accessible through private equity is much broader than the industry spectrum of listed stocks.
How does your investment process work?
We actively screen the market, drawing upon our long-standing network in the region. We have invested in Central & Eastern Europe since 1998, we know the region and the players and have some long-standing relationships with local fund managers. We are represented on a number of fund advisory boards in the region, which gives us a very good insight into the private equity activity in the market. We are also one of the few professional and systematic purchasers of secondary fund interests in the region.
As the market is comparatively small, and it is typically individual positions and not large portfolios that are for sale, it has not yet moved into the focus of the large international secondary players. Through our unique market position as the only existing fund-of-funds manager in the region, we have privileged access to secondary opportunities, which we typically identify and negotiate on a private basis.
What is your appetite for first-time funds?
When we invested 5E Holding, which was launched in 1998, there were very few fund managers in the region with a demonstrable track record. This has changed dramatically. Today there is a universe of experienced fund managers. We invest in first-time funds if the individual team members can demonstrate convincing track records and we conclude from our due diligence on the team's organisation, culture, skill set, network in the region, deal-sourcing capability, etc, that they can function successfully as a team and can implement the proposed strategy.
What do you look for in a good private equity manager?
A good private equity manager has strong deal-sourcing, analytical, negotiation and execution skills. A good private equity manager also knows that the job is not done when an investment is made. A major part of the job only begins at that point, namely managing the company to growth through hands-on involvement, and driving the company towards a successful exit.
Successful private equity investing is not only about smart pricing and negotiating, it is a lot about ongoing value creation, about recognising and addressing operational, strategic and management issues in a timely fashion - and it is about successful exits.
How do you put your new investment portfolios together?
In our funds we pursue a threefold investment strategy of selecting high quality fund managers for a defined investment strategy, purchasing fund interests in the secondary market and making selective direct co-investments. In CEE this strategy has proven to capitalise ideally on market opportunities while maximising risk diversification. We are looking for broad sector diversification and move with the opportunities presented by the market and for diversification across selected countries, while aiming to retain the flexibility to capitalise on industry-specific and country-specific opportunities as they arise.
Looking ahead, what do you think about investment opportunities in CEE?
We find the current window of opportunity in CEE very attractive. The way we like to describe it is that private equity investing in CEE today offers the opportunity to participate in 'emerging market growth' at 'developed market risk', as GDP growth in the new CEE EU member states outstrips that of old Europe and will continue to do so as the economies catch up. At the same time, the legal and regulatory frameworks of the countries are rapidly adapting to EU standards, and the currencies are converging towards the Euro.
The fast development creates a demand for equity, yet unlike in Western Europe the supply of capital remains scarce, which means attractive entry valuations and transaction terms. And the private equity industry in the region has matured significantly since the early 1990s. Today, there are a number of experienced fund managers with demonstrable track records.
What piece of advice would you give to new investors?
New investors in private equity should familiarise themselves with the features of the asset class, most prominently the long-term investment horizon and the illiquidity, to make an informed decision whether it suits their needs. Private equity outperforms the public markets over the long term but investors have to be able and willing to stick it out.
A private equity fund shows negative cash flows and returns during the portfolio building phase in the first years (the famous J-curve effect). This is a feature inherent to the asset class - there is a planting phase and a harvesting phase. Keys to successful private equity investing are diversification across managers, stages, geographies and industries ('Don't put all your eggs in one basket.'), investment continuity - meaning diversification across vintage years, manager selection and a disciplined investment process.
As manager selection is key, it is advisable for a new investor without in-house specialists to delegate the portfolio building and management to a specialist. Fund of funds managed by experienced, disciplined managers offer broad risk diversification and an optimal way to access the asset class.
What irritates you about private equity?
There is nothing that really irritates me about private equity, but what irritates me occasionally is the misperception of the asset class in some investor segments. It is an asset class often misunderstood, especially by institutions that invested in a rather undisciplined fashion in very few large positions in single regions or single stages in the boom years, lost money and then fled the asset class for all the wrong reasons.
How would you describe the investment environment in CEE today?
In CEE the impact of the EU accession on the eight new member states' economies was tremendous. GDP growth accelerated dramatically in anticipation of entry into the EU, outstripping the European average: the countries' GDP grew at an average real rate of 4.5 per cent between 1993 and 2002, or 2.5 percentage points above the EU average. The EU Commission expects an additional annual growth effect from EU membership of 1.3 per cent to 2.1 per cent in the four years following accession.
EU accession is triggering a substantial direct investment inflow into the region, as foreign companies seek to expand into higher value-added activities, taking advantage of the high education level and still relatively low wages of the local workforce. Ongoing economic reform is generating an entrepreneurial and competitive environment. At the same time, the legal and regulatory frameworks of the new member states are rapidly adjusting to EU standards, internationally accepted accounting rules and rules on corporate governance. Also, all new member states have reduced inflation to single digit levels, and local currencies are converging towards the Euro. The new EU members are scheduled to join the European Monetary Union by 2010. All of this creates a favourable environment for private equity investing in the region.
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