At the table

Zbigniew Rekusz, Mid Europa Partners

Jacek Siwicki, Enterprise Investors

Przemek Szczepanski, Syntaxis Capital

Ryszard Wojtkowski, Resource Partners

Rafal Nowakowski, Hexagon Capital

Witold Radwanski, Krokus Private Equity

On 27 April, a series of explosions rocked Dnipropetrovsk. Planted in bins around the Ukrainian city, 11 bombs were triggered in succession, the indiscriminate attack injuring 29 people. Thankfully, nobody was killed.

In the immediate aftermath, Polish president Bronislaw Komorowski decried the attacks while the country’s Internal Security Agency played down the threat on home soil. If the Dnipropetrovsk assault had happened a year from now it wouldn’t have caused such a stir, but today Poland has a lot at stake. Between 8 June and 1 July both Poland and Ukraine will host Euro 2012, one of the biggest sporting events in the world. The last thing Komorowski needs is the press casting a pall over the tournament and ticket-holders tarnishing the co-hosts with the same brush.

Of course, for Central and Eastern Europe’s 18 countries, being lumped in the same basket is nothing new. Since Communism let its iron grip go, the region’s potential has been glaringly obvious. Yet Western Europe has long viewed the east of the continent as one. Until the world economy began unravelling, that is.

“In the past, the region wasn’t so diversified, but now Poland is considered to be low-risk compared to its peers,” says Przemek Szczepanski, partner at Syntaxis Capital. “At the same time, GDP has shown the strongest growth performance. So if any firm wants to have a Central and Eastern European strategy, by definition they have to have a presence in the country.”

Odd one out

Surrounded by anaemic growth and, worse still, double dips, the only EU country to duck recession is on course for a bumper year. A recent survey by Roland Berger points to Polish private equity thriving in 2012, with four per cent growth versus minus figures in more classic buyout territories.

All macro indicators point to a healthy path ahead – output in Q4 2011 up 4.3 per cent, above early estimates, is not to be sniffed at. Inflation is tamed and unemployment levels are under control. Run a magnifying glass over the country, and things still look ship-shape.

“All funds were raised before Lehman so we had enough gunpowder to last us through the crisis,” observes Jacek Siwicki, president of Enterprise Investors. “Most of the portfolios weren’t aggressively leveraged either, so we didn’t have any spectacular Western European covenant breaches where the debt had to be renegotiated for equity and, between the macro and the micro, there is still a fast-developing private sector.”

That’s more than can be said back west. And there’s a trademark in this end of Europe that plays right into private equity’s hands. Managing any business inevitably runs its course – but unlike neighbouring Germany, where the chain of family inheritance is often unbreakable, Poland’s nascent capitalism means business owners have less to lose by cashing in. This is the first generation and they can do what they like. Around 80 per cent of Enterprise Investors’ deals are struck with founders, the remainder comprising the lesser-spotted pass-the-parcel and corporate carve-out.

Bloated corporations can’t be ruled out, however. Montagu recently helped incumbent telco TP SA Group lighten the load when it acquired TV transmission business Emitel for €425m. “We expect an increase in these types of transactions as multinationals try to cure some of the problems they have in their home markets, pay down debt and raise cash,” anticipates Zbigniew Rekusz, a partner at Mid Europa.

And what of Poland’s ongoing privatisation programme? When Blackstone’s Stephen Schwarzman set foot in the country last year at the behest of government officials, it looked as though private equity might sink its teeth into public assets. Unless, of course, the trip was merely ceremonial.

“In one case we put in an offer and were outbid by someone who offered twice as much as us. The government spent half a year trying to collect the money but it never happened, so the process was cancelled and they started again,” recalls Ryszard Wojtkowski, managing partner of Resource Partners. “We and the bidder were invited to the shortlist once again after that. I decided against acting as a benchmark again.”

Those roundtable participants who have brushed with government sales attest that it’s time-consuming, expensive, wildly bureaucratic and the chances of processes being derailed run high. And that’s to say nothing of unflinching trade unions. Besides, 22 years on from the Soviet Union’s demise and the chances of any remaining public institutions being lucrative yet unnoticed by everyone, including their own management teams, are slim to none.

Buyout Bonanza?

At least business is on the up. In 2005 there were 5,000 private firms with revenues between €5m and €50m. Today that’s more like 9,000. Move upmarket and the 500 companies with turnover above €100m have doubled since 2005. Presumably, with such a buoyant private sector, foreign firms have been piling in, inflating prices.

“Gradually, from 2004 to 2005, you had large Western funds coming to town. Some of them established offices here and were keen to put their flags in the ground and make some high-profile deals. A lot of these deals went south since then and we don’t see as much competition from those houses any more. In well-organised auction processes you have Western guys flying in and out, and those who do have offices usually only have three or four people. Competition isn’t an issue,” claims Rekusz.

Carlyle famously retrenched from Warsaw in 2008 after only a year. Bridgepoint’s investment in private rail company CTL Logistics, its only asset in the region, was rumoured to be on the ropes two years ago. It seems that it pays to be local. Competition from rival funds may be wanting in Lehman’s wake, but there’s another force to be reckoned with.

If you sifted through local pension funds’ portfolios you’d assume they can’t get enough of the stock market. The truth is they’re obliged by law to put money into domestic stocks rather than invest abroad. Consequently, the Warsaw Stock Exchange (WSE) is bustling, with market caps frequently topping 20 times earnings. And listing is painless. If you want to float in the UK you need at least a year’s working capital to hand. Not in Poland. Businesses can list as little as five per cent of their equity too. In the UK there’s a 25 per cent minimum. This light touch makes the WSE a major competitor, entrepreneurs often opting for the public route.

IPO flurry

There are two sides to this coin, however. When it comes to private equity, London – the continent’s most liquid bourse – doesn’t see anywhere near the kind of action Warsaw does. For most European mid-market firms IPOs are off-limits, the domain of Warburg Pincus, Cinven and their mega peers. Of the eight European sponsor-backed IPOs of last year, two went to the WSE. By contrast, one went to Nasdaq, one to Hong Kong and London played host to none. And we’re not talking juggernauts here. Innova Capital raised $47.3m (€36m) from paving business Libet, while FX broker Dom Maklerski sold $74.3m worth of equity.

It’s not a complete free-for-all, though. Unlike the six- to 18-month lock-ins required in the UK, Poland’s underwriters can demand anywhere up to two years. “The companies that we invest in may not be beefy enough for a strategic investor but they can get a good price on the stock exchange and then they have to grow and continue to do so,” says Witold Radwanski, partner at Krokus Private Equity. Once on display, corporations can shop freely from the bourse and – fluctuations notwithstanding – net private equity handsome returns.

And buyout shops have yet more to be grateful for. “As this generation of Polish entrepreneurs has matured and they’ve started to think about what their end game is, they’ve realised that corporate governance is essential to sell your company or list, and that you can actually get a premium with that governance in place. The success of the WSE has really enforced that by imposing discipline if they want to IPO, which is the end game for many companies. From ten years ago to today, it’s the difference between day and night.”

Siwicki agrees that corporate governance has taken giant strides in the past two decades. He recalls having to run two sets of audits – Polish tax-driven accounts and the US GAAP standard. Entrepreneurs would shun the GAAP audits because they were seen as “worthless”. It wasn’t uncommon to find a sole practitioner heading up a €50m-plus business – a fiscal and legal timebomb just waiting to blow. And even today you can still find companies with no board that do not wish to have a helping hand or outsiders scanning the numbers. But Poland is very much part of the Union, even if it has avoided the euro.

“You go over to the Ukraine or Russia and you realise that being an EU member has its advantages and it helps a lot, even on the fundraising side. There is a clear dividing line on the Bug river – to the West you have Europe and on the other side the wild East, which is much less structured and has poorer corporate governance,” claims Siwicki.

Investors should take heed. Turkey has been stealing Central and Eastern Europe’s shine in recent months, what with its jaw-dropping growth and hardy banks. Yet this supposed Aladdin’s cave is far from perfect, with auditing standards and corporate governance still murky. “If you look at the track records, Poland has established itself as an attractive place for private equity in the last 20 years with hundreds of transactions and successful exits. Okay, there have been a few deals in Turkey but it still needs to prove its place,” claims Rekusz.

Local knowledge

It’s not just a lack of exits that sets the two apart either. Turkey is an insider’s market. Unless you’re in the know, it’s nigh-on impossible to do business, let alone buy one. It’s no coincidence then that GPs in Istanbul talk up their contacts. By contrast, there is no impervious family network to crack in Poland, and with eight years of EU membership to its name, all the necessary checks and standards are in place. 

For all the perks, however, those eight years mean Warsaw is now entrenched in Europe, in sickness and in health. This may spell trouble for those nudging up against the end of their investment phases. “Around three-quarters of US investors would treat us as a basket case as they just don’t want anything to do with Europe. It doesn’t matter if it’s Poland or Spain, they just don’t want to go there,” says Siwicki.

Wojtkowski doesn’t see America’s aversion to the struggling free trade bloc as insurmountable. “Today we receive a lot of cold calls from LPs who have Poland on their radar screen and they don’t have too many options. So from that point of view, fundraising shouldn’t be a problem.” he says. “But first-time funds won’t be so lucky.”

If and when those funds get raised, at least there’s debt on the table, even if last summer’s events spooked lenders. “At the larger end of the market you would speak to consortia of pan-European or global banks, and that would be like a Western European deal in terms of leverage statistics and pricing. Where we operate, in the mid-market, you speak to local banks and some of these are really very liquid,” assures Szczepanski.

For loans of €100m and above, banks are charging 350bps to 400bps on multiples of 3.5x to 4x. Smaller cheques warrant lower interest rates, although leverage inversely drops with them. And the markets appear to trust the country’s political and macro footing. Rekusz observes that investors have a large appetite for Polish bonds, making refinancing hefty businesses a relatively painless task.

So, a private sector that’s growing exponentially, a 38-million-strong domestic market with swelling wallets, a consumer sector begging for consolidation, liquid banks eager to lend to the mid-market and EU standards to help GPs sleep at night. Poland has a lot going for it. Nowhere else in the Union has its growth, and true emerging markets are steeped in risk. It’s not without its foibles, however. Given the country’s enviable bill of health, it’s no wonder that vendors refuse to part with their businesses for anything less than the best prices. Still, it’s enough to have those Western funds marching back.

In June, football fans the world over will fly in to watch Europe battle it out on the pitch, bomb scares permitting. Poland’s native funds, meanwhile, will be crossing their fingers, hoping the West’s buyout majors continue to stay back home. 

Real Deals would like to thank Enterprise Investors, Mid Europa partners and Syntaxis capital for making this roundtable possible.