Enterprise Investors’ chairman and president Jacek Siwicki discusses the rise in expansion financing, the impact of the Warsaw Stock Exchange’s recent revival and dealmaking in CEE.

Private equity firms across the CEE region and globally reassessed their portfolios when the pandemic hit. How did you assess your private equity portfolio?

We initially reacted the same as everyone else and experienced shock in mid-March when the lockdowns started. For the first month or two, we focused on assessing what problems our portfolio was going to face and whether the businesses would survive. But all in all, when we look back at 2020, half of our ten portfolio companies exceeded 2019 results, their Ebitda grew from between 10%–20% to up to 50% in some cases. The remaining companies, which have a more consumer facing and retail profile, suffered because of the pandemic. But all of them have a sound financial standing and we did not have to inject any additional equity financing.

We managed to extend some credit lines and improve working capital management, and as of May, it has been more or less smooth sailing in all ten companies. Since then, we have also managed some travel. I visited Croatia twice, as well as France and Italy, to assist our portfolio companies. So for us, the last six months have been business as usual and there have been no major shocks for the portfolio either.

In 2020, Enterprise Investors increased its stake in two of its portfolio companies. What companies were these and what led to the increased holding?

Both were follow-on investments in existing portfolio companies. One is a bakery producer and retailer in Croatia from our PEF VII fund, and the other – from PEF VIII – is a Polish fuel importer and operator of the country’s largest independent network of gas stations. Both were transactions driven by the owners’ lifestyle changes.

In the case of the bakery business, we bought a 65% stake in the company three years ago. A year later, the founder stepped down from his role of CEO and became a non-executive board member. After another year and a half, he decided to quasi-retire with cash from the buyout.

As for the fuel business, we had a large minority stake. The founder had hoped for a family succession, but two years after our initial investment he realised the family were not prepared to take over the business, so he decided to sell another large stake. We then took control and the founder moved to a non-executive role, and remained involved in overseeing the business with us.

In terms of our involvement with the businesses, I don’t think much has changed other than the shift in focus from the founder to us at EI as the largest shareholder.

EI also completed a handful of exits last year. What is the market environment like for exits and have any of your exit plans been delayed due to the pandemic?

We were quite lucky last year, because the total value of exits in 2020 was higher than in 2019 and 2018. This is purely coincidental and the figure for last year will definitely be higher than this year, as we’ll probably complete just one exit in 2021 as opposed to one partial and three full exits last year.

I would not say that the exit environment has changed substantially in the CEE region. However, one interesting development in Warsaw, Poland, is related to the stock market, which picked up in the second half of the year. We saw the flagship floatation of Allegro, the private equity–backed business that went public, and then at the end of last year/early 2021 Advent took InPost public in Amsterdam. These transactions caused a paradigm shift on the Warsaw Stock Exchange, as both were very large, at a couple of billion euros each, and substantially oversubscribed.

The two deals attracted a lot of attention, also from foreign investors. Polish financial institutions were relatively minor players. These IPOs were followed by a couple of flotations of smaller companies, which is a new market trend.

In contrast, we are going against the current. Instead of floating, which we have done almost every year, in 2020 we completed a public to private transaction and are currently delisting a company in which we own a large majority stake.

What other developments have you seen in private equity in CEE?

Another interesting phenomenon that we’ve seen in the last year or so is rapidly rising interest in expansion financing. PEF VIII, which is a 2017 vintage, has six portfolio companies and every transaction has a growth capital component.

In PEF VII (vintage of 2012/13), by contrast, only a third were expansion and two thirds were buyouts. So people are now much more keen to look for equity growth financing in addition to buyouts. This change has been driven to some extent by the fact that the companies which were performing well are performing even better, so they want additional fuel to finance their expansion, while founders are thinking about selling out. Growing businesses are also looking to take money to fund buy and builds.

What about the CEE investment market today? Are deals being done in the region? And how comfortable are dealmakers with completing deals virtually?

We travelled throughout 2020, so none of our deals was closed completely virtually. In all of them, we initially had two or three video conferences remotely and were then invited by the founders to visit the company (in line with social distancing rules, of course). On the sellers’ side, it seems that even though we cannot shake hands, they are keen to meet in person and discuss the deal directly.

We keep meeting people who are considering selling out, but for now these are binary cases – we’ll either conclude the transactions or the founders will change their mind, in which case we will keep in touch and come back later. So it can be very hard to predict how much money we will deploy in any given year. And now, things are definitely taking longer than we’d like when it comes to securing transactions. That’s why I’m glad about the growing interest in expansion financing, because it gives us slightly greater certainty that a transaction is likely to happen.

I’m less happy with the stock market’s rebound, because for the last few years people thought that taking a company public in Warsaw was not really an option, especially if you had a smaller business. Now it looks like you can try to do it and the valuation multiples are exciting enough to make people scratch their heads and think twice.

What are EI's goals and priorities for the year ahead?

We expect to complete one exit. We are in the process of selling our alternative energy company, which develops wind and photovoltaic farms in Poland, and we have already shortlisted bidders for this, so we hope to complete this transaction in the next two months. This should be the only exit this year, as none of the other portfolio companies are ripe enough just yet.

In addition, the deal teams are active and new relationships are slowly brewing. I hope we can deploy somewhere between €50m and €100m of equity in the course of 2021, but this is mostly in the hands of God and the entrepreneurs