Mid Europa Partners’ partner and CEO Robert Knorr discusses CEE’s convergence towards Western Europe and successful dealmaking in the region over the last year. 

The CEE deal landscape has continued to thrive, even with the turbulence in the macroeconomy last year, why is this? How did it continue to operate successfully?

While some sectors have thrived, others have found it more difficult. For example, in e-commerce and logistics, most companies have managed to achieve significant organic growth because of the acceleration of the offline to online shift caused by the pandemic. Conversely, sectors relying on customer footfall, and face to face interaction have been negatively impacted, due to the continued restrictions being imposed by the governments and a certain reluctance by consumers to venture outside of their homes. This is more visible in sectors not categorised as providing ‘essential services’.

For some companies, presented with a difficult environment to achieve organic growth, their response has been an increased reliance on M&A to achieve growth plans. The number of growing companies of sufficient scale to attract PE interest is increasing in CEE, while other companies and their owners turn to private equity for support to weather the impacts of the crisis or as a way to monetise their business interests.

In respect of Mid Europa, we were within the “right” sectors. Our portfolio across our active funds is invested in four main segments: food retail and production, services, healthcare and tech. We were, therefore, able to weather the storm well throughout the pandemic, and have seen strong growth, particularly in our healthcare and e-commerce driven investments.

What challenges did you face in deal making during the pandemic? And, how has this changed the way you operate as a private equity firm? What practices have you maintained?

In the initial months of the pandemic, we worked to rapidly address issues around the switch to working from home, impact on travel and more broadly, the economic effects of the pandemic on various sectors. We saw relatively early that the pandemic will serve to accelerate several existing trends, such as online shift and digitalisation, as well as to accelerate the disruption of certain legacy industries. As a result, our first objective was to develop an understanding of the magnitude and duration of dislocations across different sectors. In addition, our operating team worked closely with the management teams of our portfolio companies to understand both the potential opportunities, as well as the challenges that the pandemic brought.

In terms of deal making, Mid Europa has developed and maintained a strong local presence within the target countries, limiting the impact of restrictions on international travel. As a result of this, and a relatively seamless switch to remote/virtual working, our portfolio management and origination activities were not significantly affected. While we saw deal activity drop in H1 because of the uncertainty at the time, we did see a reversal in Q3, despite ongoing restrictions of varying levels. Travel and meetings continued to be challenging, but given our local presence, we were able to maintain meaningful connectivity with our counterparties. 

As a result, we announced two new investments: Displate, a leading online global marketplace for artwork, and Sage Poland, a leader in ERP software in Poland. In addition, in October 2020, alongside our consortium partners, Cinven and Permira, we successfully listed Allegro, a global top ten e-commerce player and the leading and most recognised internet brand in Poland. The transaction, completed almost entirely virtually, represents the largest initial public offering on the Warsaw Stock Exchange to date.

What sectors are most attractive for dealmakers in CEE now? How has this evolved?

We have seen e-commerce experience a significant boost due to consumers shopping from the safety of their homes during lockdown, and as a result, sectors such as logistics and technology have also prospered in this environment. These sectors were already attractive and growing, but the effect has been accelerated by the crisis. Mid Europa consistently focuses on its core sectors: consumer & retail, healthcare, business services and technology. The more traditional sectors are seeing an increased level of digitisation, while all our sectors continue to see significant levels of deal activity and the outlook remains strong.

In terms of the private equity landscape, how does CEE compare to the rest of Europe?

CEE continues its path of convergence towards Western Europe, with growing wealth and disposable incomes, the professionalisation of governance structures and company management, and consolidation of fragmented markets. The region continues to benefit from the lower-cost yet highly skilled workforce. Private equity brings enormous investment into the region, with €19bn invested into CEE companies between 2010 and 2019 (according to Invest Europe).

This said, CEE still represents a very small percentage of investment activity in Europe, demonstrating further opportunity for growth.

With regards to the Covid-19 pandemic, both Western Europe and Central Eastern Europe experienced a significantly worse “Second Wave” of Covid, but given the strong macro fundamentals of the CEE region, including low levels of public debt and resilient economies, we expect to see uninterrupted convergence trends with more developed markets.