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Q&A: Navigating complexity

Xhulio Ismalaj 27 February 2023

Having backed more than 100 businesses in Central Europe since the firm’s inception in 1998, MCI Capital managing partner and founder Tomasz Czechowicz weighs in on opportunities in the region, the need for specialisation and what the future holds for MCI.

What opportunities do you see for private equity in CEE?

There are plenty of notable success stories from the CEE region. The most profitable private equity deal in the history of European private equity, Advent purchasing the parcel locker operator InPost, happened in Poland. The largest e-commerce IPO in Europe, Allegro, came from Poland. The largest global SaaS IPO, UiPath from Romania, happened on Nasdaq. I would put this down to a combination of the high quality of entrepreneurs, the economy and IT talent. We’re very happy to be focused on CEE private equity. The market is growing, there is a reasonable level of competition and it’s not overcrowded or undercrowded, which makes us believe that we will continue with the same or better returns than we received in the past.

How has the war in Ukraine affected the region and your firm?

There is large immigration from Ukraine, but also some from Russia and Belarus, which is helping to improve the quality of labour skills in CEE. There are more technology and IT specialists in the region now, with IT development centres and production facilities in Ukraine or Russia also being relocated to CEE. Interesting entrepreneurs are also moving from Ukraine to restart or continue their businesses in the CEE region – especially in Poland.

In terms of how it impacted us, we were surprised to discover that our portfolio company, Answear.com, which was working in Ukraine before the war, saw its business in Ukraine increase after the war began. This is because Russian competition was cut off as its companies moved out of the country, resulting in the Ukrainian market being served mostly by CEE-based companies. This has really increased the volume of business that you can do within Ukraine. However, we have also noted decreased interest from US-based LPs in investments in the CEE. Until there is a settlement in Ukraine, I think there will be some reservations towards the region.

More broadly, how has your firm coped with the unpredictable market conditions during the past couple of years?

As the only pure-digital private equity firm in CEE, Covid was quite positive for our portfolio. There was a huge boom in the sectors of e-commerce, SaaS, edtech and medtech. I would even say that Covid created a bubble in the technology sector, so last year there was a massive correction in valuations. Considering this, we did relatively well, with a good, high-single-digit IRR, which for many firms invested in technology was probably unachievable. In 2021 we had more than 30% net IRR, so I think we will continue to have an average growth of 20% per year.

Overall, 2021 was a record year in terms of new investments for private equity, but new investments have been the most difficult part of the business in 2022, because of the huge discrepancies between sellers’ and buyers’ expectations. Add in the massive devaluation and lack of clarity due to the war, inflation and growing interest rates, and 2022 was a much weaker year. However, given that there was much lower transaction activity in 2022, I think we will observe some catchup effects with a larger number of deals coming in 2023 and 2024.

Do you think CEE-based PE firms will increasingly have to specialise?

You definitely need to specialise in this region. Unlike Western Europe, there is a sense of complexity around our region. CEE and the Balkans have a population of more than 180 million people, spread across 20 different countries, with 15 different languages. Sometimes there is dedicated legislation for each of the countries, so to be really successful in the region, we think it’s better to be local versus pan-European. For CEE, operating in the lower mid-market is attractive, because most of your exits are generated on the European or global level, meaning you get to escape the local discount level. Usually, there is a discount on smaller deals in CEE, as local valuations are lower than Western European and US valuations. Most of the deals we do are basically addressing this gap – we buy in the lower mid-market and mid-market, and then we exit to the mid-market and large-caps.

What does the future hold for MCI Capital?

We expect about €300-500m worth of dry powder for investments between 2023 and 2025, which we’re looking to deploy within the next three years. I think there will be more transactions in CEE, so we’re hoping to benefit from that. Given our average deal size, which is €30-60m, we should be making around three-plus deals per year for the next three years, which is a pretty ambitious plan. Regarding fund size, we’re currently at €600m evergreen and aiming to reach our objective of €1bn by 2025 or 2026. We may have some exits in 2023, but that’s not the major focus. Our focus is on growing the value of our current portfolio, and new investments.

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