Private equity investors in Central and Eastern Europe (CEE) are well positioned to benefit from a period of robust growth, despite geopolitical risks and macroeconomic turbulence, according to a report from Bain & Company.
In a survey of fund managers across the countries of CEE, Bain & Co identified several important driving forces that the firm said will underpin private equity growth prospects. Overall, it concluded that the economies of the 11 regional EU members will continue to expand faster than developed Western markets, describing how investors can benefit from this fundamental trend.
The report highlights the attractiveness of CEE as an investment destination with consistently strong macro fundamentals. Poland and Romania, for instance, have forecast GDP growth of 4.2% and 5.1%, respectively in 2022, versus 2.7% for the euro area. Bain’s researchers added that there is ”substantial room for further growth” in investment, with private equity investment in CEE averaging just 0.2% as a proportion of GDP, compared with 0.8% in Western Europe.
Bain & Co said the private equity and venture capital industry continues to mature across CEE, attracting more European and global investors. Private equity firms, or GPs (general partners), in the region will see an improving fundraising outlook due to better current and future returns on investment, according to the report.
Bain’s researchers said the most important trends in the CEE region in terms of investment opportunities are the green transition, manufacturing and services nearshoring and the shift to online, as well as consolidation of a fragmented, founder-owned business landscape.
Meanwhile, local investors, or LPs (limited partners), are emerging in the CEE region, with their activity intensifying in the last five years and likely to continue growing over the coming decade.
On the conflict in Ukraine, the report said CEE economies are “likely to benefit in the medium term” from ”vast opportunities to assist with reconstruction and development programmes”, while the direct impact of the conflict on investment funds’ existing operations has been limited.
Bain published its report alongside PFR Ventures, a private equity and venture capital firm based in Warsaw.
“There’s no denying that the war in neighbouring Ukraine is taking its toll on PE, particularly in fundraising and exit options”
Maciej Ćwikiewicz, president of the board of PFR Ventures
Maciej Ćwikiewicz, president of the board of PFR Ventures, said: “There’s no denying that the war in neighbouring Ukraine is taking its toll on PE, particularly in fundraising and exit options.
“But there’s reason to believe this will be relatively short-lived: 86% of the people we surveyed expect the effect to fade away within one to two years. And once the war ends, they also foresee benefits for companies in the region doing business with Ukraine, particularly in the construction, industrials and business services sectors.”
In the venture capital space, according to Bain, the value of investments in CEE is “skyrocketing”, reaching around €4.1bn in 2021, making CEE the fastest-growing venture capital market in Europe.
The region is also home to a wealth of tech talent, with four CEE countries making it into the top six globally when ranked by the quality of software developers.
Jacek Poświata, managing partner at Bain & Company Poland/CEE, said: “CEE economies are growing fast as they continue catching up to the West, fueled by a highly qualified labour force, and investments in nearshoring, infrastructure and the green economy.
“After developing over the past two decades, PE funds now have all the pieces in place to capitalise on that trend. [Venture capital] is already booming and we expect this to continue, with investment doubling or tripling over the next four years, based on the trajectories we’ve seen in Western European economies.”
Małgorzata Bobrowska, chair of the Polish Private Equity and Venture Capital Association (PSIK), added: ”Investors can benefit from trends within the region’s economies including support from the EU, with €584bn of cohesion policy funding arriving in the region from 2007-2027; nearshoring of manufacturing as global companies reconsider their supply chains in the wake of COVID; and consolidation and internationalisation of companies based in CEE.”
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