1. CEE Roundtable
the panel
Michal Rusiecki,
Enterprise
Investors
Michal Rusiecki is
managing partner
at Warsaw-based
mid-market private equity group
Enterprise Investors. He is responsible
for investments in the food retail,
consumer goods, healthcare,
renewable energy and cleantech
sectors. He also oversees the firm’s
activities in Slovenia and Croatia.
He has completed 15 transactions,
including those in Polish Energy
Partners, Harper Hygienics, DGS, Dino,
Wento and UOS. Before moving into
private equity, he worked at the Polish
Ministry of Privatization and at the
University of Warsaw.
roundtable Matthew
Avoiding contagion
Strassberg,
Mid Europa
Partners
Matthew Strassberg is a
PEI’s recent trip to Warsaw to gauge market sentiment partner at CEE-focused
buyout firm Mid Europa Partners.
found three local industry heavyweights relatively bullish Formerly an investment banker with
Merrill Lynch in London and with JP
about Central and Eastern Europe’s prospects. By Oliver Morgan in London and in New York,
Smiddy and an executive at US buyout firm TLC
Capital Partners, he joined Mid Europa
in 2002. He was involved in Mid Europa’s
investment and recapitalisations of
Invitel, and the financing of the Bité
If the wretched weather in London as year, especially in light of what’s going on buyout. He led the series of four
acquisitions which constitute the Lux
Private Equity International left for Poland elsewhere in the Eurozone?
Med Group, the acquisition of Kent
in early May (torrential rain, with dark Strassberg: If you read the Western media Hospital Group and is responsible
clouds overhead) seemed symptomatic of reports and other publications of that sort, for the on-going consolidation of the
Diagnostics Platform. Most recently he
Western Europe’s economic gloom, the you probably think the world is coming to
led the exit from Aster.
blazing sunshine in Warsaw – where three an end. Frankly it has been coming to an
local industry luminaries gathered for our end since 2009 – but it is 2012 and none Richard Seewald,
annual Central and Eastern Europe round- of the banking failures that were predicted ALPHA Associates
Richard Seewald is a
table – was equally fitting for a region that have happened.There has been turbulence, Partner at ALPHA
has generally weathered the storm rather but most of the countries in the region Associates, a Zurich
better than some of its peers to the West. have done pretty well, and actually had based global private
equity investor with over USD 2 billion
We asked three local experts for their view reasonably robust domestic consumption. under management. He is responsible
on the current state of play. They have very pro-growth tax regimes and for direct investments, secondary
they have much lower debt-to-GDP levels. transactions and primary fund
commitments and is a member of the
PEI: From a macroeconomic perspective, The level of fiscal resilience and flexibility
firm’s Investment Committee.
how has the region fared over the past is therefore much greater. ››
SPONSORED BY Enterprise Investors, Mid Europa Partners and Alpha Associates
j u n e 2 0 1 2 private equity international 39

2. cee roundtable
We are very
big believers
in the fact that
the region still has a lot of
intrinsic growth from all
these trends in consumer-
based convergence
Matthew Strassberg
›› Seewald: In comparison to the
Eurozone, the economic environment
in the region has been resilient with an
average GDP growth rate of 4.4 percent
in 2011 and a forecast growth rate of 3
percent in 2012. Poland,Turkey and Russia
have performed especially well and this is
expected to continue in 2012. In Q1 of
this year we have seen softening in some
of the export-dependent economies in the
region like the Czech Republic, reflecting
the challenges of trade partners in Western
Europe.
That said, consumer sentiment has consumer resilience, but the crisis has Poland matters so much to what you see
remained positive and is an important undeniably brought the economic cycle in the overall region.
driver of private equity performance. to Central Europe. Before that, with the
Looking at some of the fundamentals of exception of Russia and the 1997 crisis, PEI: Poland may be the standout performer,
the region, almost all the CEE countries the Central European region and new EU but this is a diverse region – how does the
fulfill the Maastricht criteria or are closer members more or less benefited from picture differ across the board?
to fulfilling them than many members of strong growth irrespective of what was Seewald: The region’s economies are as
the EMU, and with the exception of Hun- happening elsewhere. The current crisis diverse as the various opportunities for
gary have lower debt as percentages of has ended that and brought the economic private equity capital to be deployed in
GDP than the key Western economies of cycle to the region. CEE. They are by no means homogenous.
France, Germany and the UK. So, in light You see it most acutely with cyclical A good starting point is Russia, which
of what is going on elsewhere in the Euro- businesses exposed to the construction will become the largest consumer market
zone, on balance, CEE has fared better. I say market – there’s been a lot of pain there in Europe in many key segments and sub-
this with caution, however; the Eurozone and it is not going away. So I think if you segments over the next five to ten years,
crisis clearly presents potential hazards to invest in cyclical businesses, you need to ranging from automobiles to household
the region should its contagion effects spill start being much more mindful of the goods and the services sector. It already
over into greater Europe in a more pro- downside. Where we have a consumer- is the largest internet market, overtaking
nounced way. focused business or a business which Germany last year. Private equity investors
is not cyclically exposed, it’s done well. in Russia, in aggregate, have done very well,
Rusiecki: I totally agree with the positive Our export-led businesses have done well, outperforming other BRIC markets over
notes, so I’ll add some negative items, obviously helped (especially in Poland) by the last ten years and with reasonably good
just for the full picture! I agree with the the weakening of the currency. Generally prospects going forward. ››
40 private equity international june 2 0 1 2

3. cee roundtable
Where we have
a consumer-
focused
business or a business
which is not cyclically
exposed, it’s done well
Michal Rusiecki
›› Rusiecki: I think it is increasingly Strassberg: You see, on that we differ, thoughtful asset selection – but again, we
difficult to justify investments in many of because we actually see the former find opportunities in that market. As those
the smaller markets of the region. Yugoslavia as an attractive place to invest – countries have traditionally been neglected
in terms of their pro-business attitude, good by investors, there is low-hanging fruit in
Strassberg: There has definitely been a growth prospects and where they stand on terms of the availability of transformational
decoupling. In the golden days of 2006/07, issues such as the corruption index. transactions, and the ability to add value
you had a lot of investors who became less very quickly by improving processes and
discriminating, despite obvious signs of Rusiecki: I think the former Yugoslavia is corporate governance. In places like Poland,
differences within the region. Investors still a market marked by a long history of things are at a different level of sophistication
went into places like Romania and debt-fuelled high valuations paid by local and it therefore requires a more considered
Bulgaria and showed effectively no price investors.The bubble hasn’t completely burst approach to value creation.
discrimination on assets, relative to what – expectations still remain high. When the
they were prepared to pay for Polish or debt is worked out, expectations go down PEI: What is your perception on Russia,
Czech companies. Now people have learned and assets can be picked up at reasonable which always seems to come in fourth in
that there is a difference.There’s the unique prices, then it will be attractive. There are conversations about the BRIC countries?
case of Hungary, too, which for a long time many strong manufacturing businesses in the Seewald: Our perceptions of Russia are
was among the good countries and then for formerYugoslavia which would be interesting founded on experience gained investing in
the last few years has been in the doldrums. if the sellers’ price expectations were in line the country, and on balance this has been
with valuations elsewhere in Europe. good to date. In aggregate, private equity
Rusiecki: Then there’s the formerYugoslavia, returns in Russia over the last 10 years
which we are much less enthusiastic about Strassberg: Particularly Slovenia and Croatia have outperformed places like China, India,
– it’s one of those places that remains in a have shown good indications in terms of Western Europe and the US. For casual
world of its own. convergence trends. Serbia requires more observers of the market, there is often ››
42 private equity international june 2 0 1 2

4. cee roundtable
›› a less flattering perception which is
driven in some cases by faulty assumptions
and in other cases by actual risks present
in all of the BRIC markets.
If what you say is true – that Russia
seems to come in fourth in conversations
about BRIC countries –then implicitly the
type of inefficiencies that private equity
thrives on should remain in place, and posi-
tion the market well for investors familiar
with the opportunity.
PEI: How about your portfolio companies?
Have they been affected by the wider
malaise in Western Europe?
Strassberg: If I look at our portfolio
companies that are exposed to the consumer
end of the Central European market, by and
large they have done very well. If I look at
investments in regulated sectors such as
alternative energy or telecoms, the driver
for performance has frankly been less about
macro statistics and more about regulatory
shifts. But ultimately nothing that has The main in contact since then and appear to be
happened to the companies in the region maintaining their level of interest.
seems to be directly correlated with the
concern [is] how There are some investors who, for their
eurozone crisis. By and large, we think the the Eurozone own reasons – either because they don’t
region has been sheltered to a large extent. crisis may affect the have the capital or because of regulatory
constraints – will have some hurdles. But
region and derail some of
Seewald: Across our portfolio, including I don’t think that LPs have fundamentally
underlying fund investments and direct the opportunities in the walked away from the region. The noise
investments, on balance we saw both top short to mid-term emerging from all the issues around the
line and EBITDA growth come back over the eurozone has made LPs, particularly those
Richard Seewald
last two years. So it has been resilient.We had from the US or Asia, more concerned if
two direct portfolio companies go public on they are considering Central Europe for
the New York Stock Exchange in February the first time.
2012, namely EPAM Systems, a Russian IT Rusiecki: Investors recognise that even if you
outsourcing business and AVGTechnologies, a are performing better than many European Seewald: Most investors implicitly
security software developer that was founded countries, if the eurozone collapses then understand the opportunity for private
in the Czech Republic. Both companies are obviously there’ll be a knock-on effect. equity here – the concept of convergence
examples of businesses built by scientists and European investors obviously have a slightly with core Europe, the consumer driven
engineers from the region. different perspective – but encouraging growth, the growth buyout market in the
investors from outside of Europe is a challenge. region and the inefficiencies that usually
PEI: How do LPs perceive the region? present investors with good opportunities.
Are they still enthusiastic about the Strassberg: We have had some investors The main concern comes from the question
opportunities here, or are concerns about who for various reasons did not come into of how the eurozone crisis may affect
Europe clouding the issue? our last fund in 2007, but have remained the region and derail some of the ››
44 private equity international june 2 0 1 2

5. cee roundtable
›› opportunities in CEE in the short to yourself rooting for a delay in convergence.
mid-term. We believe convergence is a good thing,
and want to benefit from it, rather than
PEI: What about local LPs? How has that hoping it slows.
market developed over the last few years?
Is there capital to be found? PEI: Has your approach to investing changed
Strassberg: We haven’t seen any. One of over the last few years in terms of how
the attractive features of the region from operationally engaged you are with your
an investment standpoint is the relative assets?
scarcity of domestic capital competing Strassberg: We have ended up spending
against funds like ourselves.There are very more time on buy-and-builds – which is
few investors in the region that are willing more labour intensive because the onus on
and able to allocate to alternative asset M&A falls on more on our teams rather
classes. There is limited understanding of than on the management teams.
the non-traditional asset classes, and there Also, we’re seeing the creation of
are some regulatory-driven constraints. regional platforms. Historically, it was
less common; it seemed dangerous, given
PEI: Across the region, which sectors do management teams typically didn’t have the
you see as most attractive at the moment? requisite expertise and were absorbed by
Rusiecki: It’s consumer-driven. I think we the challenge of managing growth within
generally assume that the underlying level of their domestic confines. Now, we’re seeing
market growth is going to be much slower situations where there’s an explicit oppor-
than pre-2008, so the real growth has to be tunity created, as the business has grown
market share driven – as with food retail as much as it can in its domestic market
and healthcare. and is now looking for expansion. That’s
Renewable energy is interesting, but could where private equity investors are able Management
be a victim of the crisis.A lot of the activity has to help – but it also means more labour
been driven by investors from Eurozone coun- intensity from us, in making introductions,
teams are
tries with perceived zero cost of capital. And bringing in incremental management teams, becoming more
that source has dried up, which actually cre- financing locally, and so on. sophisticated, and the
ates opportunities. On the other hand, there
involvement in setting
is also a regulatory risk, as governments look Rusiecki: Management teams are becoming
at the cost of supporting renewable energy. more sophisticated, and the involvement in up the basic systems is
So we’re very careful about how we structure setting up the basic management systems is getting smaller
deals in this area. getting smaller and smaller. Also, the new
Michal Rusiecki
generations of entrepreneurs are 35 to 45
Strassberg: Our investors want exposure years old and they are more sophisticated
to the GDP growth profile of the region. So and understand the need to build teams. – because at this point, with valuations
we have consistently sought opportunities So I think that involvement is actually less that have come down somewhat, you are
that give us exposure to anything that’s in basic tasks, which leaves more time for finding that with the 45 to 50 percent
consumer-driven, plus service sectors like helping companies grow. equity cushion requirement, you can fully
healthcare, telecoms and cable television. finance with senior debt only.
We like sectors where the fundamental PEI: Have debt-to-equity ratios changed
theme involves benefiting from the growth at all? PEI: What about competition? Is there too
in disposable income of the local population. Strassberg: Dramatically. In effect, much capital chasing too few deals?
We avoid themes based on labour cost the equity cushion requirement has Seewald: I wouldn’t say there is a capital
arbitrage, because then you suddenly find marginalised mezzanine, to some extent overhang in the region. Quite the opposite.
46 private equity international june 2 0 1 2

6. CEE Roundtable
enough. As long as you have the money and PEI: And what are the biggest clouds on
the will, you can buy a company. It’s what the horizon?
you do afterwards – your ability to follow Seewald: Aside from Eurozone concerns,
up day-to-day, working with the manage- the CEE region must accelerate innovation
ment teams, speaking their language, meet- across industry sectors in order to position
ing the regulators, meeting the relevant itself as not only a lower cost region, which
counterparties – that’s quite operationally for the most part in the core countries it no
hands-on for most of the big pan-European longer is, but also a high value, productivity
guys to get involved in. driven business environment.Without this,
economies will become stagnant over time
Rusiecki: Quite honestly, the difficult and the region will lose its edge. Private
competition has not so much been equity can play an important role in
from private equity players – although achieving this and already has accomplished
there have been auctions where we’ve a great deal, but the human resources
competed against each other head on. A needed going forward for fund management
lot of competition has been from strategic will be different.
investors, who are willing to pay a very
high price for growth. If you look at the Rusiecki: Will companies move from the
food companies sold in Poland in the last model of offering reasonable quality at
few years, there have been exceptionally a lower price to offering some sort of
high valuations placed on them by innovation and value-add? Will they move
investors willing to pay for any growth from being just component suppliers
whatsoever. to being suppliers of complete systems?
If they don’t, I think the threat is that
PEI: Looking forward then, what’s your Central Europe will end-up similar to many
In the mid-market and lower mid-market, prognosis for the region? parts of Southern Europe: no longer fully
where we believe the sweet spot is for Seewald: I like the private equity competitive as just a subcontractor, but
private equity in CEE, we are seeing opportunity in CEE and Russia but I am lacking enough inherent innovation.
imbalances of supply and demand of capital concerned that the Eurozone crisis will Where I think Central Europe is quite
that favour investors. Given the challenges cause further disruption in the near to weak – and where the likes of Sweden, Ger-
to raise new private equity funds in the mid-term. Assuming no protracted market many and so on excel – is in innovation
current market, I believe these imbalances disruptions in the mid to long term, the around manufacturing. There is not very
will remain in place over the next five region remains well positioned to benefit much worthwhile research being done in
years and a shakeout will occur where from the tail winds driving the convergence the technical universities of Central Europe
some managers unable to raise will exit the with western markets, especially the CEE – and if it is done, it’s often very theoreti-
market. This type of shakeout is a natural, consumer and the deep pool of human cal, with no link to the commercial world.
healthy evolution of the market. capital in the region. But I think this is something that will
cure itself. There are quite a few serial
Strassberg: One of the things we’ve seen Strassberg: We are very big believers in entrepreneurs that are redeploying
is that some of the pan-European players the fact that the region still has a lot of their capital from some straightforward
who have made forays into the region have intrinsic growth from all these trends in consumer business into supporting
had their fingers burnt in some instances. consumer-based convergence – demand innovation and breaking down this
There are still quirks as to how the for things that they don’t even know they barrier. So time will deal with that; I think
region operates, and you really need to have need yet. It’s not just about GDP growth the challenge is: will that happen fast
that local know-how – hiring two freshly- being slightly at a premium; it’s the overall enough to provide an additional boost to
minted MBAs from Ivy League schools who dynamic of being able to roll out a lot of productivity? I am positive but I see it as a
speak whatever local language is just not incremental services. major challenge. n
june 2012 private equity international 47