Private equity investors lose confidence

Central Europe's private equity investors are losing confidence as the eurozone crisis and resulting economic slowdown take their toll on the region, according to a survey of private equity professionals conducted by Deloitte.

After two years of steady growth that reached a post-crisis high in April, investors are now much more reticent about the private equity market in countries like the Czech Republic, Poland, and Slovakia, with confidence down in October to the second-lowest level ever seen since the Central Europe Private Equity Confidence Index was launched eight years ago.

A clear majority, 66 percent of respondents, anticipates a decline in the overall economic environment, a dramatic rise from the 10 percent of respondents who foresaw a slowdown just six months ago. Respondents also said they believe the availability of debt will decrease, reflecting concern about the stability of financial institutions and state finances in the euro zone. They said they expect the efficiency of their investments to remain unchanged because expectations for growth and returns remain low.

"When investors lose confidence, businesses and economies suffer. We have seen an abrupt and decisive change of sentiment over the last six months," said Deloitte Partner Garret Byrne.  "This suggests that the events of 2008 are still fresh in many minds, and any recovery we have witnessed over the last two years has been extremely fragile."

Private equity investments are usually made by funds or institutional investors who engage in buyouts of distressed companies, venture capital investments in young companies or the pooling of funds to make public companies private. Prior to the crisis in 2008, the Czech Republic and Poland had been among the most attractive countries in the region for private equity investments - the Czech Republic for its attractive legal and regulatory environment and Poland for its ability to generate economic activity from internal demand.

Though expectations are now more measured, Byrne said there are still plenty of funds and around 30 prominent companies owned by private equity firms, among them the software firm AVG and soft-drinks company Kofola.

Byrne says the economic environment will drive private equity investors into "defensive" sectors less likely to be impacted by a potential recession, like food and drink companies and healthcare businesses. "We all still have to eat, drink and take care of our health."

Jiří Beneš, investment director with 3TS capital partners, says the macroeconomic forecast has no doubt led to more conservative behavior on the part of private equity investors on the lookout for lower risk premiums but says there are still companies with opportunity for growth in the region.

"With the many macro issues it will be harder to find solid growth companies; however, we believe the true winners will take the opportunity to take market share and cement their leading positions in their respective sectors," Beneš said. "We focus on technology, media and telecommunications and services related to that and, despite the macroeconomic outlook, we are still able to find nicely growing companies in many niche markets."

Emily Thompson can be reached at
ethompson@praguepost.com