Defying gravity Private Equity Confidence Survey Central Europe July 2021 This publication contains general information only. The publication has been prepared on the basis of information and forecasts in the public domain. None of the information on which the publication is based has been independently verified by Deloitte and none of Deloitte Touche Tohmatsu Limited, any of its member firms orany of the foregoing’s affiliates (collectively the “Deloitte Network”) take any responsibility for the content thereof. No entity in the Deloitte Network nor any of their affiliates nor their respective members, directors, employees and agents accept any liability with respect to the accuracy or completeness, or in relation to the use by any recipient, of the information, projections or opinions contained in the publication and no entity in Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies thereon. Defying gravity | Private Equity Confidence Survey Central Europe Defying gravity Private equity is reinforcing its superpower An increased supply of capital supports high The last semester has seen a continuation to invest across cycles. With over a year pricing, and we see ample evidence of climbing of private equity-backed M&A: the acquiror of the pandemic behind us, it may be that valuations. Announced transactions are often benefits from its backer’s funding and expertise the extraordinary time is enabling the private at high entry multiples, and pipelines show no as it accelerates its entry into new markets equity (PE) market in Central Europe (CE) to sign of this abating: nearly half of respondents and/or verticals, while the acquiree owners emerge stronger as it utilizes its three decades (46%) claimed full pipelines, with nearly a third are able to take a step back or even fully exit of experience in building businesses to support (30%) claiming pipelines are picking up pace the business they’ve built up. companies on their paths back to growth. as they gain comfort and confidence in the The latest Deloitte Survey shows that the Index backdrop – reflecting our Survey’s latest Index. These sentiments on pricing and its impact has exhibited an almost gravity-defying climb ring true with our own recent experience over the last year, from 62 last summer to 149 We note in this Survey that a growing number and dialogues. Sourcing and assessing these now. This puts it very near its peaks in 2007 of respondents are looking to focus more on opportunities pose both a challenge and and 2011. selling in the coming months – nearly a fifth opportunity for the region’s deal-doers. (19%), up three-fold from the previous Survey We are standing by to work with them on The recovery in confidence is markedly (6%) – and high pricing may be behind that. helping to recapitalize the many companies steeper than after the Global Financial Crisis, ripe for the right financial backer in this with the sector’s experience in the time since Hefty price tags entice vendors, so in dynamic region. then a real differentiator. Most deal-doers addition to private equity firms looking have an armoury of proven growth creation to harvest portfolios, they should encourage strategies as well access to funding from their more business owners to consider external own vehicles, bank debt, LP co-invest and partners to sell to. This, combined with credit funds. The latter two were only nascent the unprecedented events of the last one a decade ago; now they have evolved into and a half years, may make the temptation established and increasing sources of capital. to bring on board an experienced private equity firm more appealing than ever. Mark Jung Partner, Private Equity Leader Deloitte Central Europe 3 Defying gravity | Private Equity Confidence Survey Central Europe Central European Private Equity Index: Key findings The Index continues its climb to its 2007 and 2011 peaks, with respondents optimistic about the economy, market activity and leverage availability – though also mindful of heightened pricing. While the proportion of deal-doers expecting the economy to improve has nearly doubled to 70% since our winter Survey, 41% of respondents feel it is more expensive to acquire businesses now than six months ago, a four-fold increase on six months ago. For the first time in two years, no respondents feel prices have come down. Looking ahead, over two-fifths of deal-doers (41%) expect pricing to continue its climb. This is impacting plans to buy and sell, with experienced deal-doers seemingly adopting a more cautious approach to buying as the pricing creates a strong divestment backdrop: The proportion of those expecting to sell more than they buy over the coming months has tripled from 6% in the winter to 19% now. At the same time, those expecting to buy more has dropped from 72% to 57%. Deals that take place now will continue to be supported by liquid leverage markets. A third of respondents (33%) expect the availability of debt finance to increase over the coming months, up from just 13% in our last Survey and the highest level in six years. 10 12 14 16 18 and going forward. going and business agility fuels vendors’ expectations of what prices they can command now is expectation of high prices continuing or even climbing further, as awall of capital and growing activity or stay to increase the same (61%) (37%), up from 83% last time. One important finding backdrop, nearly double our last Survey. Furthermore, 98% of respondents expect market optimism around the economy, with astaggering 70% expecting an improvement in the economic A number of indicators in our latest Survey attest to the continued confidence, namely ongoing very closely to the peaks landing seen at in avery 2007 and 2011, impressive 149. seen since the winter and –which saw our largest survey-on-survey climb –as the Index hovers Our latest Survey shows that the revival of confidence continues, maintaining the incredible uptick 5 Central Europe PE Confidence Index 20 40 60 80 0 0 0 0 0 - ar. 2003 10 0 ep. 003 15 6 ar. 2004 14 8 ep. 004 13 9 ar. 2005 15 4 ep. 005 14 9 ar. 2006 15 5 Oct. 006 15 3 Apr. 007 15 9 Oct. 2007 11 8 Apr. 008 10 Defying gravity | Private Equity Confidence Survey2 Central Europe Oct. 008 48 Apr. 009 78 Oct. 009 11 7 Apr. 010 14 0 Oct. 010 13 8 Apr. 011 15 3 Oct. 011 70 Apr. 012 10 1 Oct. 012 71 Apr. 013 10 1 Oct. 013 12 7 Apr. 014 14 4 ep. 014 11 4 Apr. 015 13 0 ep.2015 92 Apr. 016 12 4 ep. 016 10 9 Apr. 017 11 3 Nov. 017 13 0 ay. 018 12 3 Nov. 018 10 5 Jul. 019 10 2 Nov. 019 87 Jun. 020 62 ec. 020 123 Jun. 2021 149 Defying gravity | Private Equity Confidence Survey Central Europe Economic climate (December 2020 vs June 2021) Survey Results Economic climate There has been a near doubling to over two-thirds of participants The Index is perennially correlated to economic expectations, (70%) expecting the economy to improve. It is the third Survey and this time is no different. The Index has climbed even higher, in a row that perceived prospects around the economy are surpassing the single largest climb in our Survey’s history in improving, and – crucially – the first time since 2007 that no Winter 2020 from 62 to 123 to land at 149. 33% respondents expected conditions to worsen. Just under a third 37% (30%) expect conditions to remain the same, flat on last survey. Economic barometers bear out these stats. Poland, Central December Europe’s largest economy, is expected to grow 4% this year, 2020 The timing of our latest Survey polled participants as it became following a GDP contraction of 2.7% in 20201 . Romania’s GDP clear that a season of vaccinations was insufficient to suppress growth is expected to exceed 5% this year, up markedly from new variants of the Coronavirus from appearing. It also comes contracting 3.9% in 20202. While these rates are impressive, after Britain’s transition period after leaving the EU came they will reflect movement from a currently low base, with to a close. That both these meaningful events have done economists expecting we won’t reach pre-pandemic levels 30% nothing to deter deal-doers from believing in Central Europe’s of output before 2022. economic prospects says a great deal about the robustness of its dynamic economies. For this period, I expect the overall economic climate to: 100% 4% 2% 9% 7% 10% 9% 8% 10% 10% 10% 30% 16% 17% 90% 21% 21% 27% 25% 33% 30% 33% 30% 80% 31% 46% June 70% 59% 55% 61% 57% 47% 66% 68% 60% 62% 60% 2021 68% 64% 74% 50% 30% 74% 49% 69% 67% 75% 40% 70% 63% 73% 70% 63% 30% 62% 54% 43% 43% 19% 20% 39% 41% 32% 34% 37% 29% 30% 10% 24% 24% 26% 16% 13% 11% 12% 10% 3% 7% 2% 8% 0% Oct. Apr. Oct. Apr. Oct. Apr. Oct. Apr. Oct. Apr. Sep. Apr. Sep. Apr. Sep. Apr. Nov. May Nov. Jul. Nov. Jun. Dec. Jun. 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 2021 Improve Remain the same 1 https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/poland/economic-forecast-poland_en Decline 2 https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/romania/economic-forecast-romania_en 6 Defying gravity | Private Equity Confidence Survey Central Europe Debt availability (December 2020 vs June 2021) Debt availability A third of respondents (33%) expect the availability of debt and financiers alike to have better conviction of executing finance to increase over the coming months, up from just on growth plans.