The New Normal Central Europe Private Equity Confidence Survey

The new normal Central Europe Private Equity confidence survey Private Equity, May 2012 Our region’s PE community have developed an effective capacity to respond positively to opportunities, no matter the nature of the prevailing business environment. 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 or any 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. 2 Introduction Welcome to the latest edition of the Deloitte Central There is a marked increase in the expected fund raising Europe Private Equity Confidence survey – the latest activity with 18% of the respondents expecting to instalment in the private equity story of the last nine spend more of their time raising new funds. This is years, during which the survey has plotted all the highest level since 2008. The environment for fund the changes in outlook and sentiment of the region’s raising is tough and Central European GP’s are being PE professionals throughout a turbulent period of highs very much regarded by LP’s as now being part of and lows. the mainstream European PE landscape. This edition of the survey is a significant one, charting Overall the current activity suggests to me the flexibility the cautious recovery of some optimism and stability of the PE professionals operating in Central Europe, following the abrupt and decisive change of sentiment who have responded to the uncertainty of market in November 2011. There are many parameters within conditions to continue finding opportunities to create the survey where our respondents have in general growth and value. moderated the negativity that they expressed last autumn to suggest some return of optimism. Further It is fair to say that, with the potential of a double-dip talking to PE practitioners regularly I think there is recession still far from extinct across Central Europe the feeling that there are more deals around. and in many key export markets throughout the Eurozone and elsewhere, any sense of recovery is In the last edition of this report we highlighted how “fragile” at best. Whatever the financial and economic a majority of respondents intended to focus on new future holds, I suggest that our region’s PE community investments, and this new report clearly shows have developed an effective capacity to respond the truth of their statement. In addition, it reiterates positively to opportunities, no matter the nature of that intention for the next six months. This is the prevailing business environment. The PE underlined by the 28 new investments highlighted in community is dealing with “the new normal”. the investments section of this report. Garret Byrne Partner Private Equity Leader Central Europe May 2012 Overview Key findings Central Europe PE Conﬁdence Index • The sudden decline in the index in October 2011 180 from one of the highest levels on record to its 156 154 159 153 second lowest has been partly reversed, with 155 160 148 140 a 31-point climb to 101 149 153 140 • While this is around the same level recorded in April 139 138 2008, immediately prior to a collapse, the index is 120 118 102 117 101 climbing today rather than declining that was 100 the case four years ago 100 80 • The increasing levels of confidence suggest that 78 70 fears of region-wide economic turmoil that 60 characterised our last report have subsided 48 40 • The more positive outlook expressed by our respondents is substantiated by the high volume 20 of investments made in comparison to exits over 0 the last six months, suggesting the existence of . 2003 . 2004 . 2005 . 2006 . 2007 . 2008 . 2009 . 2010 . 2011 . 2012 a buyer’s market and a preparedness to take risk Mar Sep. 2003Mar Sep. 2004Mar Sep. 2005Mar Oct. 2006Apr Oct. 2007Apr Oct. 2008Apr Oct. 2009Apr Oct. 2010Apr Oct. 2011Apr • There is still considerable uncertainty in the market, however; the most recent CFO report from Deloitte Central Europe shows that CFOs in most countries are operating amidst abnormally high economic and financial uncertainties Central European Private Equity Index It would appear that, for now, negative sentiment In addition, the 18% expecting to focus most of their reached its low point in October 2011 and a more time on raising new funds – one of the highest positive outlook among the CE region’s private equity proportions in the history of the survey – suggests that practitioners is emerging. This is most strongly reflected many professionals are planning to build a war-chest for in the 24% anticipating an improvement in economic heightened investment activity in years to come. conditions over the next six months, and the 29% expecting an increase in PE market activity. It is also inescapable, however, that at 101 points the index is significantly lower than the 153 posted However, the strongest indication of a more optimistic a year ago. It is tempting to look at these results outlook is the number of investments that have been as more “realistic” than those of the recent past, made since the publication of our last survey, reaching neither extreme of April 2011’s newly demonstrating that the region’s investors are taking burgeoning confidence nor the out-and-out pessimism advantage of a buyer’s market to grow their portfolios. of six months later. However, the widely held belief that This is hard evidence of investors’ sincerity when they the next six months will see a primary focus on growing say – as did 59% of our sample – that they expect to revenues suggests that many portfolio businesses have focus most on new investments through the summer of completed their cost-cutting activities of recent years 2012. and feel ready to concentrate more aggressively on growth. 4 Survey results Survey results Economic climate For this period, I expect the overall economic climate to: 4% 4% 4% 100 10% 7% 9% 10% 9% 13% 18% 31% 28% 26% 27% 36% 44% 75 37% 53% 51% 57% 74% 61% 62% 47% 66% 68% 93% 50 74% 64% 69% 70% 69% 67% 64% 53% 56% 43% 25 47% 39% 26% 32% 29% 43% 34% 18% 5% 23% 13% 7% 6% 0 Mar. 2003Sep. 2003Mar. 2004Sep. 2004Mar. 2005Sep. 2005Mar. 2006Oct. 2006Apr. 2007Oct. 2007Apr. 2008Oct. 2008Apr. 2009Oct. 2009Apr. 2010Oct. 2010Apr. 2011Oct. 2011Apr. 2012 Decline Remain the same Improve There has been a significant turnaround in opinion since a worsening situation last time appear to have joined the bleak outlook recorded in October 2011, when the “remain the same” camp. While this would on its economic expectations were gloomier than at any time own suggest expectations of further stagnation, in the survey’s history apart from October 2008. Now the 23% who claim to expect an improvement move fewer than one in 10 expects a decline, and the over- these results away from neutrality and into marginally whelming majority of the 66% who anticipated positive territory. Debt availability For this period, I expect the availability of debt ﬁnance to: 4% 5% 100 11% 7% 19% 21% 40% 39% 48% 75 50% 46% 52% 42% 62% 61% 67% 67% 61% 57% 64% 78% 84% 75% 50 67% 76% 36% 60% 61% 52% 25 47% 46% 48% 38% 38% 37% 33% 33% 39% 36% 22% 16% 18% 14% 18% 3% 3% 0 Mar. 2003Sep. 2003Mar. 2004Sep. 2004Mar. 2005Sep. 2005Mar. 2006Oct. 2006Apr. 2007Oct. 2007Apr. 2008Oct. 2008Apr. 2009Oct. 2009Apr. 2010Oct. 2010Apr. 2011Oct. 2011Apr. 2012 Decrease Remain the same Increase The proportion of respondents anticipating This is the highest proportion recorded in the survey the availability of debt finance to remain unchanged since April 2007, suggesting some belief that we are over the next six months (76%) has more than doubled seeing some stability return to the credit market. since October 2011, reflecting reduced concerns in A substantial 21% continues to expect a decrease in the market thanks to the continuing availability of very availability, however, although the decline in this metric low interest loans from the European Central Bank and from 61% last time clearly signposts a less negative several of its national equivalents across our region. outlook. 6 Investors’ focus For this period, I expect to spend the majority of my time focusing on: 100 30% 42% 49% 75 50% 59% 62% 69% 68% 74% 64% 58% 74% 80% 77% 79% 77% 77% 88% 86% 50 53% 31% 55% 14% 48% 23% 25 24% 24% 6% 29% 13% 39% 22% 16% 14% 17% 12% 24% 17% 19% 17% 7% 18% 4% 12% 5% 3% 3% 3% 3% 7% 8% 7% 9% 13% 12% 6% 0 Mar. 2003Sep. 2003Mar. 2004Sep. 2004Mar. 2005Sep. 2005Mar. 2006Oct. 2006Apr. 2007Oct. 2007Apr. 2008Oct. 2008Apr. 2009Oct. 2009Apr. 2010Oct. 2010Apr. 2011Oct. 2011Apr. 2012 New investments Portfolio management Raising new funds Although the 59% of respondents who expect to focus committed to business expansion, in some cases via most on new investments has hardly changed since add-on deals. Interestingly, the proportion targeting new October 2011, the high number of entry investments in funds (18%) is as it highest level since early 2008, the deals section of this report is a clear demonstration suggesting that many PE practitioners are gearing up for that the region’s PE professionals are increasingly increased investment action in the foreseeable future.

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