CEE/CISAn Overview of Trends in Select Sectors and Markets July 2008 overage of the Central and Eastern Europe (CEE) and Commonwealth of Indepen- Region Snapshot dent States (CIS) markets often mistakenly conveys homogeneity—a monolithic Central and Eastern Europe (CEE) C“emerging Europe.” This brief covers a range of markets under the rubric of CEE includes: and CIS, however with the acknowledgement that these “regions” remain fragmented, Latvia with a core of large, more mature markets coupled with several smaller developing PE Lithuania markets. Estonia Czech Republic Among the CEE markets, more nuanced treatment in the wake of the first wave of Acces- Hungary sion reflects the reality that “CEE” subsumes several discrete investment environments. Poland Slovakia Poland—with 40% of GDP and population among the Accession countries—has captured Romania the majority of private equity investment to date. However, private equity investors are Bulgaria increasingly finding opportunities in markets throughout the region, with the Baltic coun- Albania Slovenia tries and Southeastern Europe emerging as the next frontiers. Croatia The inclusion of Russia among the BRICs obscures the distincitviness of the Russian pri- Bosnia and Herzegovina Serbia vate equity market, over a decade in the making. While Russia continues to draw the bulk Montenegro of investment within the CIS markets, remarkable economic growth in the markets of Republic of Macedonia Ukraine and Kazakhstan is encouraging investors to broaden their scope within the CIS. Turkey Perceptions about investment risk in CEE and CIS markets have improved. But the no- The Commonwwealth of Independent States (CIS) includes: tion that Accession in the CEE markets translates to uniform harmonization with EU stan- dards is misplaced. Enforcement of legal protections and treatment of investors still var- Armenia Azerbaijan ies from country by country. Furthermore, while robust natural resource-driven economic Belarus growth has given birth to an emerging consumer culture in the CIS countries, these mar- Georgia kets remain relatively uncrowded due to remaining challenges in sourcing and managing Kazakhstan Kyrgyzstan continued on page 2 Moldova EU Accession and Eurozone Enlargement Timeline Russia Country EU Accession Euro Adoption Date Tajikistan Turkmenistan Czech Republic 2004 2012—14 Ukraine Estonia 2004 2011 Uzbekistan Hungary 2004 2014 (Markets in bold indicate core markets attracting the Latvia 2004 2012—13 majority of private equity investment to date) Lithuania 2004 2011 Poland 2004 2012—13 Slovakia 2004 2009 Bulgaria 2007 2012 Romania 2007 2014 Slovenia 2004 2007 Turkey 2013* - Macedonia cand. - Croatia cand. - © 2008 Emerging Markets Private Equity Association 1 EMPEA Insight: CEE/CIS July 2008 investments. The good news is that fund managers operating Fund managers are also increasingly targeting investments locally across the CEE and CIS countries see these markets as across Southeastern Europe. In 2007, Bedminster Capital Man- underinvested, and the higher risks relative to Western Europe agement closed its US$200 million Southeastern Europe Equity are still offset by the possibility of higher returns. Fund II, and Marfin Investment Group closed a US$7 billion fund that will invest in the Balkans and Turkey. Fundraising Trends As the sophistication of CEE private equity markets grows, es- tablished local players are being joined by US and Western Eu- Capital commitments for private equity in CEE and CIS steadily ropean fund managers. Several GPs have set up operations in increased from US$2.2 billion in 2003 to an outlier US$14.6 Warsaw and are developing local teams, among them UK-based billion raised in 2007. The unusually high figure in 2007 can be Bridgepoint and 3i and US firms The Carlyle Group and CVC attributed to Marfin Investment Group’s US$7 billion close and a Capital Partners. US$2.1 billion close by MidEuropa Partners. Following multiple Fundraising for Russia and CIS record-breaking fund closes in 2007, fundraising is down in the first half of 2008. Funds focused on CEE and CIS markets raised Russia experienced a breakout year in 2007, when capital com- US$2.5 billion through June 2008, versus US$3.6 billion raised mitments grew to a record high of US$ 1.8 billion, led by Baring in the same period in the previous year. However, the region Vostok’s US$1.45 billion Baring Vostok Private Equity Fund IV. has attracted a host of new fund managers seeking capital —29 The Russian private equity market has long been both very local funds are seeking to raise as much as US$10.2 billion for invest- and relatively uncrowded, but that is gradually changing. ments across CEE and CIS as of July 2008. Western European and US-based firms are beginning to enter Fundraising for CEE the Russian landscape. In May 2008, Nordic-based asset man- agement firm CapMan signed an agreement to acquire private Veteran fund managers with regional mandates have amassed equity firm NORUM along with its 13 private equity professionals. ballooning pools of capital: Mid Europa closed US$2.1 billion At the time of the acquisition, the firm was raising NORUM Rus- Mid Europa III in 2007, and Advent International closed US$1.6 sia Fund III with a target of €150 million. The fund has raised billion Advent Central & Eastern Europe Fund IV in April 2008. €88 million and will now operate under the name CapMan Rus- While regional CEE funds have expanded in size and investor sia Fund. TPG, which recently bid on two headline-grabbing base, country-dedicated and subregional funds are also grow- transactions in Russia, set up operations in Moscow in 2007. ing, most notably in Turkey. Turkey’s private equity industry is Mint Capital, a Scandinavian private equity firm operating in undergoing a renaissance, with funds raising US$1.1 billion in Moscow with US$150 million under management, has closed 2007 after several years of relative inactivity. New Turkey-dedi- two funds investing primarily in companies located around the cated funds include Actera Partners Fund I with US$475 million city and intends to raise a larger successor fund later this year. and Turkven’s Turkish Private Equity Fund II with US$428 million Belgium-based GIMV, which launched the US$100 million Eagle in committments. continued on page 3 EMPEA Insight Advertising Opportunities Editorial Director Jen Choi EMPEA Insight, available free of charge to members, offers [email protected] readers an overview of the data and drivers behind investment Writing and Research Harrison Moskowitz / Sean Michaels trends in emerging markets private equity. Each issue of EMPEA [email protected] / [email protected] Insight provides an opportunity for a single exclusive back page Production Manager Cristiane Nascimento advertisement. Issue-specific placements are on a first come, first [email protected] served basis. 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For more The Emerging Markets Private Equity Association is a broad-based information about advertising opportunities and rates, please membership organization founded in 2004 that focus on the emerg- contact Cristiane Nascimento at [email protected]. ing private equity markets of Africa, Asia, CEE, Russia/CIS, Latin America, and the Middle East. 2 © 2008 Emerging Markets Private Equity Association July 2008 July 2008 EMPEA Insight: CEE/CIS Russia Fund in 2006, signed a partnership agreement with KBC EMPEA Survey of LP Interest: Current vs. Projected Private Equity this year to create a new company, Eagle Capital Investment Strategy, CEE/Russia and CIS Partners, which will invest EUR10 million per year in medium- sized Russian companies. 100% 87% Domestic private equity shops accustomed to competition from 80% 75% oligarch-run industrial groups are also being joined by a plethora vesting 61% Current Strategy 60% 57% of local investors flush with cash-generating business looking to Projected invest in smaller private equity-style deals. 40% Strategy (3-5 years) 20% Within the CIS, Russia continues to hold the core, but the scope In espondents % R of funds is expanding to Ukraine and Kazakhstan, the largest 0% 2007 Survey 2008 Survey and fastest growing among CIS markets. Russian fund manag- ers such as Baring Vostok and Alfa Capital Partners are consid- Source: EMPEA ering investments outside of the Russian Federation. The European Bank for Reconstruction and Development Fund managers Aureos Capital and Mint Capital Advisers have (EBRD), which has played a catalytic role throughout private eq- recently launched funds focused exclusively on investments in uity’s development in Emerging Europe, remains the leading LP CIS countries—Mint Capital III was launched this year with a tar- for funds dedicated to CIS countries. But government-backed get of US$250 million, and Aureos Central Asia Fund held a first funds are emerging as another source of capital. State funds close of US$50 million in 2007. Ukraine’s private equity market, are channeling natural resource-driven wealth into investments while still small, continues to grow. Ukraine-based Horizon Capi- intended to diversify economic growth beyond oil and gas. Ka- tal is raising a US$300 million Emerging Europe Growth Fund zyna Sustainable Development Fund teamed up with EBRD to II, which will predominantly invest in Ukraine. Kazakhstan is create the Kazakhstan Growth Fund aimed at strengthening beginning to emerge as a destination for private equity. Sigma private companies in non-extractive industries in Kazakhstan. Bleyzer, active in Ukraine since 1996, closed Sigma Bleyzer V in In Russia, the Kremlin created the Russian Venture Company December 2007. The fund, oversubscribed at US$221 million, (RVC), a federal state fund of venture funds with US$560 million is targeting investments in Kazakhstan. that provides low-cost financing to early stage innovative compa- Sources of Capital nies. In March 2006, the government of Azerbaijan created the Azerbaijan Investment Company to invest state capital in non-oil Institutional investor interest has increased steadily every year sector companies.