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Private Equity - Proceeding with caution in Central Europe

After an all time high in 2007 a new stage is set - the Deloitte’s Central Europe Private Equity confidence index has reached a low point, yet Central Europe is expected to continue to be one of the key focus points for many PE funds.

Garret Byrne, M&A Transactions Services leader for Deloitte in Central Europe, said that “Despite the hopes of some a few months ago, Private Equity activity and sentiment in Central Europe has reached a 5 year low point in line with other global markets and lack of liquidity in the banking market”. Some PE funds are sitting on the sidelines while others are prepared to do equity only deals and wait for the debt market to come back for refinancing. Portfolio management is now a key focus.

Despite the overall current lack of optimism and cautiousness, private equity sees Central Europe positively as one of the regions which will be less hit by a global economic downturn. “Many private equity professionals in Central Europe see the current environment as a great opportunity and believe that seeds sown in 2009 may reap great rewards,” added Byrne. The corollary of this of course is that seeds sown in 2008 may need constant nourishing in order for them to flourish. This is confirmed by the findings of Deloitte's latest Central European Private Equity Confidence Survey.


Signs of distress are seen and felt in virtually all aspects of leading economies. Hopes for quick recovery are tampered by locked credits and a stagnant interbank market. Unprecedented volatility in international equity markets forced European equities to reach new lows.

Despite the completely changed M&A landscape, positioning of leading PE funds in Central Europe is still strong with funds available to invest, however largely in a stand-by mode waiting for entry multiples and seller expectations to curtail and for the debt markets to come back.

Three key reasons for the current slowdown pinpointed by key private equity players are uncertainty in the markets, limited funding and time needed for sellers to adjust to new multiples and expectations. Market players currently face concerns about the gap between the point when buyers are legally committed and ultimate payment of money takes place.

On a brighter note – historically in downturns there are more opportunities to create value for players who have available funds and can enter the market of low valuations and forced sales where cash is king. Strong companies may face a once in a life time opportunity to secure dominant market share at reasonable pricing levels.

Corporate divestitures are expected to be a hot topic in the near future, while many large troubled groups will aim to divest non-core assets at potentially lucrative prices. The majority of deals should fall into the mid-market deal size range.

“The current PE model may have to adapt, or rather step back, to the model used in the early 2000’s - buying at comparatively low multiples, focusing on improving operations, bringing in expertise, realising synergies and selling on again, rather than relying on a leverage based model,” said Byrne. To a large extent, this correlates with the overall shift of investor focus from new acquisitions to portfolio management, which will require more managerial and industry expert skills to survive the storm in the short run.

Once reasonable confidence in the markets is re-established, M&A track will be gained again. Deeper investigation of the potential deals with a focus on robust financial and commercial due diligence, and going back to fundamentals when valuing targets is expected.

Highlights of the survey:

Economic Climate
Signs of concern over economic climate expressed six months ago converged to zero improvement expectations in the short-term. 92% of respondents expect the overall economic climate to decline.

Debt Availability
Swing in expectations regarding debt availability which was clearly visible during last year has come to haunt the CE market worse than ever with limited debt available at increasing margins.

Investorsґ Focus
Participants focus on portfolio management with new investments left as second priority - a flashback to early 2003.

Size of Transaction
Remaining market activity is expected in small to mid-market deals with anticipated growth potential to be realised during coming periods. Small-cap deals with low levels of leverage seem to be the order of the day.

Market Activity
The M&A market is largely in suspense in the short term, with speculation regarding recovery in Q2 or Q3 of 2009.

Investment Efficiency
Notable change in participant investment efficiency in short term is expected compared to previous periods. 40% of respondents expect performance of their financial investments to decline, while only 6 months ago not a single respondent responded pessimistically.

Investorsґ Activities
Unsurprisingly, given current valuation levels, PE funds expect to be net buyers. Search for new and add-on investments at lower multiples prevail with the expectation that seeds sown in 2009 may lead to great rewards.

New Investments Competition
Market leaders and less affected high potential mid-market targets are expected to steal the investment interest spotlight in short term.

Raising of new funds
The fund raising environment for general partners will be very tough and will favour established players with good track records.

New Investments Competition
Survey participants expect competition to tighten in the short term. The fight is likely to concentrate around the less affected small and mid-market targets with growth potential and clear sector/market leaders, which are expected to keep their stronghold.

For more information or to download the Deloitte Central Europe Private Equity Confidence Survey please visit

Deloitte Private Equity Confidence Index

The confidence index is based upon answers received from private equity professionals focused on Central Europe. It is composed from answers to the first seven questions of the ten question survey.

For each period the average of positive answer ratios over the sum of positive and negative answers is computed. This average is compared to the base period, which in our case is spring 2003.


About Deloitte

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“Deloitte” is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu, a Swiss Verein (“DTT”). Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTT helps coordinate the activities of the member firms but does not itself provide services to clients. DTT and the member firms are separate and distinct legal entities, which cannot obligate the other entities. DTT and each DTT member firm are only liable for their own acts or omissions, and not those of each other. Each DTT member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in their territories through subsidiaries, affiliates, and/or other entities.

About Deloitte Central Europe

Deloitte Central Europe is a regional organization of entities organized under the umbrella of Deloitte Central Europe Holdings Limited, the member firm in Central Europe of Deloitte Touche Tohmatsu. Services are provided by the subsidiaries and affiliates of Deloitte Central Europe Holdings Limited, which are separate and independent legal entities.

The subsidiaries and affiliates of Deloitte Central Europe Holdings Limited are among the region’s leading professional services firms, providing services through more than 4000 people in more than 30 offices in 17 countries.

About Deloitte Bulgaria

In Bulgaria, the services are provided by Deloitte Bulgaria OOD, Deloitte Bulgaria OOD – Varna Branch, Deloitte Audit OOD (jointly referred to as “Deloitte Bulgaria”) which are affiliates of Deloitte Central Europe Holdings Limited. Deloitte Bulgaria is one of the leading professional services organizations in the country providing services in four professional areas – Audit, Tax, Consulting, Financial Advisory through 200 people national and specialized expatriate professionals.

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