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Index Recovery Accelerates as Central Europe Private Equity Professionals Gain Confidence in Prospects

The reversal in last year’s steep fall in confidence picks up momentum as experienced deal doers look ahead to a strong vintage supported by stabilizing economic and leverage backdrops, according to the latest Deloitte Central Europe Private Equity Confidence Survey.

We may be emerging from the darkest days of the last few years beset by inflation, war and a pandemic all making for an incredibly challenging investment backdrop. Our latest Survey reveals firmer signs of optimism, with nearly 80% of respondents confident 2023 will prove a good year for returns as the Index grew for the second semester in a row.

Economic expectations are brighter, with the proportion expecting an improvement darting up from just 3% to 15% this time. At the same time, the cohort expecting a deterioration of conditions has nearly halved from 79% last time to just 43% this time.

This is likely to play a role in the market’s optimism around market activity, with over a quarter (26%) expecting transacting to boost, over double last survey’s 12%. Equally uplifting is that there has been a halving of those expecting a decrease, from over two-thirds last semester (69%) to a third (34%) this Survey. This is backed up by pipeline optimism, with half of respondents seeing more actionable opportunities now than three months ago, marking the third Survey in a row where pipeline optimism is growing.

"We are encouraged by the sentiment for the region, though not surprised given our Survey has shown each shock to be followed by a recovery over the last 20 years,"

says Dusan Sevc, Deloitte Partner and Private Equity Leader.

"Now more than ever, CE PE deal doers’ experience makes them well placed to transact across cycles, and we are seeing improving indicators give reason for further optimism."

A boost in activity will support a growing role for credit funds in CE, with 45% of Survey respondents looking more to non-bank lenders for leverage, up on our last Survey’s 40%. While 28% report no change in leverage availability, another 15% claim to need more lenders for a deal now than in the past, possibly a sign that lenders’ appetite for larger tickets is shrinking.

There are further signs of optimism in the ESG space, with a growing number of PE houses embracing this as a value driver. Our latest Survey shows over a quarter have implemented decarbonization commitments and targets, up from a fifth on our Winter Survey, while another third have started to develop these targets. Another third (30%) intend to do so, up from a quarter in our last Survey.

"Investors increasingly appreciate ESG’s merits as a value creation tool, driven by a confluence of LP demand, growing regulation and now increasingly empirical GP experience as they see valuations impacted at exit,"

says Irena Pichola, Global Government & Public Services Climate Action and Sustainability Lead for Deloitte Central Europe.

Nearly three-quarters of houses in CE have investment policies that include ESG factors, whether investment policies (51%) or ESG improvements post-deal (23%).