Baring Private Equity Partners is readying to raise its second fund that focuses in Central Europe, Baring Central Europe Fund II. While locations like Hungary and Poland haven’t been popular destinations for LBO firm, Gyuri Karady, a managing partner with Baring, assures that they are up and coming countries that will soon be ripe for buyouts.
There are a few reasons for Karady’s optimism on the region. In May 2004, 10 Central European nations will join the European Union, which will give companies in the region more stability and may pique banks’ interest in investing there. Additionally, much of the workforce in Central Europe is educated and cheap, according to Karady.
_Banks are already starting to get interested in many of the Central European countries. In Hungary, lending to the private sector has soared from 23% of GDP in 1995 to 34% of GDP by 2001, while in Poland it doubled from 12% to 24% by 2000, then rose an additional 5% in 2001 to 29% of GDP.
“Debt for acquisitions has not been that available until 18 months [ago]. Now a couple of banks are beginning to lend. The lenders tend to be local banks owned by Westerners. I suspect there is less debt available in Central Europe than in other countries, but any debt is better than none,” said Karady. “This area is growing at a fast average and becoming more western.”
Karady went on to say that construction, pharmaceuticals, health care and financial services are the sectors that will probably be getting the most play.
Therefore Baring’s new fund, which is expected to start fund raising at the beginning of next year, will focus in those areas. Additionally, the fund will target the Central European market. Karady is looking to raise upwards of E200 million by the end of 2004. Its last Central European fund, which closed in Dec. 2001 with $86 million, is fully invested.
“We really like to stick to our knitting. The only difference between this next fund and our last is that this one will be larger because the market is evolving and the investment sizes are getting bigger,” said Karady.
The firm’s first fund bought out seven companies and has already exited one investment. It expects to exit two more shortly.
With its first fund, Baring spent anywhere from $7 million to $18 million in equity to invest in middle market companies. It also invested expansion capital to a lesser extent. With its new fund, Baring will be looking to put between $10 million and $30 million to work in every deal.
The firm will be tapping its LPs from its last Central Europe fund for the new fund. Most of its LPs are U.S. and European insurance companies.