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Central Europe faces fundraising paralysis

Speakers at the Central and East European Private Equity Forum warned that, despite a positive long term outlook, the region may be facing a period of fundraising paralysis. Events in America and concerns about the outbreak of war are leading investors, already cautious because of the economic slowdown, to freeze investments in private equity in Central and Eastern Europe.

Jamie Halper, a partner at TDA Capital Partners, said: “This has very little to do with what’s going on in Central and Eastern Europe, it’s related to the US and global equity markets.” Coming out of a benign period for fund raising institutional investors have exceeded their alternative assets allocation and funds in Central and Eastern Europe are now facing a survival of the fittest scenario when it comes to raising fresh capital. Emerging markets such as Latin America and Asia can expect the same problem.

The panel agreed new investors are showing interest in the region but they are failing to actually invest as they see the area as peripheral to their other private equity commitments. Members of the panel also questioned whether investors are adequately compensated for the increased risk of investing in emerging markets. Halper does not believe the strategy of private equity firms in the region is flawed, but blamed the difficulties of generating returns on the region’s structural problems.

Armando D’Amico, managing director of consulting boutique, Acanthus Advisers, reported that as little as $300 million had been raised in the last 12 months. He believes the perception of emerging markets has slid from unfashionable to unattractive. He found the sentiment of the institutional investors he polled was by and large worse than last year. Issues facing the region include doubts about the timing and terms of EU accession. The market is seen as inexperienced, with a limited pool of PE talent, there have been too few exits; the public markets are non-existent as an exit route and many funds have large, unrealised “zombie” portfolios.

On a positive note the area is still viewed as a good investment opportunity and falling inflation and interest rates are reasons to be optimistic about Central and East European’s future. Gyuri Karady, of Baring Private Equity Partners, concluded: “This region is destined to remain the best kept private equity secret in the world for the next two to three years.”