The Case for Private Capital in CEE
This EMPEA Brief explores Central and Eastern Europe’s place in the global private capital landscape, with an eye to the challenges and often overlooked opportunities posed by its “in-between” status vis-à-vis emerging and developed markets. A closer look at the historic trajectory of private capital in CEE and the current deal-making environment suggests that investors who can manage the nuances of the market may find advantages in the region’s relative obscurity.
- Private capital in CEE offers a potential solution to the tradeoff between the stability and predictability found in developed markets and the growth potential of emerging markets. However, the region remains overlooked by many investors.
- CEE experienced a glut of private capital just before the Global Financial Crisis, but an upheaval soon followed. Fund managers betting on growth stemming from the integration of CEE with the rest of the European Union generated strong returns, which drove record fundraising from 2006 through 2008. However, the crisis caused limited partners to pare down their new private capital commitments, with allocations to emerging markets such as CEE among the first to be curtailed.
- After several lean years in the wake of the Global Financial Crisis, conditions appear to be favorable again for private capital in CEE. Big-ticket investments are again attracting pan-European players, and fund managers have had success returning capital to investors in recent years, with upticks in both strategic sales and public market exits since 2014.
- Economic growth in CEE remains stronger than in Western Europe—leading to continued growth in wages and consumption—while the region has largely avoided the currency volatility and growth downturn that has plagued other emerging markets, especially commodity exporters, over the last several years.
- CEE remains underserved by investors. On one hand, the region has failed to attract significant capital from the largest global investors, as most of its funds are not large enough to absorb these LPs’ ticket sizes. On the other, EM-oriented investors eschew CEE for other regions with greater developmental need and a perceived higher growth ceiling. Few local institutional investors exist to fill the gaps.
- The lack of private capital in CEE represents a potential opportunity for shrewd allocators, especially when viewed in the context of increasingly crowded alternative investment markets in the United States, Western Europe and Asia. Fund managers in CEE who can successfully raise funds, especially those in the middle market, may enjoy stronger competitive positioning than their global peers.