Nicholas Watson in Prague
February 28, 2012
Hybrid crops have long been used by farmers to increase yields, so it's perhaps no surprise that the hybrid markets of Central and Eastern Europe – emerging markets yet with many characteristics of western markets – should prove such fertile ground for private equity.
According to the European Bank for Reconstruction and Development (EBRD), private equity in the former Eastern Bloc has outperformed all other markets globally over the last 10 years, yielding returns of between 15% (CEE ex-Russia) and 24% (Russia and the CIS region).
The main reason behind this performance is that all the ingredients necessary for an attractive private equity market – structured business environment, a pool of local managers, capital markets, trade sale opportunities, and a private equity "midwife" in the form of the EBRD – already existed 10 years ago when the economies of the region were just about to take off. "If you look at other private equity markets such as the BRIC ones outside of Russia, many didn't have these same ingredients," says Richard Seewald, a partner at Alpha Associates, a Swiss-based private equity fund manager with more than $3bn invested directly in CEE private companies as well as other funds invested in the region. "That doesn't mean going forward they won't, but over the last 10 years the 'infrastructure' for private equity wasn't in place like it was for CEE."
The extent to which the CEE private equity market has matured over the past decade was illustrated in February by the twin IPOs from technology companies AVG Technologies and EPAM Systems on the New York Stock Exchange. While neither of these CEE companies enjoyed the smoothest of debuts (AVG fell 19% on the first day of trading, while EPAM priced below its indicative pricing range), their ability to raise a combined $200m in tricky market conditions underlined how global investors are paying more attention to the technology and media businesses that have grown up and proven themselves in Russia and the wider CEE market, and can now realistically offer a significant IPO exit for investors – something that has traditionally proved a problem.
These two companies, together with Russian internet search engine Yandex which went public last year, are not the typical technology start-ups that western investors are used to seeing, ie. potentially great companies in search of a business model and revenues. AVG is one of the world's leading providers of anti-virus software that posted profits in the first nine months of 2011 of $105m on revenues of $198m. "The region has been long recognised for quality engineers and scientists, and over the past decade entrepreneurs have built world-class businesses – these three will pave the way for the next generation of entrepreneurs from CEE and Russia that will have greater access to resources, including experienced investors, management expertise and global capital markets," says Seewald, whose Alpha Associates was an early investor in both AVG and EPAM. "We've certainly seen more international investors look at tech deals in the region."
Alpha and other private equity investors are particularly looking to the new generation of companies that are serving Russia's promising consumer markets, many of which have either become or are set to become Europe's largest over the next few years. The markets in Russia for mobile phones, milk and children's goods are already the biggest in Europe; for cars, clothes, advertising and consumer electronics they are set to be, according to a bne
survey. "Russia still has a high-growth environment if you look at the macro trends and that should support an environment where consumer-driven companies are able to grow at a rate that's attractive for private equity investors," says Seewald.
This will be driven in large part by Russia recently surpassing Germany as the continent's largest internet market (Russia had 50.8m internet users in September 2011 versus 50.1m users in Germany), implying that its e-commerce market, worth just $20bn-22bn in 2010, will follow suit and top $100bn as soon as 2019.
In anticipation of this, Alpha recently invested in Ozon.ru, Russia's Amazon.com, along with several other international investors in a $100m round of financing to further strengthen the company’s position as the country's largest online retailer. Ozon’s revenue in 2010 reached $137m, up 34% on 2009, from 5.2m registered users – and that momentum has continued building. "Ozon is well positioned to consolidate this space in Russia going forward," predicts Seewald.
Indeed, in its first acquisition since securing the $100m in financing, Ozon on February 15 announced it had bought Sapato.ru, a Russian online shoe and accessories retailer. "It is our first acquisition," Ozon CEO Maelle Gavet was quoted by the Wall Street Journal
as saying, "but it certainly won't be our last."