Private Equity in Central and Eastern Europe

Private equity had a strong start in 2021, and its popularity only continues to rise, with significant activity in Central and Eastern Europe. It is an important segment of the M&A market, and projections for continued investment remain high. Understanding the local investment landscape and legal requirements surrounding private equity is a fundamental first step. The analysis below on key investment countries in the region provides business critical information for private equity in 2021 and beyond.

Austria, Hungary, Poland and Romania

Updated legal information on:

•    mergers and acquisitions
•    due diligence
•    the structure of transactions
•    terms of acquisition documentation
•    public-to-private takeovers
•    mandatory offer thresholds
•    hostile takeover offers
•    management incentives
•    shareholder oversight and liability
•    and exits, including by an initial public offering (IPO).

Austria

M&A Transactions and Deals

Globally, private equity deal volume pushed global M&A to all-time highs in the first half of 2021, and the M&A market is expected to remain robust in Austria in terms of volume and number of deals in the second half of 2021.

Private equity companies and strategics that have dry powder available are intensively seeking attractive targets, particularly in the technology, life sciences and infrastructure sectors and in sectors focusing on sustainability, such as renewable energy. As such targets are relatively rare, the Austrian market remains seller-friendly to a certain extent. Auction processes are typically very competitive and attract multiple bidders.

Emerging environmental, social and governance standards have led to increased security of business models and caused large corporates to use M&A as a means to reposition themselves in order to secure their long-term growth prospects. This trend will continue to further increase M&A activity.
Another strong trend is private equity buyers looking at carve-out opportunities, with an increase in carve-out transactions expected in the last quarter of 2021 and beyond.

Market Activity

Private equity deals at the top end were spread across sectors rather than focusing on any specific sector. However, in the mid-market, technology, life sciences, infrastructure and sustainability sectors (environment in particular) are expected to see the strongest interest in 2021.
The full text is available in the Private Equity 2021, Law and Practice: Austria.

Hungary

M&A Transactions and Deals

Despite the modest slowdown of overall deal activity during the COVID-19 pandemic, Hungary continues to be a popular investment destination within the Central and Eastern European (CEE) region for private equity M&A transactions and deals. Although the Hungarian government still clashes with EU institutions and other Western European governments, investors also seem to favour Hungary’s long-lasting political stability, the healthy condition of its macroeconomic environment and its stable budgetary status.

As several major private equity players have long been focusing on expanding their existing portfolios in the CEE region, the potential sizeable targets available for them in Hungary have thinned out, to some extent. Nonetheless, there has been healthy activity among smaller regionally focused players, as well as among domestic funds that continue to see opportunities in Hungary during the COVID-19 pandemic. Accordingly, in contrast to global trends, deal-making going forward in Hungary is expected to be dominated by domestic M&A activity.

For the remainder of 2021, it is foreseeable that the mid-market and lower mid-markets will continue to weaken, as potential targets in those segments that are the intended beneficiaries of government relief measures are afforded reasonable protection for owners against market turbulence. For the same reason, market observers have not yet seen genuine distressed deals in Hungary.

Foreign investors also closely monitor the macroeconomic environment of Hungary, such as the inflation rate or the base rate of the National Bank of Hungary, which could have a significant impact on foreign direct investments.

Market Activity

The COVID-19 pandemic pushed retail and consumer service sectors towards online sales, but other segments equally had to adapt to the changing market environment pointing to the new norm. Accordingly, to date in 2021, the largest transactions have been in the online services and IT sectors, although special sectoral transactions, such as in energy (photovoltaic renewable energy, in particular) have continued to be among the busiest, due to the favourable dynamics of the underlying regulatory regime in Hungary. Apparently, the COVID-19 pandemic also accelerated consolidation within the Hungarian banking sector and sparked transactions on the local insurance market.
Looking ahead, the local market sentiment is that deal activity is likely to remain reasonably stable in Hungary in the second half of 2021, despite uncertainties across global markets and slower trends elsewhere in Europe reflecting a more cautious and less active deal-making environment. However, negative predictions about the effect on the local transactional market of COVID-19-related legislation in Hungary, which requires the screening and prior ministerial approval of foreign acquisitions of certain Hungarian companies engaged in selected industries, appear to have been fulfilled.

The full text is available in the Private Equity 2021, Law and Practice: Hungary.

Poland

M&A Transactions and Deals

Despite the 15 months of restrictions in the economy, M&A activity in Poland has endured. According to the “M&A Index Poland” prepared by Navigator Capital and Fordata, the second quarter of 2021 recorded as many as 82 M&A transactions, improving on the result of the first quarter by six transactions. TMT is constantly the leading sector among target companies, as with the acquisition of the Polish company Edipresse Polska by Burda Media Polska. Due to the development of the pandemic, the key drivers for Burda to acquire Edipresse Polska were the acceleration of the company’s digital transformation and the growing importance of internet services, which have become a more widespread trend. Entrepreneurs are increasingly looking for technological solutions that will accelerate their development and improve customer and supply-chain interactions.

Market Activity

Most of the M&A activity in 2021 occurred in the TMT, industrial and fast-moving consumer goods sectors. According to the “M&A Index Poland” prepared by Navigator Capital and Fordata, private equity funds were responsible for 12% of all transactions and their activity increased in comparison to 2020. It is worth mentioning that in 2020, due to the COVID-19 pandemic, the Polish government introduced limitations on foreign direct investments to protect certain sectors that are considered crucial to public welfare and security (energy, gas, fuel, telecommunications, chemicals, IT, certain food production, etc) from foreign acquisition, which is still in force in 2021. Despite the regulation, there has not been a noticeable decrease in M&A activity in these sectors.

The full text is available in the Private Equity 2021, Law and Practice: Poland.

Romania

M&A Transactions and Deals

After the disruption of the M&A market caused by the COVID-19 pandemic in 2020, where certain deals fell through the cracks of uncertainty and glooming forecasts, 2021 has so far seen a significant recovery in terms of deals.

The following three pillars are considered the main motivating forces behind this M&A-driven activity:

• postponed or halted deals that were picked up in late 2020 or early 2021;
• several distressed or cash-needy businesses that were planned for sale even before the COVID-19 outbreak and have now found a good window of opportunity to sell at a reasonable market value, especially given the increase in prices and overall market inflation; and
• the cash available and the general optimism, coupled with the promising results of the aggressive vaccination programme.

There has been particularly effervescent M&A activity in the private equity space, which was active throughout the first half of the year and continues to see increasing activity in the second half of 2021.

2021 is likely to be a very intense M&A year for the Romanian legal business environment, threatening to challenge even the most prosperous M&A years before the great economic downturn.

Market Activity

It is anticipated that IT, fast-moving consumer goods, pharma & healthcare and energy will be particularly attractive sectors for private equity funds in 2021.

The full text is available in the Private Equity 2021, Law and Practice: Romania.

All texts originally published in: Private Equity 2021, Law and Practice, Chambers and Partners.