Private Equity in CEE overview

Private Equity in CEE overview

Private Equity in South-East Europe is alive and well. There are few talks in media on the recent acquisitions in the South-East region. One of them includes Nikos Stathopoulis, chairman of BC Partners’ portfolio management committee. Moreover, Nikos is also a chairman of Serbia based United Group and leads media and telecoms. Last year, there were two major acquisitions in the region. One was Tele 2 Croatia for an enterprise value of €220 million. While the other one was for Bulgarian service provider Vivacom for a reported enterprise value of €1.2 billion.

Meanwhile, a Pharmaceutical company Zentiva Group completed the acquisition of Alvogen’s CEE business in Romania, Bulgaria, Croatia and several other countries.

Private-equity (PE) investors own companies but are not like those that raise money by selling their shares in stock exchanges. There is a big difference. Public companies are those that shareholders list on publicly available registers. Secondly, listed companies make regular announcements. If they’re backed by private equity, there’s no need to do so: it’s all private. Therefore, Private Equity backed companies tend to value that freedom.

Private equity investments in CEE companies

Private equity and venture capital investment into companies in Central and Eastern Europe (CEE) reached a record €3.5 billion in 2017, according to data from Invest Europe.

Source: Invest Europe / EDC

From the Invest Europe, 2018 Report, 3,750 European companies exited in 2018, a 3% decrease on the previous year. By the amount of former equity investment (divestment at cost), the total value was €32bn, a year-on-year decrease of 28%. The most prominent exit routes by the amount at cost were trade sale (32%), sale to another private equity firm (31%) and public offering (10%).

Buyout funds in the region raised a total of €1.1 billion, whilst CEE venture capital funds attracted over €500 million of investor cash for the second year in a row.

The number of private equity and venture capital-backed exits in CEE reached an all-time high with a total of 128 companies divested in 2018. With an exit value of €575 million, Poland accounted for nearly half of all exit activity. The biotech and healthcare sector took the lion’s share of CEE private equity investment, making up just over 30% of the total value for the year. Consumer goods and services companies also fared well, receiving 27% of the overall funding.

What is private equity looking for in 2020?

According to online media, private equity markets are looking for technology companies where covid-19 is not worthy of mention.

It will be some time yet before the bargain hunters are searching for opportunities in manufacturing industries with complex, international supply chains. Meanwhile, creditors will be more focused on a conservative business plan for the underlying companies.

Overall we maintain a positive outlook for the performance of new commitments to private equity in 2020. Investors’ emphasis on ESG will increase further in 2020. That also aligns well with private equity’s long timeframes and higher engagement. This is becoming especially important for private equity in CEE; Central and Eastern Europe.

As we mentioned in the previous article on ESG growth, heightened awareness of climate change are important drivers of change. Nevertheless, the European Commission’s Sustainable Finance initiative is as well, highly important driver.

According to Pitchbook, private equity is on a long-term growth trend, and there seems to be little that will stop it. Private equity has long been an important contributor to value creation in the real economy and for investors’ portfolios alike.

Growth of ESG investing in Europe

Growth of ESG investing in Europe

The green revolution was in the focus before, but according to the latest data, the growth of ESG investing is here to stay. Investors around the world are demanding socially and environmentally conscious options. Moreover, for the first time since WWII, we sense a shift in which climate will become a priority of governments.

In addition to the increase in environmental awareness, when coupled with technology disruption, green stocks start a new trend in equity markets.

The push toward ESG (environmental, social and governance) investing is not just about the potential returns, as consumer demand is outpacing the market.

Growth of ESG investing in Europe became a focus for investment companies. Moreover, European countries have adjusted their regulatory outlook in including sustainability factors in the financial sector.

Financial returns on ESG investing

There is growing recognition in the industry of the link in incorporating ESG issues into portfolio management. ESG criteria cover issues that would not traditionally be covered by financial analysis. However, ESG issues do have financial implications. Such considerations include corporate culture and climate change.

The holistic approach of ESG integration into investment processes covers a wide range of factors. The integration of ESG includes investment and risk management processes, governance, technological and team resources.

Also, the emergence of the availability of data sources has made it easier to integrate ESG criteria into the investment process. Better methodologies allow for better interpretation of the data.

Moreover, a significant amount of research suggests a positive correlation between companies that incorporate ESG investing principles. In the Journal of Sustainable Finance & Investment, out of 2,200 studies on ESG, 90% showed either a positive relationship to Corporate financial performance (CFP) or at least no-negative relationship. So, we can come to the conclusion that ESG can not harm company performance.

Investors are aligning their responsible investing goals with long-term financial risk adjusted performance. Investment firms are increasingly aware of ESG factors and this, in turn, is influencing their investment offerings and product strategies.

Growth of ESG investing from 2019

Industry experts say 2019 was the year environmental, social and governance investing became the new normal. In a chapter published in the IMF’s October 2019 Global Financial Stability Report, researchers found the performance of “sustainable” funds is comparable to that of conventional equity funds. The IMF estimates there are now more than 1,500 equity funds with an explicit sustainability mandate. Here we look at some key figures that underline the ESG growth.

growth of esg investing

Source: IMF, World Bank

There was a big change over the past years in the way wealth managers use sustainable funds. Whatever the approach they use, experts recognise the growth of ESG investing as an integral part of the investment process. Patrick Thomas, Investment Director, Head of ESG Investments at Canaccord Genuity Wealth Management claims ESG is a structural trend. The Canaccord Genuity is, in fact, one of the first firms to launch an ESG-dedicated portfolio service.

Both academic and industry research has demonstrated that ESG investing has not harmed investors. Moreover, investors have experienced similar returns and often with lower volatility. Thus, leading to improved risk adjusted returns.

To sum up, the key ingredient in product development will be the cost of incorporating sustainability in the investment model to remain competitive and attractive to investors. Integrating ESG into the investment process is more important now than ever. In addition, a rising number of investment funds are considering the implementation of the ESG policy into their entire investment process. Further analysis of the ESG models by the industry could help tackle the ESG risks. Therefore, an in-depth analysis of ESG investment model could be beneficial for your business. 

Digital disruption impact on business in the new era

Digital disruption impact on business in the new era

We live in disruptive times. Digital disruption impact on business will face uncertainty. Technology has changed the way we work, shop, sell, our economy, day to day factors such as transportation, right down to the way we live in society. With the new era, comes a new disruptive technology that will change the way we live or how we think.

A wave of innovation disruption is happening faster with companies going out of business faster.

Especially, now that we have all different technologies suddenly converging – IoT, robotics, self-driving cars, AI, Big Data and analytics, 3D printers, nanotech, AR, VR, quantum computing, bioengineering and blockchains. The immediate impact of blockchain technology may not be apparent for the non-technological eye; however, it could improve existing systems within society at large.

This digital disruption impact on business is, therefore, changing lives on many fronts. It is changing the value propositions for a business.

Moreover, a common example is an e-commerce as a digital transformation in business. Disruption in commerce means a radical break from the existing processes in the industry. A recent study by Accenture showed that industry leaders expect up to 40 per cent of incumbent businesses to be displaced by digital disruption by 2020.

The global financial sector could be worth US$26.5 trillion in 2022 with a CAGR of 6%. There are still financial institutions that do not have an app or a website to meet today’s market demand. Therefore, the businesses that put customers first, are those that win the prospects.

What are the most disruptive technologies or trends between now and 2022?

 

The answer found at Quora, by Thomas Kutschi,  VP Alliances at Infonova, a leading-edge BSS vendor.

To change the world within the next 1-5 years the technology has to be mature already and in the early adopters’ phase. This limits it to a few “un-revolutionary” technologies. A few that come to my mind:

Distance education: education is still seen as an on-premises activity. This will largely change. The technology is there, providers of education are ramping up their efforts to tackle this market and users start to adopt it.

E-Commerce: A significant part of purchases are already made via the web, but this is going to increase and conquer a new customer segment.

Non-linear media consumption: linear TV is still king in the living rooms of today (and it is there for good, just less important) – but non-linear VoD, Time-Shift etc. will be widespread with availability of broadband.

Home automation: This might probably take longer. Moreover, five years from now it will be normal to live in a fully “automated” and remote-controlled living environment.

Big data: We are currently only talking about this, but the impact will be there five years from now. That said, big data will evolve with tailored solutions, mass-customization, personalised offers and ads.

Internet of things: More and more sensors or actors will be internet-connected.

Cashless payment. Either via plastic, NFC, mobile, whatever – we will see less cash circulation 5 years from now.

Recycling: A lot of very expensive and valuable material goes to waste. Garbage is put into a hole in the ground or burned. New technologies for separation of garbage and re-winning material out of it will hit the street and make your garbage a big business.

Digital disruption impact on business

Business meetings shifted to video conference. Digital technologies are in use in the day-to-day of every company. In addition to that, businesses who have trouble switching to digital communication are rare.

Moreover, the sudden switch to technology and digital communication affects companies at all levels. Changes the channels of communication with customers and suppliers. And even the tastes and dynamics of the market change in a profound and surprising way.

A real case study example of disruptive technology transformation is a company WW (formerly Weight Watchers).

According to Which 50; In response to COVID-19, the company moved 30,000 face-to-face meetings — impacting a third of the company’s members and the bedrock of its business — into the digital realm. A month later, high satisfaction ratings from its customers demonstrate the success of the venture.

There are many examples of companies who adapted the new change quickly without any difficulties. Online meetings performed easily through the video calls with the app we already know such as Zoom or Microsoft Teams. Online payments are also possible through e-commerce and communication between teams through Slack channel, popular in the tech community.

In summary, the digital disruption impact on business already resulted in a sudden change in the way we do business. How we communicate with our partners or customers. It also changed the way students learn in schools and are prepared for the new era of digitalization. Meanwhile, Fintech companies offering short-term financing to cash-strapped businesses are slammed with online enquiries for help.

Changes in the M&A world: Tech sector

Changes in the M&A world: Tech sector

While the crisis has not yet passed, M&A discussions are already increasing. Many firms that were once in a stable position last year are now looking for an exit strategy or need to merge for growth or survival.

In the latest Economic Outlook chapter, economic experts describe a baseline scenario. In the scenario the pandemic fades in the second half of 2020 and containment efforts will slowly loose. Moreover, the global economy could show growth by 5.8 % in 2021 as economic activity normalizes, helped by policy support.

Source: IMF

When looking at the latest chart from the IMF Economic Outlook, a high rise in GDP is expected for the countries with advanced economies. With this in mind, companies can incorporate the latest data related to covid-19 into their equation. With coronavirus, the acquired or merged-in firm’s revenue stream may not be as predictable as in the past. The quality of the firm is not the question. Moreover, a firm’s value can drop if the incoming firm’s client revenue shrinks.

What are the remaining challenges in the M&A?

No matter the covid-19, the selling factor remains the same. In M&A challenges, there is an ongoing concern of whether or not the team can bring in sales. Partners do not want to risk payout on a team with no record of selling.

Here’s how to look at the firm value in any CPA M&A deal, pre- or post-pandemic. Value has been, and will always be, what the buyer/acquirer feels it is worth.

Make sure that there is no risk of revenue loss. In that case, the seller or upward-merger firm should not be worried about getting paid in full.

How do you increase the value of your firm? To maximize value, you need to understand the market value of your firm in today’s environment and the drivers that increase or decrease firm value.

Software industry changes in the M&A

In the software industry, private equity-backed providers are helping in subtle ways. They are offering their products and services to government agencies to help them respond to the pandemic or track its spread.

The world of private equity ownership often provides for higher authority over a company’s strategic management. That said, businesses can promptly shift direction to respond to market challenges. Moreover, the technology sector shows that a lot of companies are constantly producing innovative technological solutions.

A recent example of the tech company is digital assistant Andrija, developed in Croatia to help fight against coronavirus. This “virtual doctor”, powered by artificial intelligence, has been developed by Croatian IT companies in cooperation with epidemiologists.

The idea of ​​the assistant is to assist healthcare professionals, doctors and epidemiologists in controlling the development of the Covid-19 epidemic. In addition to that, users are able to determine if they are covid-19 positive.

In short, many software companies are looking for new ways to thrive after the crisis. The post-pandemic situation will bring some economic difficulties for many companies. Meanwhile, tech giant Facebook is already working with health researchers and nonprofits. Facebook will provide anonymized and aggregated statistics about people’s movements. The project is called desease-prevention maps.

Changes in the M&A: Investors still on the hunt

With 170 deals completed in the first three months of 2020, deal volumes are significantly down. If we compare with the previous quarter, deal volumes are the lowest since early 2014.

Moreover, covid-19 crisis has significantly disrupted the normal flow of M&A deals. With the global economy change in mind, companies are more likely to prioritize short-term actions over long-term initiatives. However, those that are able to stay on the course, will more likely establish foundation for continued success once the crisis ends.

Although M&A activity as a whole is expected to be down this year, the deals that get done are expected to involve the same technology disrupters that make attractive targets in scope acquisitions. In the survey, company Baker McKenzie predicted global M&A drop 25% this year, from $2.8 trillion to $2.1 trillion. However, the deals that will get done will involve technology of disrupters. In the repor, data shows that across all sectors, companies will seek to acquire the advanced digital technology.

To sum up, technology sector will continue to receive increase in interest from financial buyers. Moreover, the changes in the M&A will result in fewer acquisitions. In addition to fewer M&A acquisitions, the buyers will take companies in a new directions.

The economic impact on e-commerce

The economic impact on e-commerce

As the COVID-19 changes buying behaviour, the economic impact on e-commerce could be longlasting. As people come to terms with their new living situations, their buying behaviour has adapted to suit their needs. While panic buying may have slowed in some countries, consumers continue to stock up on supplies, or “pandemic pantry products”.

Although grocery shopping has received higher demand, the Adobe digital economy index data shows that electronics, home and gardening are also influential due to the online economy. See the charts below.

Source: Adobe Digital Economy Index

Demand for groceries has been increasing slightly in recent years, driving online price up by 4.6%. Moreover, plunging TV prices and wider 4K availability have boosted online purchase power over past years. As for the home and gardening, prices have been steadily deflating, but they still rise in early summer as demand increases for outdoor furnishing.

Meanwhile, consumers are experiencing out of stock pages as the supply chains are impacted. The products that receive higher demand due to the COVID-19 impact from January to March, include:

1. Virus protection category products like hand sanitizers, gloves, masks, and anti-bacterial sprays surged 807%

2. Over-the-counter drug purchases increased by 217% for cold, flu, and pain relievers

3. Toilet paper online sales spiked by 231%

4. Non-perishable, canned goods and other shelf-stable food sales increased by 87%

Looking ahead, the economic impact on e-commerce caused changes in shopping and buying behaviour.

“Quick turnaround shopping happens when you think something it is going to go out of stock, like on Black Friday,”

Tamara Gaffney, VP of Decision Strategy at Quantum Metric in an interview with Retail TouchPoints

She also shared that no matter what category you look at, regardless of if you think that matters right now, is seeing online growth.

The covid-19 outbreak in France

Moreover, an interesting increase in online sales is showed in online pharmacies. The latest statistic report from Statista shows e-commerce activity development after the covid-19 outbreak in France.

Source: Statista

The statistic shows the activity of online commerce after the outbreak of the coronavirus (Covid-19) in France in March 2020, in terms of transaction and traffic rate development. Hotel websites showed a fall of about 9% in transactions and around 8% in website traffic rate between February 16 and 23, 2020. Online pharmacies had increased their traffic by 15.3% and their transaction rate by around 2%.

Demand in supply chains: impact on e-commerce

While it was easy to predict the rise in online shopping and demand for e-commerce in the supply chain, the retailers may be facing pressure. Officially the world’s largest retailer, Amazon has announced it can no longer keep up with consumer demand. As a result, it will be delaying the delivery of non-essential items, or in some cases not taking orders for non-essentials at all.

That said, the pressure that economic e-commerce demand from online shopper posed will have consequences on small retailers. Many don’t have the large supply chains that Amazon has and therefore could experience delayed in shipping.

In fact, in early March, 20% of shoppers already had had an e-Commerce delivery delayed or cancelled due to coronavirus, according to ShipStation.

No matter if you are a small or large business with well-organized supply chains, you should keep your communication transparent. If you want a good long term relationship with your customers, be honest and transparent with the possible shipping delays.

Although you can’t virtualize a warehouse worker, you can use digital communication and the process between supplier and retailer.

Change in Grocery E-commerce

Higher demand in grocery online shopping has had a meaningful impact on e-commerce. There are some implications that the changes in consumer behaviour will be lasting. Moreover, the most profound change in consumer behaviour is happening in grocery e-commerce.

Statistic of e-commerce per category
Source: Statista

The recent research from Statista shows the e-commerce share of total retail revenue in the United States as of February 2020, sorted by product category. According to the findings, food and beverage segment accounting for 3.2% of total retail sales. This is at the moment the fastest-growing e-commerce category.

Grocery e-commerce has had huge momentum behind it—even prior to much of the US population social distancing and staying home—with last year representing an obvious inflexion point. According to TABS Analytics from e-Marketer, internet users jumped from 38% in 2018 to 56% in 2019, while the percentage of those who regularly ordered groceries online spiked from 17% to 37%.

Online grocery shopping behaviours-impact on e-commerce
Source: Figure from eMarketer

While retailers are still facing the problem of higher demand and managing the logistics, the operations such as click and collect helped propel the behaviour forward. The example of Walmart’s click and collect is just one out of many groceries chains.

What started as simply making a purchase eventually progressed to buying in new categories, purchasing high-ticket items, and shopping and buying via mobile. Every time these behaviours crystallized for a new set of consumers, it permanently shifted their online buying habits. Supply chains demand had a rather positive impact on e-commerce.

Takeaways

Although online buyers will eventually go back to buying in stores, buying behaviour could easily for some shift to e-commerce. At least one out of five grocery online shoppers could stay online.

The economic impact on e-commerce is widely caused by impulsive buying behaviour while staying in the midset of fear on “something will be out of stock.”

Make sure to properly prepare your logistics and supply chains for higher demand in supplies. If you can not deliver, be transparent and share this information with your customers and workers.

The question that remains is will the buying behaviour change for good?