Poland’s pro-EU switch could aid private equity interest, says Abris

‘The expected release of EU funds will also be a boost for many businesses,’ says partner Edgar Kolesnik.

Edgar Kolesnik, Abris Capital Partners
Edgar Kolesnik, Abris Capital Partners

Central Europe could enjoy renewed private equity interest in 2024 thanks to the region returning to its previous growth trajectories faster than the rest of the continent, as well as the idiosyncrasies of its investment landscape, Edgar Kolesnik, partner at Abris Capital Partners, told PE Hub Europe in the latest of our dealmaking outlook series.

Politics could play a part too. Pro-EU former prime minister Donald Tusk won the Polish election in October and was sworn in this week. The new government “is expected to encourage foreign investors… There is already growing interest from some Western European financial investors who have not previously invested in the region,” Kolesnik said. “The expected release of EU funds will also be a boost for many businesses.”

The European Commission had locked Poland out of billions of euros from the EU’s post-pandemic recovery fund due to concerns about the independence of the judiciary under the previous PiS government. European budget commissioner Johannes Hahn said this week that the EU would look into helping Poland reach the blocked money, according to Reuters.

Abris, which has offices in Warsaw, Bucharest and Nicosia, agreed to sell Polish hygiene product manufacturer Velvet Care to global investor Partners Group in December. Velvet Care had €277 million of revenues in 2022.

Do you expect a pickup in dealmaking in 2024 compared to last year? What’s making you optimistic and what are you worrying about?

It is still too early to talk about recovery, but market participants in Central Europe are becoming increasingly optimistic about the prospects for increased deal activity in 2024 as some of the fears of a deep recession that dominated the discussion in early 2023 begin to fade.

The prospects for the private equity industry in the region in terms of new investments are very good, for a number of reasons. First, entrepreneurs and management teams do not have a large choice of routes to obtain financing. The public markets are limited and, for debt financing, conditions and availability are a challenge. Second, the limited pool of investors with capital to invest in the region should translate into lower company valuations. And third, in times of market and economic uncertainty, it is vital that companies make strategic moves in order to ensure their survival and development – therefore, consolidation through M&A, expansion into foreign markets and other activities to build competitive advantage are likely to grow in importance. Private equity funds are best placed to do this.

How was your dealmaking experience in 2023? What were the high and low points?

While the market was subdued in 2023, the overall M&A figures for the year are not as disappointing as they may first appear. Total deal value for 2023 is still on course to top 2019’s full-year total, which was the previous high before 2021. What is noticeable in Europe is that investors have moved away from mega-transactions this year and almost 60 percent of deals are in the mid-cap space.

The biggest challenges of 2023 were the significantly increased cost of debt and tightening covenants, combined with unbalanced valuation expectations between vendors and buyers.

Despite this, Poland saw a total of 285 M&A transactions during the first three quarters of 2023, according to data from Fordata and Navigator. This is more than in the same period in 2022 (249) and 2021 (226).

However, we have seen numerous transactions in 2023 being put on hold for various reasons. In many cases this was related to ongoing trading performance being below the sell-side’s expectations, resulting in a mismatch in valuations. To overcome the mismatch in valuations, there has been more willingness to employ earn-outs in the structuring of transactions, but these can be difficult to structure for transactions that assume the succession of founders.

Which sectors and/or subsectors do you expect to do well in 2024 and why? Which do you expect to struggle? 

In Central Europe there has been a visible improvement in sectors such as technology, healthcare and industrials. However, due to high uncertainty, many processes that started out as auctions ultimately end in bilateral talks. This requires a more selective approach of buyers and an openness from sellers in developing an optimal solution for both parties.

We expect there to be continued cautious optimism in technology M&A in 2024. The market is being driven by increasing integration of technology in traditional sectors, and the prospects for private equity funds investing in this sector – where you see more attractive valuations for companies that require digital transformation – are good. Valuations are down from the highs of 2021 and 2022, which should drive deal activity, and these companies also tend to demonstrate relative resistance to unfavourable macroeconomic factors.

What’s your outlook for exits in 2024? 

I would like to believe that IPOs will come back, but I don’t expect great activity before the summer. However, there are a number of processes in the starting blocks, and these could be a litmus test for investor appetite.

Trade buyers will continue to be selective, focusing on strategic acquisitions rather than building scale and market share. This approach is the result of the cost of funding remaining high, and therefore balance sheets remaining contracted, but also performance indicators across a number of industries being at low levels.

Financial sponsors will remain a strong exit route, as they continue hunting for trophy assets or assets they can bolt on to existing platform investments.

While I am not overly optimistic for most of Europe, the possible exception is Central Europe, where many economies have already returned to their growth trajectories and where investors may feel there are opportunities to tap into this growth.

Portfolio companies that have successfully adapted their commercial and operational activities to the current market conditions, and that are growing profitably, are still of interest to strategic and financial investors. Moreover, due to the relatively smaller pool of resilient and strong companies, exit valuations can be attractive.

Finally, the result of the recent election in Poland is expected to encourage foreign investors, and there is already growing interest from some Western European financial investors that have not previously invested in the region. The expected release of EU funds will also be a boost for many businesses.

Editor’s note: PE Hub Europe will be running 2024 outlook Q&As with senior private equity dealmakers through December. The previous instalment was with Paul Lamacraft, senior private equity investment director at Schroders Capital.