August 7, 2012
Interviewed by: David Snow
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What LPs Think of Emerging Europe

Considering the challenges that beset the region, what are investor perceptions toward Emerging Europe right now? Privcap posed this question to three experts: Baris Gen, Senior Investment Officer for Private Equity Funds – Europe, Middle East & North Africa at the International Finance Corp.; Robert Graffam, Senior Managing Director of Darby Overseas Investments; and Ralph Jaeger, Managing Director, Siguler Guff & Company.

Considering the challenges that beset the region, what are investor perceptions toward Emerging Europe right now? Privcap posed this question to three experts: Baris Gen, Senior Investment Officer for Private Equity Funds – Europe, Middle East & North Africa at the International Finance Corp.; Robert Graffam, Senior Managing Director of Darby Overseas Investments; and Ralph Jaeger, Managing Director, Siguler Guff & Company.

David Snow, Privcap: We”re joined today by Baris Gen of IFC, Ralph Jaeger of Siguler Guff, and Robert Graffam of Darby Overseas Investments. Gentlemen, welcome to Privcap today.
All of you are very active investors in emerging Europe. So in this segment, I think I”d really like to dive deep into what the LPs with investors think about emerging Europe now, especially in the wake of all the problems that have beset the region and its neighbors to the west.
Starting with Ralph, since you are in touch with many investors and also are in touch with many GPs who themselves have fundraising goals, how is emerging Europe faring in the battle for capital among all regions of the world? What is the investor perception of emerging Europe?
Ralph Jaeger, Siguler Guff: I think perception is very difficult. I think the funds that we”re looking at, GPs pretty much unanimously tell us that fundraising is taking much stronger than anticipated, and that investor appetite is not as strong as they would like it to be.  I think, we see that there”s definitely significant competition for capital.
As I said before, investors are not necessarily forced to commit or to invest in emerging Europe. So you compete with other regions, other geographies, other market segments that you need to be aware of, and against a track record, which has been difficult in a more recent past. It”s not an easy recipe.
Now, one should take a contrarian approach in some of these markets. So for example, when we look at Russia, and we have a fund in Russia, obviously, that”s been very, very successful Russia partners. We very much like what we”ve seen. We continue to see very attractive valuations, strong data flow, high growth rates, and a very nice diversity of investment opportunities.
So Russia, you mentioned venture capital in Russia, or kind of the tech side in Russia, which is a new avenue of interesting investment channels there. And then the periphery. We”ll be looking at Ukraine, potentially, and other more Eastern European markets, if you want. And Turkey being also among one of these markets.
Snow: Bob, your firm, Darby, has recently completed a fundraising with Eastern Europe as the focus. What was that like?
Robert Graffam, Darby Overseas Investments: It was hard. It was hard. It was two years in the in the offing. We raised 150 million euros for first close, which we were pretty pleased with. It is our third fund, so we”re not a first time GP. It”s the second fund with the same strategy. And we closed in December of 2011. So obviously it”s been a difficult market.
There was a statistic that I heard from the EBRD people. And they”re the predominant investors in Eastern European funds. Since 2008, somewhere between 66% to 2/3 of all capital raised by Eastern European funds have come from the development agencies that have a different objective, clearly, from pure private sector capital. And they were important supporters of our fund as well.
Outside of Europe, in addition to all the other issues, we have the euro issue of getting investors comfortable to make a 12-year, 10-year commitment to this currency.
Baris Gen, IFC: It”s actually interesting. You have recently seen some funds actually switching currencies from euros to dollars also, which I thought was interesting.
Snow: What are some of the questions that investors have for you? Are they really focused on your strategy and track record, or different are they really worried about just the geography, the region?
Graffam: Well, I mean, yeah. The combination of the geography and the strategy– we”re a mezzanine fund– will eliminate a very large segment of investors that simply are not open to it. They don”t have allocations for Eastern Europe. Don”t invest in mezzanine. So then you immediately narrow the universe of investors down to maybe 10% of the total. And then, within that 10%, you have to find investors who are willing to look beyond the last two or three years.
In fact, the track record for private equity or alternative asset investing in Eastern Europe for a 10-year time horizon is still very good. Because it was by far the most attractive region for private equity investing pre-2008. And there are investors that are contrarian or are aware of vintage years. It”s when you”re coming out of a difficult period that usually you get the best investment opportunities.
Snow: Baris, as an investor yourself and someone who”s in close contact with many GPs who also have fundraising goals, what are you hearing from them? What is especially challenging about the current fundraising market for them?
Gen: Because it is quite difficult. For example, in Turkey, the first time fund managers, that”s clearly something that we see, that the first tme fund managers are taking much longer to reach the first close and second close. So those time horizons have increased. The size of first closes have come down. I think also in some funds in central Eastern Europe, some of them are facing the decision of, OK, can they actually raise another fund? Or is this time up for them?
So you kind of see that. It is pretty difficult. And I guess LPs are more judicious and more careful. At the end of the day, this is a liquid investment that is fairly costly in terms of the expenses, fees, the carry that”s provided. So I think everybody”s very careful.
And for example, institutions like IFC, we are also a direct investor. So we would want to see how a fund would do versus our direct investment. So that”s something that we”re looking at. And I think a lot of the LPs are also just comparing returns, looking really in detail into track record. So those are critical areas.
Snow: Well, if emerging Europe was once the most popular strategy among all the emerging countries for private equity, what will it take to convince investors that it should rank near the top again? Because right now it probably trails many other regions. As one of the more advanced private equity markets in the world, should it have a more natural place higher up on the–
Gen: I think the one thing is success stories. For example, probably what has helped some funds in Turkey and Russia to really raise large sizes recently has been success stories. In Turkey, for example, you have a number of exits that are successful and that get lots of coverage. So that”s something that catalyzes I think, and also overall track records. So it may take some time. It”s not just going to happen over night.


Graffam:
I think you need to have fund managers out there that have compelling, new themes. As we discussed in a prior segment, the old theme of convergence isn”t selling anymore. So you have to have a new theme, whether it”s a new part of the geography that hasn”t been contaminated in the same way, or it”s a new theme.
For example, a lot of money has been raised in Western Europe for credit firms. They”re supposed to be taking advantage of banks selling a lot of assets. So it”s going to be the other markets or a new strategy. Plus, we need Europe to get off the front page for a while.


Snow:
Right. And obviously, good stories usually end in an exit of some sort. And so it sounds like, for the time being, the average Eastern European manager is tending to his portfolio. It”s a time of asset management. But whenever we get through the other side, if a number of exits occur, then those are the good stories. And maybe more capital will be allocated to Eastern Europe.

 

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