The latest edition of Deloitte Central European (CE) Private Equity (PE) Confidence Survey by business consulting company Deloitte reveals that private investors from Central and Eastern Europe are optimistic about the near future. Forty-nine percent of private equity fund representatives expect an increase in transaction volumes. While the improvement in sentiment has been observed for over a year, investors also seem to demonstrate caution in their forecasts.
The issue of ESG (Environmental, Social, and Governance) continues to grow in importance, and is taken into consideration in investment strategies by over half of the surveyed investors.
Developed over 20 years, the Central Europe PE Confidence Survey is a reflection of the views of local private equity market participants. At the end of 2023, its value amounted to 107 points, 24 more than six months earlier. The report authors underscore a steady increase in optimism over the last three surveyed periods, marking the third such occurrence in the history of the survey. The observed change is less dynamic than in previous years, signaling, according to experts, a cautious approach by investors towards improving market conditions. Despite this, a full 86% of respondents believe that the next 12 months will be a good time for investment activity. In 2024, nearly half the respondents plan to focus on new investments, nearly 10 percentage points more than a year earlier. Meanwhile, one in three plans to mainly manage their current portfolio of companies, and only 15% are focused on fundraising.
The survey found that while the latest sentiment indicator is the highest in a year and a half, Central European private equity market participants are more cautious than in the past. This is the outcome of experiences from over twenty years of functioning in changing market conditions. At the same time, we expect that despite many economic challenges, the activity of private investors in Central and Eastern Europe should grow. This applies to both the demand and supply sides, as evidenced by the over 40% of respondents who continue the sales process despite the changing market situation – says Arkadiusz Strasz, Partner in Financial Advisory at Deloitte, M&A Transaction Services.
Fund activity is increasing with 42% of respondents stating that they expect an improvement in the market situation, nearly three times more than in the previous survey. At the same time, the percentage of respondents projecting a negative scenario halved. There is also more than double the number of respondents expecting an increase in the availability of debt financing; 29% of respondents gave such answers.
Asked about market activity – the anticipated number of transactions in 2024 – 49% of respondents stated that they expect greater activity in this area. That is almost twice as much compared to mid-2023. This result also represents over 40 percentage points more than in the summer of 2022 when only 6% of respondents gave such answers. Conversely, the group expressing pessimism shrank more than twice – to 14%. Various factors are influencing investors’ willingness to take action, including the cost of capital. According to every third respondent, the availability of financing should increase in the coming years. This percentage is twice as high compared to the previous survey. Almost half of the respondents don’t expect changes to the current conditions, and one in five predicts a deteriorating ability to secure funds for investments.
“Although inflation remains one of the main challenges for the contemporary economy, over time the rate of price increases – and therefore the level of interest rates – should decrease. Private investors, whose availability of capital is fundamental to their activities, are expecting this. As central banks move away from restrictive monetary policies, the expectations of private equity market participants should become reality, which will undoubtedly result in an increase in fund activity in Central and Eastern European countries” – says Michał Tokarski, Partner, Financial Advisory at Deloitte in Poland, M&A Corporate Finance Team Leader.
ESG factors are escalating in importance for Central European private equity fund participants, especially in investment decision-making. over 50% of the fund representatives confirmed that they pay special attention to these issues in their operations. There was a significant increase amongst entities that don’t currently have an ESG strategy but plan to change this – from 9% in the first half of 2023 to 23% six months later.
When asked about carbon neutrality, most funds responded that they are only at the beginning of the road to zero emissions. The proportion of entities that have so far implemented decarbonization obligations and objectives fell by 8 percentage points to 18%. At the same time, an equivalent increase was noticed amongst funds that are in the process of developing their own climate goals. This is now the single largest group of surveyed entities, accounting for 42% of all respondents.
“The growing significance of environmental, social, and corporate governance factors is best evidenced by the fact that over 90% of the entities surveyed take them into account in their operations or plan to do so in the future. Last year was also a breakthrough because, for the first time in history, a company that is part of a local private equity fund achieved the prestigious B Corporation status, committing to active ESG efforts. In the near future, we can expect a dynamic increase in such entities, for whom commitment to sustainable development will be a key issue” – says Irena Pichola, Partner, Leader of Sustainability & Economics Consulting CE, Deloitte.
