Opportunities are expected to be particularly bountiful in Poland this year

There are companies and projects in the Central and Eastern Europe (CEE) region that certainly have the potential to attract investors from the Gulf Cooperation Council (GCC) – which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates – in 2012. Many CEE countries have made tremendous progress during the last few years and the vast majority are now well established economies with high potential for growth.

In a recent study by Ernst & Young, investors ranked CEE as the third-most attractive investment region in the world. Companies looking for opportunities in Europe are increasingly considering the CEE region, due to the fact that it offers dynamic growth prospects, high returns on investment and much more stable and predictable growth than crisis-stricken Western Europe.

However, in order to secure a successful and profitable entry into CEE markets, some principles of investment need to be followed.

The CEE region and Poland

Germany and Poland’s econ-omies form a bridge between Western Europe and Central European countries. The CEE region itself borders the Baltic Sea in the north of Europe, as well as the Adriatic and the Black Sea in the south, and has a population of over 180 million (including Ukraine).

The region’s work force is well educated and technically skilled, and labor costs remain very competitive compared with Western European countries. EU structural and cohesion funds allocated to CEE countries for infrastructure development stand at over €177 billion for the 2007-2013 period. Meanwhile the United Nations global economic forecast predicts average GDP growth of above 2.5 percent in CEE this year (with Poland at 4.1 percent), whereas the euro zone is expected to grow by just 0.3 percent.

The economic volatility of some CEE countries during the financial crisis did not negatively impact on private equity (PE) and M&A transactions returns. Poland, as a CEE tiger, is an example worth elaborating on. A 2011 annual survey on Investment Attractiveness of Europe prepared by Ernst & Young placed Poland at the forefront of the most attractive investment destinations in Europe. The largest economy in the CEE region, Poland has a population of over 38 million, which is young and willing to work hard. With high-potential sectors, such as automotive, electronics, machinery and steel, as well as pharmaceuticals, it is the only EU country whose economy has grown throughout the financial crisis.

What are GCC investors after?

Laws in GCC jurisdictions do not prohibit their nationals from making investments abroad. There are also no restrictions on repatriation of funds by GCC nationals. What GCC businesspeople look for when they consider making an investment varies depending on a number of factors. Historically there was a strong trend for GCC investors to invest in real estate assets locally as well as in the US or Europe and there was a significant focus on quick and high return on investment. But the financial crisis, which the GCC region has not been immune from, has seen investment interests evolve and shift into more diversified models.

According to a recent UNCTAD report, outward FDI from Arab countries reached $169 billion during the period from 2001 to 2010, of which 82 percent came from GCC countries. This investment was part of the diversification policies of GCC countries as they move away from established oil and gas markets.

These days, investors from the Gulf not only seek political stability in investment locations, they are also interested in stable projected economic growth rates. GCC entrepreneurs have an increasingly long-term focus on acquiring equity or assets whose value is unlikely to depreciate, even if this means waiting a while for a return on their investment.

Sectors of interest for GCC investors fluctuate from one investor to another quite significantly. GCC state-owned corporations tend to make investments that are in line with state policies and the strategies of their governments. On the other hand, sovereign wealth funds and family offices prefer to invest in sectors that don’t yet form part of their portfolios, to minimize investment risk through diversification.

Impressive levels

PEs’ fund-raising for the CEE region reached a significant level in 2011. Capital for CEE funds is still coming from the EU and the US but with increasing participation of global investors. Sovereign wealth funds, pension funds and family offices have all been participants in the fund of funds rush and are seeking new targets in CEE markets. There are some top PE houses that will raise new funds in 2012 as well, such as Enterprise Investors, which is seeking to raise $700 million for its eighth and newest fund.

PE transactions reached impressive levels last year, with over 40 PE deals closed in the CEE region in 2011. Poland attracted over $1.5 billion of PE investment in 2011, followed by the Czech Republic and Hungary at approximately $400 million each, and Romania and Ukraine with some $70 million each. Communication, consumer goods and retail were the key sectors of focus for PEs last year.

The year 2011 was good for investor portfolio exits throughout CEE, with the average return on investment at over 100 percent. The Warsaw Stock Exchange also saw a lot of activity, being the European leader in terms of the number of IPOs in 2011.

The CEE is also a hot spot for infrastructure projects with 500 road infrastructure projects planned for implementation. Privatization efforts are also likely to remain stable in the region this year.

The key CEE sectors with high potential for growth are: agri-food, automotive, electronics, insurance, machinery and steel, and pharmaceuticals.

2012 CEE market preview

Numerous investment funds are seeing more CEE company owners prepared to discuss a potential share or asset sale. More than 20 years since the start of CEE economies’ transformation, many local families who established busineses in the 1990s are seeking exit or external capital as well as advice on growth and expansion strategies for new markets.

Those CEE countries that are part of the EU but have kept their local currency such as Poland, Romania and Czech Republic, are likely to do the best in the coming years.

The largest chunk of this year is still ahead of us. Aggressive investors focused on deals valued at over $50 million will make their mark. Large deals already in the pipeline and many more in the works attest to the fact that the CEE market is uniquely attractive for direct investments.

We are yet to see which direction the world will go in 2012. For the time being though, CEE has the means of attracting foreign investment through easy access to the EU market and relatively low labor costs for well-qualified professionals.

Source:From Warsaw Business Journal