Portfolio.hu Interview - “Valuation levels will surely come down" - Craig Butcher, Mid Europa Partners

Woes on the lending market will inevitably lead to a drop in private equity valuation levels, Craig Butcher, partner at Mid Europa Partners, a leading independent private equity investment firm, told Portfolio.hu in an interview. In spite of this, Butcher believes that years of growth, investment and efficiency improvements as well as an increase in M&A activity generally supports a strong pipeline of activity at higher enterprise values than was the case in the past.


Craig Butcher will be one of the speakers at Portfolio.hu's 4th CEE Corporate Finance and Private Equity Conference, on 6 November in Budapest.

Porfolio.hu.: What is the main focus of Mid Europa Partners?

Craig Butcher: Mid Europa Partners is a leading independent private equity investment firm focused on Central and Eastern Europe with approximately €2.2 billion of assets under management. Mid Europa Partners seeks to take controlling stakes in its investments either on its own or working alongside other financial or strategic partners. We typically invest €25 million to €200 million in companies with enterprise values ranging from €100 million to €1,500 million, which are cash-flow generative and have dominant market positions in sectors with high barriers to entry.

P.: How have leveraged buyout transactions been affected by recent developments in the financial markets both globally and in the CEE region?

Craig Butcher: Buyout transactions in CEE have to some extent been impacted by the credit crunch. We have seen some lenders that have simply closed for business temporarily, some bidders in competitive processes have stepped back due to a lack of finance, the lower leverage available and tighter pricing has likely led to lower prices for some businesses. Moreover some financing offers available a few months ago have been taken off the table and other deals re-priced and/or restructured.

The impact in CEE will nonetheless likely be less than in Western Europe as the buyout market here still relies firstly on growth for value creation and secondly on margin improvement from efficiency improvement and consolidation. As such the buy out market is not as dependent on leverage and financial engineering as has been the case in more developed, low growth markets.

P.: Will this trigger bankruptcies in the private equity market?

Craig Butcher: It is too early to say. Default rates remain very low and corporate profitability strong. It is not impossible though that a large deal in Europe may encounter financial difficulties. In CEE the risk of default is in my view lower as the higher growth supports faster deleveraging.

P.: How will the possible liquidation of assets affect valuation levels?

Craig Butcher: Valuation levels will surely come down.

P.: How do you see the private transactions in the mid-size M&A segment in the CEE region?

Craig Butcher: The market continues to improve and years of growth, investment and efficiency improvements as well as an increase in M&A activity generally support a strong pipeline of activity at higher enterprise values than was the case in the past. We are also seeing an increase in secondaries (private equity buying from other private equity) and the emergence of transactions involving companies that were only formed in the nineties and might now be worth EUR 100m+.

P.: Which are the hottest sectors in this market segment?

Craig Butcher: We see opportunities right across the board but the biggest increase in deal flow is in sectors that have benefited from the strong growth in consumer disposable income in recent years.

P.: Do strategic investors and venture capital investors use different valuation models in the M&A transactions?

Craig Butcher: Not really though strategic investors are often able to price in synergies and may have a lower cost of capital than private equity in some instances. Strategics often also take account of "strategic considerations" when contemplating an acquisition whereas private equity is purely focused on value creation.

P.: There is a bullish IPO activity globally and Hungarian investors are craving mid-size (HUF 5-10 bn) stock market transactions. Can sellers reach a better price in a private transaction in this segment?

Craig Butcher: Potentially though outside Poland there have been very few private equity exits in CEE via the stock markets. We welcome any developments in this area and would certainly consider an exit through the public markets if appropriate demand and liquidity exists.


Craig Butcher will be one of the speakers at Portfolio.hu's 4th CEE Corporate Finance and Private Equity Conference, on 6 November in Budapest.