SEE Regional Investment Climate
description
Transcript of SEE Regional Investment Climate
Where Opportunities Emerge
SEE Regional Investment Climate
Dr. Edilberto SeguraDirector and Chief Economist
SigmaBleyzer/The Bleyzer Foundation
Where Opportunities Emerge
Recent developments in the SEE region with a significant impact on investment climate
Improving prospects of closer association or EU membership for several countries in the region.
Good progress in fighting corruption and accelerated modernization of judiciary - two reform areas which were identified as the most urgent issues for improvement in Bulgaria and Romania to ensure EU membership.
Liberalization of business regulations and cross-boarder capital movements.
Reduced tax burden (i.e., downward revisions of the corporate profit tax and personal income tax in Bulgaria and Romania).
Significant decrease in the level of political risks and improving image of the region.
Investment ratings of many countries have been recently upgraded.
Where Opportunities Emerge
PE Fundraising for Emerging Markets 2003-2005, USD billions
2.2
0.4 0.4 0.4
3.42.81.8
0.7 0.5
5.8
15.4
2.71.3
2.7
22.1
0
5
10
15
20
25
Asia* CEE/Russia Latin America Africa/Middle East Total EmergingMarkets
2003 2004 2005
Source: Emerging Markets Private Equity Association
Region 2004 2005Asia* 27% 452%CEE/Russia 338% 53%Latin America 71% 78%Africa/Middle East 56% 397%Total EM 73% 279%
Growth over the previous yearRegion 2004 2005
Asia* 27% 452%CEE/Russia 338% 53%Latin America 71% 78%Africa/Middle East 56% 397%Total EM 73% 279%
Growth over the previous year
Where Opportunities Emerge
PE Investments in Selected Countries(EUR million)
Source: EVCA
20.1
95.7
130.
0
23.9
4.2
4.5
4.021
.4
1.4
24.2
24.1
154.
0
58.3
46.7
0
40
80
120
160
200
CzechRepublic
Hungary Poland Romania Slovakia BalticStates
Croatiaand
Slovenia
2004
2005
Where Opportunities Emerge
PE Investments as a Percentage of GDP
Central and Eastern Europe private equity investments make up only a fraction of their GDP compared to the West
Source: EVCA
0.07
9
0.07
3
0.06
4
0.05
5
0.05
3
0.04
1
0.02
2
0.00
40.24
7
0.40
3
0.45
3
0.66
2
0.86
1
0
0.15
0.3
0.45
0.6
0.75
0.9
Swed
en
Uni
ted
Kin
dom
Fran
ce
Eur
ope
Ger
man
y
Irel
and
Rom
ania
Pola
nd
Bal
tics
Hun
gary
Cro
atia
and
Slo
veni
a
Cze
ch R
epub
lic
Slov
akia
2004
2005
Where Opportunities Emerge
Performance of Global Market for Private Equity, MSCI Standard Index (January 2000 = 100%)
Eastern European markets have considerably outperformed developed countries in the last five years
0
100
200
300
400
500
Jan
-00
Ap
r-0
0
Jul-
00
Oct
-00
Jan
-01
Ap
r-0
1
Jul-
01
Oct
-01
Jan
-02
Ap
r-0
2
Jul-
02
Oct
-02
Jan
-03
Ap
r-0
3
Jul-
03
Oct
-03
Jan
-04
Ap
r-0
4
Jul-
04
Oct
-04
Jan
-05
Ap
r-0
5
Jul-
05
Oct
-05
Jan
-06
Ap
r-0
6
Jul-
06
EASTERN EUROPE LATIN AMERICA ASIA USA EUROPE
Where Opportunities Emerge
Cambridge Associates’ Emerging Markets Private Equity Index, December 2005
Returns on Private Equity in Emerging Markets have been steadily increasing
Eastern European markets show the highest returns for the Emerging Economies
1 Year 3 Year 5 Year 10 YearEmerging Markets VC and PE Index 21.87 19.24 4.95 4.06Asian PE Index 13.78 16.47 5.06 3.67CEE Russia PE Index 50.26 30.58 15.34 10.25Latin America PE Index 14.71 10.95 -6.81 -3.62US PE Index 27.35 24.93 10.07 13.37US VC Index 7.90 7.30 -9.89 39.34Western Europe PE Index 24.70 28.42 19.91 21.13MSCI EM Index 34.54 38.35 19.44 6.98S&P 500 4.91 14.40 0.54 9.07
1-, 3-, 5- and 10-year returns
PE – Private Equity, VC – Venture CapitalSource: Emerging Markets Private Equity Association
-5
0
5
10
15
20
25
1 Year 3 Year 5 Year
Dec-03
Dec-04
Dec-05
Return horizons
Emerging Markets PE IndexReturns Evolution in 2003-2005
Where Opportunities Emerge
INVESTMENT DRIVERS IN SEE
Three main drivers of value creation in South Eastern Europe:• Macroeconomic expansion (5% to 10% annual GDP growth) – top line business expansion;
• Inefficiently run Eastern European companies provide significant opportunity for value creation through improved operations, marketing, finances, customer and quality focus – bottom line growth;
• Valuations expected to rise when Bulgaria and Romania join EU in 2007 – multiples expansion.
Where Opportunities Emerge
Average Real GDP Growth in 2000-2005 by Selected Countries
Source: IMF
SigmaBleyzer’s countries of operationUkraine 7.4%Bulgaria 5.0%Romania 5.1%
EU new frontier countriesAlbania 5.7%Bosnia and Herzegovina 5.1%Croatia 4.1%FYR Macedonia 1.9%Serbia and Montenegro 5.1%
New EU countriesEstonia 7.65%Latvia 8.13%Lithuania 7.12%Poland 3.17%Slovak Republic 4.4%Slovenia 3.5%Hungary 4.2%Czech Republic 3.7%
Russia
Other developed countries
Canada
USA
EU 15
Japan
0 1 2 3 4 5 6 7
6.8%
5.9%
5.2%4.4%
3.0%3.0%
2.8%1.8%
1.7%
Where Opportunities Emerge
SigmaBleyzer’s countries of operation New EU countriesEU new frontier countries
0
2
4
6
8
10
12
14
Uk
rain
e
Bu
lgari
a
Ro
man
ia
Alb
an
ia
Bo
sn
ia a
nd
Herz
eg
vin
a
Cro
ati
a
FY
R M
aced
on
ia
Serb
ia a
nd
Mo
nte
neg
ro
Esto
nia
Latv
ia
Lit
hu
an
ia
Po
lan
d
Slo
vak
Rep
ub
lic
Slo
ven
ia
Hu
ng
ary
Czech
Rep
ub
lic
Ru
ssia
2003 2004 2005 2006*
SEE is one of the fastest growing regions in Europe Real GDP growth, % year-over-year
* IMF projectionsSource: IMF, National Statistical Offices
Where Opportunities Emerge
SEE - one of the most attractive regions in the Eastern Europe
Well educated labor force (i.e., university enrolment ratio is around 50%, which is good comparable with Western European countries);
Low level of wages compared with Western European countries (around EUR 200 per month)
Political risks have been notably reduced and local governments’ commitment to market-oriented reforms has been significantly strengthened.
Prolonged period of significant economic recovery and growth is expected.
Acquisition multiples of 1–4 times EBITDA are possible in the region
Exit multiples in 5 years should approach current Western European multiples of 6–10 times EBITDA
The path is more important than destination
Where Opportunities Emerge
Low Labor Costs in Eastern Europe Create Investment Opportunities for Europe
0 1 2 3 4 5 6 7 8 9 10
Latvia
Lithuania
Estonia
Slovakia
Poland
Hungary
Czech
Slovenia
NMS-8 (average)
Moldova
Albania
Ukraine
Macedonia
Bosnia
Bulgaria
Serbia
Romania
Croatia
EU border (average)
EU (15 countries) 24
Source: Eurostat, ILO, National Statistical Offices
Hourly labor costs in 2004, €
Where Opportunities Emerge
SBF IV – SigmaBleyzer Southeast European Fund IV
Fund IV in a family of funds Regional fund
• Focusing on Bulgaria, Romania, Ukraine • Other Balkan countries (exceptional opportunities only)
Based on proven business model of investing in emerging markets
• Successful track record of creating value
Regional fund taking advantage of regional synergies and country diversification
Opportunities in new EC Frontier countries Target size: €200 million Focus: Private Equity Transactions (control or near control)
Where Opportunities Emerge
Adding Value to PE Investments
Double inefficiency play:• Macro-economic inefficiency
• Micro (Market and Business) inefficiency Must have:
• Improving business environment
• The right team of local and western professionals
In the next 10 years EM PE will provide a unique opportunity to achieve superior returns while making socially responsible investments
Where Opportunities Emerge
Adding Value at the Macro Level
Where Opportunities Emerge
Where Opportunities Emerge
The Bleyzer Foundation Investment Drivers
1. Macroeconomic Stability
2. Liberalization and Deregulation of Business Activities
3. Stable and Predictable Legal Environment
4. Privatization, Public Administration reform and Corporate Governance
5. Removal of International Capital & Foreign Trade Restrictions
6. Facilitation of Business Financing by the Financial Sector
7. Reducing Corruption levels
8. Minimization of Political Risks
9. Improving Country Promotion and Image
Where Opportunities Emerge
Country Ratings: Macroeconomic stability
0
10
20
30
40
50
60
70
80
90B
osni
a
Alb
ania
Mol
dova
Ser
bia
Mac
edon
ia
Ukr
aine
Rom
ania
Cro
atia
Pol
and
Rus
sia
Bul
gari
a
Cze
ch R
ep
Est
onia
Hun
gary
Slo
vak
Rep
Slo
veni
a
Recent Developments:
▪ Strong economic growth ▪ Stable national currencies and low inflation
▪ Strengthened fiscal discipline ▪ Declining public debt and prudent debt service
Where Opportunities Emerge
Country Ratings: Business Liberalization and Deregulation
0
10
20
30
40
50
60
70
Ser
bia
Alb
ania
Mo
ldo
va
Bosn
ia
Mac
edo
nia
Russ
ia
Ukra
ine
Rom
ania
Bulg
aria
Po
lan
d
Cro
atia
Cze
ch R
ep
Hun
gar
y
Slo
ven
ia
Slo
vak
Rep
Est
on
ia
Recent Developments:
▪ Liberalized business regulations
▪ Enhanced bankruptcy procedures
▪ Reduced tax burden
Where Opportunities Emerge
Country Ratings: Stability and Predictability of Legal Environment
0
10
20
30
40
50
60
70
80
Alb
ania
Bos
nia
Ser
bia
Mol
dova
Rus
sia
Ukr
aine
Mac
edon
ia
Rom
ania
Bul
gari
a
Cro
atia
Pol
and
Slo
vak
Rep
Cze
ch R
ep
Hun
gary
Est
onia
Slo
veni
a
Recent Developments:
▪ Accelerated judicial reforms
▪ Deeper integration of EU laws into national legislation of accessing countries
▪ Lower corruption in courts
Where Opportunities Emerge
Country Ratings: Corporate and Public Governance
0
10
20
30
40
50
60
70
80A
lban
ia
Mol
dova
Bos
nia
Ukr
aine
Rus
sia
Mac
edon
ia
Cro
atia
Ser
bia
Bul
gari
a
Slo
vaki
a
Rom
ania
Cze
ch R
ep
Hun
gary
Slo
veni
a
Pol
and
Est
onia
Recent Developments:
▪ Improved regulation and supervision of public companies
▪ Better disclosure procedures
▪ Deeper public administration reforms and better privatization practices
Where Opportunities Emerge
Country Ratings: Liberalization of Foreign Trade and Capital Movements
0
10
20
30
40
50
60
70
80
90
100B
osni
a
Mac
edon
ia
Mol
dova
Alb
ania
Serb
ia
Rus
sia
Ukr
aine
Rom
ania
Bul
gari
a
Cro
atia
Slov
enia
Pola
nd
Hun
gary
Slov
ak R
ep
Cze
ch R
ep
Est
onia
Recent Developments:
▪ Liberalization of foreign trade regulations and enhanced efficiency of customs administrations
▪ More flexible foreign exchange markets
▪ Accelerated liberalization of capital accounts
Where Opportunities Emerge
Country Ratings: Financial Sector Development
0
10
20
30
40
50
60
70
80
90B
osni
a
Mol
dova
Mac
edon
ia
Serb
ia
Alb
ania
Rus
sia
Ukr
aine
Rom
ania
Slov
enia
Bul
gari
a
Cro
atia
Slov
ak R
ep
Pola
nd
Est
onia
Cze
ch R
ep
Hun
gary
Recent Developments:
▪ Fast expansion of the banking sector with increasing foreign participation
▪ Improved efficiency of local Stock Exchanges
▪ Rapidly growing capitalization of the listed companies
Where Opportunities Emerge
Country Ratings: Corruption Level
0
10
20
30
40
50
60
70
80A
lban
ia
Mac
edon
ia
Ser
bia
Mol
dova
Rus
sia
Ukr
aine
Bos
nia
Rom
ania
Cro
atia
Pol
and
Bul
gari
a
Cze
ch R
ep
Slo
vak
Rep
Hun
gary
Slo
veni
a
Est
onia
Recent Developments:
▪ Significantly lower corruption levels in the region
▪ Improved capacity of authorities to fight high-level corruption
▪ Better transparency of government’s activities
Where Opportunities Emerge
Country Ratings: Political Risk
0
10
20
30
40
50
60
70
80
Mac
edon
ia
Bos
nia
Serb
ia
Mol
dova
Ukr
aine
Rus
sia
Alb
ania
Rom
ania
Cro
atia
Bul
gari
a
Pola
nd
Cze
ch R
ep
Slov
enia
Hun
gary
Slov
ak R
ep
Est
onia
Recent Developments:
▪ Lower political instability
▪ Strengthened commitment of national authorities to advance with market oriented reforms that improve investment climate and establish business-friendly environment
Where Opportunities Emerge
Country Ratings: Country Promotion and Image
0
10
20
30
40
50
60
70
80
90
Mol
dova
Bos
nia
Mac
edon
ia
Ser
bia
Ukr
aine
Rus
sia
Alb
ania
Rom
ania
Cro
atia
Bul
gari
a
Pol
and
Cze
ch R
ep
Slo
veni
a
Hun
gary
Slo
vak
Rep
Est
onia
Recent Developments:
▪ Improved investment ratings of the countries
▪ Many countries were granted a status of market economy by US Senate and EU
▪ Higher prospects of EU accession
Where Opportunities Emerge
SigmaBleyzer's Aggregate Investment Climate Index – Country Ratings
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Bos
nia
Mol
dova
Alb
ania
Mac
edon
ia
Serb
ia
Rus
sia
Ukr
aine
Rom
ania
Cro
atia
Bul
gari
a
Pola
nd
Cze
ch R
ep
Slov
ak R
ep
Slov
enia
Hun
gary
Est
onia
Where Opportunities Emerge
Adding Value at the Micro Level
Where Opportunities Emerge
Where Opportunities Emerge
Micro-Level Risks
Company-Specific Deterrents
• Waste of resources and inefficiencies
• Mentality of management and employees
• Lack of transparent information, inadequate accounting
Broken supply chains Illiquid markets – difficult exits
Where Opportunities Emerge
Transaction Examples (1)
Sevastopol Shipyard (SSY)• Largest Naval Yard in Ukraine with over 18,000 employees in late
80s; 15,000 by late 90s• UGF acquires 50.4% for $2M in multiple transactions• Local press, local authorities, management, employees react with a
lot of concern about the future of SSY• Company restructured into five profit centers from 39 companies,
streamlining intracompany business flows • Shift in focus from naval to commercial ship repair• Payroll reduced to 3,600• Annual revenues up over 100% • From 4 ships repaired in one year to 60 ships!• Multiple smaller enterprises created around SSY • Exit for $6.8M; All funds combined: 230% gain; 34% IRR (5.7x
cash and 45% IRR for UGFIII)
Where Opportunities Emerge
Transaction Examples (2)
Poltava Confectionery• Initial investment of $1.1 million by UGF III to buy control, followed
by second round investment of $4 million to build new factory• Annual sales up 300% since 1999 from $12 million to over $50 million,
EBITDA up 500% to $6.1 million • Production volumes up more than five times since 1997• Valuation up over 500%
Softline (Software Developer)• Annual sales up 500% since 2000• 75 programmers to 450+ programmers• Successful outsourcing business development in US• Valuation up 300%• Leading Ukrainian systems developer
Where Opportunities Emerge
Transaction Examples (3)
Volia Cable• Largest cable operator in Ukraine
- Over 80% of the cable market in Kiev- 850,000+ homes passed / 560,000+ subscribers
• Company created through the consolidation of several separate buyouts and additional investment in network build-out
• First cable operator in FSU to offer digital cable, PPV, VOD, and Broadband Internet
• Value Added- Management Replaced- New fiber optic network built / Call Center constructed- Huge cost reductions (through consolidation)- Network consolidated around a single digital head-end, improving
operational efficiency- Tariff methodology developed and government approved - now utilized
by the entire Ukrainian cable industry - Increased revenue by over 3 times
• Valuation up 300% and expectations are for even more growth
Where Opportunities Emerge
SEE Regional Investment Climate more information on www.sigmableyzer.com
Where Opportunities Emerge