Abris Capital Says Mid-Market is Sweet Spot

For Abris Capital managing partner Pawel Gieryński, there is only one sweet spot for private equity in the Polish and wider Central and Eastern European region. That is the spot where his Warsaw-based firm has always been a big player: the mid-market.

"There is no real touch-point between us and the big international firms," Gieryński said, though he admitted that London-based specialist firm Mid Europa Partners, which mainly invests at the higher end of the mid-market, might be seen as a kind of transitional size between them. Most of the other international firms with offices in the region, such as CVC Capital Partners Group or Bridgepoint Capital Ltd., are looking at fewer, much larger deals.

Gieryński and Abris' two founder partners, George Swirski and Neil Milne, raised their maiden Euro320.3 million ($354.4 million) fund in 2007 with an anchor commitment of Euro100 million from Harvard Management Co. Since then, the firm has done 26 buyouts across five countries and a further 50 bolt-on acquisitions over the course of three funds.

Fund II was Euro450 million and the 2017 vintage Fund III, which Abris is now investing, is Euro500 million, a progression that Gieryński says is in line with changing definitions of the midmarket itself. Poland and Romania are the two countries where the firm has offices and where it focuses its attention, but it also looks for targets elsewhere in the region, especially for add-ons and consolidation opportunities.

"We focused on mid-sized private companies," he said. "That was the decision 12 years ago, and we plan to continue with it for as long as we can think about it."

Gieryński likes to compare the firm's success with the experience of Advent International Corp, which Swirski joined in 2005 but took the tough decision to leave less than two years later when the Boston and London private equity shop chose to raise a new Euro1 billion CEE fund. It was more than double the Euro400 million fund it had previously invested in the region. Although his former colleagues thought he was crazy, Swirski's view was that there were too few opportunities for a billion-euro fund to invest in.

He was eventually proved right. The new Advent approach was not a great success, and the firm eventually decided to draw in its horns, close the Warsaw office and watch the region from London instead.

"We decided to step into their shoes and do what they were doing before," Gieryński said.

Once Abris has taken a company under its wing, professionalized management, and brought governance and environmental issues into line with the European Union regulations, valuations have tended to grow sharply. And the buyers have tended to come from outside the EU.

The firm's biggest exit was the 2016 sale of waste management business Novago Sp. z.o.o. to China Everbright International Co. after a three-year hold. While the full financial terms have not been disclosed, Abris showed in a recent presentation that the multiple of enterprise value to Ebitda had risen from a little over five times on entry to 19 times Ebitda on exit. The sale was the largest single Chinese investment made in Poland at the time and the largest acquisition in the environmental treatment industry anywhere in the the CEE.

It helped, Gieryński admitted wryly, that after the usual tortuous negotiations with a state company, the final details were settled just in time for the deal to be signed with great fanfare during a visit to Poland by Chinese President Xi Jinping.

Abris likes to point to advantages political stability in the region, a well-educated, highly competitive, tech-savvy workforce and attractive valuations in the region compared with Western Europe. The region's economies are growing faster than in the West. Communities brought up under Communist rule had little experience of saving or putting cash aside. With the growth of individual wealth in the post-Communist era, consumers and companies have money to spend, and investors can find attractive returns.

One example is spending on cosmetics and aesthetic medicine. Abris in 2018 invested in ITP SA, which does business as ITP Biomedical Co., providing it with professional support for further rapid growth and international expansion. It is the first company Abris has backed to advertise its wares in New York's Times Square, but it also sees growth in the business at home in Poland. 

Gieryński argued the region does not have the problem, so often encountered in mid-market firms in Germany, for instance, of old founding families wanting to pass a business on to the second or third generation rather than sell to an outside investor. There were no private companies, in Poland for example, before the end of the Communist era and little tradition of leaving a legacy. The first entrepreneurs of the early 1990s largely set up businesses out of need. They educated their children to do better than themselves, not take over the family business.

But not everything is plain sailing. Years of emigration to the West and full employment at home have caused labor shortages that have been exacerbated by the process of "near-shoring" in a string of sectors from auto parts to financial services and technology companies. That is the process whereby a Western European company, be it an automaker, a packaging company or a food processor, moves production to a still relatively cheaper neighbor with shorter more efficient supply lines, rather than to East Asia or India.

Until recently such developments were seen as an unalloyed advantage, allowing the region's economies to grow and increase in wealth. More recently, they have also begun to present a problem.

"The challenges are similar in most CEE countries," Gieryński said. "The biggest challenge these days and it's pretty new to us is access to labor. Unemployment is disappearing; business is growing. There are more and more new places and very few people that would like to apply.

"Brexit also helped in the sense that there were a number of new jobs that were created as banks and insurance companies moved back offices to CEE. On an individual scale, one may employ 2,000, one may employ 3,000; but together it's tens of thousands of professionals that were attracted to these new jobs."

Gieryński said there are no clear figures as to whether Brexit, shifting exchange rates or simply the growing opportunities in Poland and elsewhere have now begun to attract more people back to the region from Britain or other Western European nations. Anecdotally, he said he has heard that in 2019, there may in fact have been more people returning home than leaving for the West, but without the statistics to back this up, he cannot be sure.

For the moment, access to labor will remain a problem that may put a brake on growth. That is unlikely to be different for big-cap or small-cap investors. It won't be changing Abris' view that the mid-market remains the future for investors across the CEE region.

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