The following Q&A is an extract of the Private Equity Trends Monitor, which provides you with an up-to-date overview of the latest and anticipated trends across the European private equity sector in the wake of the COVID-19 pandemic. The report on trends and developments will be issued every two months as the situation continues to evolve. This extract covers private equity deal activity in Central and Eastern Europe.
How has COVID-19 impacted deal flow in the CEE private equity sector?
Deal flow has remained quite strong through H1 2020. Most transactions where negotiations commenced before the lockdowns continued unabated, albeit occasionally with revised pricing. For H2, however, while we anticipate a number of larger deals coming to market, we foresee a possible weakening of the mid-market and lower mid-market. It is also difficult to predict the effect on the CEE M&A market of COVID-19 related legislation passed or under consideration in many CEE countries requiring government approval of certain foreign investments.
Do any particular industries in CEE seem to be insulated from the adverse economic effects of the pandemic?
Online retail, which was relatively underdeveloped as compared to Western Europe and North America, has been expanding exponentially. The more successful online food retailers are seeking growth equity to fund the geographic buildout of their operations. Also, alternative energy and infrastructure also continue to draw significant interest from infrastructure funds and asset managers.
Are downward economic protection clauses / measures (including MAC clauses) becoming more prevalent in transaction documents?
It has really depended on the transaction. In competitive auction processes or transactions involving global PE players, as usual, there are no downward economic protection clauses. However, in semi-distressed transactions or transactions without any competitive tension, some buyers are able to elicit conditions precedent protecting them from significant deterioration in the target’s economic position.
Are you seeing any distressed deals so far?
We are not seeing truly distressed deals yet. In fact, we have seen several distressed deals pulled from the market as government relief measures have afforded sufficient protection for the seller to pull the deal temporarily in order to take advantage of them. On the deals which were already being negotiated at the outset of the crisis, there have been some substantial price renegotiations reflecting the stress on (and in limited cases, distress of) the target.
By Rob Irving, Co-head of the Europe Private Equity group, Budapest
Piotr Dulewicz, Co-head of the Europe Private Equity group, Warsaw
Petr Zakoucky, Co-head of the Corporate and M&A group in the Czech Republic, Prague, Dentons