Central and Eastern European LPs Investing in Private Equity

by Bogusia Glowacz

  • 14 Jun 2011
  • PE

Central and Eastern Europe (CEE) is a diverse region made up of former Soviet satellite states, Turkey and Greece. Its continued economic growth, assisted by the EU integration and favourable demographics, has drawn an increasing level of interest from GPs looking for potential investment capital.

Preqin has recently spoken to and researched 101 institutional investors in CEE in order to discover new players in the private equity market. We found there are 45 investors in CEE which either invest or consider investing in private equity funds and a further 14 LPs which have previously made commitments to private equity funds, but are no longer active in the asset class.

Although it is gradually improving, many institutional investors in CEE are restricted by local government regulations on investments in alternative asset classes such as private equity. Public pension funds in Poland, for example, can invest in private equity but only via closed-end investment funds. In reality, however, such rare investments are not taking place as regulations for assessing the investment performance of pension funds are a major obstacle.

Other investors are permitted to invest in private equity funds focused exclusively on the local market.  One Croatian private sector pension fund, which been an active investor in private equity for a number of years, has a mandate to invest in funds focused only on Croatia. Since it has a narrow geographical focus, it is has to be very selective when looking for prospective investment managers.

Similarly, a Slovenian government agency, which allocates a large proportion of its portfolio to private equity, invests mainly in funds which help the development of SMEs in Slovenia. It only considers investing with managers based in Slovenia, with at least 70% of the capital to be invested in Slovenia and 30% which is can be invested overseas.

However, there are a few promising investors in the region which are planning to enter the asset class in the coming years. One large Polish insurance company is currently reviewing its investment portfolio as part of gradually moving towards a more diversified investment strategy, which will eventually include private equity.  Another significant public pension fund in Bulgaria is also keen to invest in the asset class and is currently negotiating relaxing local regulations which prevent it from investing in private equity.

Even though some institutional investors in CEE have shown an interest in investing in alternatives such as private equity, many are yet to enter the private equity market. Government restrictions remain the major obstacle, which either prevents them from making such investments altogether or stipulates a narrow geographical focus. However, the steady economic growth and the participation in the EU economy indicates that it will not be too long before the CEE region fully sees benefits offered by investing in the private equity asset class.

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