Opportunities in CEE: Looking East in the hunt for yield

Financing for businesses exposed to Russia and Ukraine has become riskier, says Claudio Viezzoli, managing director for SME Finance from the European Bank for Reconstruction and Development (EBRD). “There is a big, big impact both in terms of financing availability and willingness of SMEs to invest or engage,” he tells PDI.

Investors have pulled capital out of the regions, following the fighting in Ukraine and sanctions against Russia. The EBRD has increased investment in the Ukraine however, due to its mandate to venture where others won’t.

The tensions haven’t helped financing for SMEs in CEE, which has been in a dire state for a number of years. The prognosis is for more of the same.


The lending landscape in Eastern Europe including Central Europe, Southern Eastern Europe and the Baltics, changed completely during the depths of the economic crisis, Viezzoli says, from a bullish market to a complete retreat.

The SME sector was hit hardest because of its higher risk status with a larger ratio of non-performing loans, he says. New private equity investment in Eastern Europe has virtually stopped, Viezzoli observes. Only a few have ventured into the territory, such as the EBRD, which increased investment dramatically.


Viezzoli has witnessed little change by way of private investment but has seen some countries like Poland and Romania successfully attempt to use the crisis to boost the competitiveness of their own domestic companies.

“This has been helped tremendously by institutions like the EU, which have provided a lot of funding to support the competitiveness of SMEs in all new member states and pre-accession countries including Turkey. This helped tremendously as the moment you have less competition in the market is the moment when you have to expand.” 

In the commercial real estate markets, Poland and Romania, along with Czech Republic, have also exhibited increased activity over the last couple of years. And where commercial real estate leads, other investment often follows.

Petr Svoboda, recently appointed by real estate advisor CBRE to head up a new debt and structured finance team for CEE, tells PDI that in Czech Republic and Poland: “It’s more active and more competitive at the moment and we see that continuing.” Romania shows even greater promise. There has been a “huge change in the investment market”, he says.

According to data from CBRE, property investment in Romania increased by 202 percent in 2014 year-on-year. In Czech Republic, it rose by almost 52 percent. Poland was slightly down on the previous year, at nine percent. But in Hungary, investment climbed 69 percent. The Slovak Republic also exhibited robust growth up 72 percent on the previous year.

These five countries are where the vast majority of property investment is taking place, Svoboda highlights. But in due course, as the search for yield continues, he opines that investors could end up looking south for “higher margins”.


Cautious optimism on the back of a wave of liquidity has expanded into parts of CEE. The West is looking to deploy capital at a good level of return with acceptable risk, Prague-based Svoboda believes.

Like many, he is not sure how long it will last, particularly in light of increased volatility economically and geo-politically, but “the markets are changing”, he emphasises, abroad and at home.

First of all, the banks are back. “There are a few German banks who were previously not interested in lending outside of Germany but have now come back in to Poland and the Czech Republic,” says Svoboda.

Reflecting on trends throughout Europe, international insurance companies are stepping in and providing standard debt financing.

“In the last three years they have learnt how to do these transactions and are slowly focusing on other markets as well. We believe we will see some initial players change their strategies [to search outside of home markets] as they look for higher returns as yields become more compressed in all markets,” he adds.

Domestic insurance companies could, in time, step into the equity or lending gap too, he thinks. “It’s something that is definitely changing and something that will develop further over the longer term.”

There is room for debt funds too, he believes. “Once there is [interest abroad] looking for financing in CEE, it’s not just about senior debt but definitely also the debt funds and less senior positions like junior mezzanine. We will probably see more of that [financing] in the future.”

There is evidence of deal making by global investment firms in the region.

TPG and real estate specialist Ivanhoe Cambridge acquired Prague-headquartered PointPark Properties (P3) in 2013 and has been busy in Poland, Romania and Czech Republic. Private equity funds HIG affiliate Bayside Capital, AnaCap Financial Partners and Deutsche Bank purchased €495 million of non-performing and sub-performing loan books backed by a mix of primarily residential and commercial real estate in July last year.

“Some of the private funds are getting braver. It means there this is an optimistic mood in the market and it proves that when the big players are here, there is a good opportunity,” Svoboda says.


For SMEs there is still a wide gap in matching up businesses with investment.

Viezzoli has noticed the emergence of a few alternative players “but not to the extent that it is systemic”, he says. Although, “there are potentially big opportunities out there given the right risk appetite,” he says.

One area is factoring of state-receivables to the corporate sector, he explains. State receivables could be used as collateral to support business lending. “Over the last five to six years there has been an enormous amount of receivables not paid by the state to local companies [which] could be transformed into a product.”

More private investment firms could step into the NPL space, he says. However, he does think that the market is perceived as opaque.

Very often banks don’t really know what’s on their books and “that is a big limit for a third party to come and step in,” Viezzoli says.

New deal flow at least looks positive, he says. And the Russian sanctions have had one positive outcome for Eastern European countries.

Of the €9 billion invested by EBRD in 2014, roughly €2 billion of the €2.5 billion that was due to go to Russia in 2014 went to countries in CEE and SEMED instead. In total, EBRD allocated €1.6 billion to SMEs in Europe during 2014.

In CEE: “More regional players are willing to expand and integrate regionally. For us the business is flourishing. Even though we had to suspend operations in Russia in June, we haven’t seen any reduction in overall business volume. Activity [from the EBRD] in other regions has significantly increased,” Viezzoli says. 


In January, BPM Capital held the first and final close on its debut mezzanine fund, reaching a €70 million hard cap.

Baltics and Poland-focused BPM Mezzanine Fund will invest in mezzanine transactions in Estonia, Latvia, Lithuania and Poland.

Fundraising for the fund, first announced in February 2013, surpassed the original target size of €50 million. Limited partners include the European Investment Fund, through the Baltic Innovation Fund and the Mezzanine Facility for Growth, the European Bank for Reconstruction and Development, Ambient Sound Investments investment group, LHV Pension Funds and Swedbank Investment Funds.

Investment from the new fund will be focused on high growth small and medium-sized enterprises and lower mid-cap companies, “as they are the main driver of the economic expansion, market share gains and earnings growth in the region and constitute the most attractive investment space”, according to the firm.

The fund will invest between €2 million and €10.5 million per transaction and BPM will mainly look to sponsorless expansion and acquisition projects to fill the deal pipeline.