Deloitte study: Economic optimism recovering, but slower than post-financial crisis

The confidence in the evolution of the economy is improving, after a 12-month decline following the Ukraine war, according to the latest Deloitte Central Europe Private Equity (PE) Confidence Survey. The share of respondents expecting an improvement in the economic climate went up to 15%, from only 3% in December 2022, and, at the same time, the proportion expecting a deterioration of conditions has nearly halved from 79% at the end of 2022, to 43%.

While the fall in last summer’s confidence was as dramatic as the post-global financial crisis period, the recovery is slower, most likely because of the persistent inflation and the experience-induced moderation, the study highlights.

This sentiment drives the Central Europe private equity houses’ optimism around market activity, with over a quarter (26%) expecting transacting to boost, more than double compared to December 2022. Equally uplifting is that there has been a halving of those expecting a decrease, from over two-thirds at the end of 2022 (69%) to a third (34%).

Deal doers in Central Europe also show confidence that 2023 will be a good year for investments (77% of respondents), so the proportion of those expecting to focus on new investments has increased at 43% (from 40% in December 2022). The study highlights another reflection of the renewed confidence, namely the decrease in the share of those expecting to focus on portfolio management, which is typically a defensive position taken amidst challenging backdrops. As far as divestments are concerned, the study shows a reduced interest, of 15% of the respondents, but still a great appetite for buying more (51%).

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“The Romanian private equity market has kept a good pace in the first half of this year, with several noticeable recent deals such as Innova Capital’s takeover of NETOPIA Group or Value4Capital’s investment in Clarfon. Our country continues to provide opportunities for the region’s experienced private equity houses to invest in local businesses and then help them grow, whether geographically, through developing digital capabilities or setting up ESG frameworks,” said Radu Dumitrescu, Financial Advisory Partner-in-Charge, Deloitte Romania.

The availability of debt seems to be stabilizing, with 51% of the Central Europe PE firms expecting it to remain the same or increase. As interest rates have been impacting bank debt, non-bank lending has become more widespread in CE. A boost in market activity will probably be supported by a growing role for credit funds, a source of funding which is well established in the US and Western Europe, with 45% of the survey respondents looking more to non-bank lenders for leverage. Also, 15% claim to need more lenders for a deal now than in the past, which may be a sign that lenders’ appetite for larger tickets is shrinking, the study explains. Another development in the region worth mentioning is that lending tends to take place more in euros, even where the target is based in a country with a sovereign currency.

Deal sizes are stabilizing, with over two-thirds (66%) of deal doers expecting them to stay the same. According to the study, CE’s PE market has long been a mid-market opportunity, with high volumes for smaller tickets and only occasional large deals, which tend to attract global PE houses or multiple investors with complementary skills and networks, as is the case especially for cross-border transactions.

The study also indicates the growing role of ESG (environment, social, governance). Over a quarter of respondents have implemented decarbonization commitments and targets, while another third started to develop these targets. In addition, nearly three-quarters of houses in CE have investment policies that include ESG factors. On the other hand, the study also points out that over half (57%) of the surveyed deal doers do not incorporate yet sustainability into valuation methods, as they deem the ESG data unsatisfactory.

Deloitte Central Europe Private Equity Confidence Survey has mirrored the private equity market evolution since 2003, twice per year.