Central Funding

Jakub Leonkiwicz AVIA Capital

Central Europe is seeing an upswing in interest from global investors, even during the last 12 months, which should provide a strong financial impetus for the region in the coming years.
Often seen as a tricky market to access for outside investors, due mainly to the vagaries of some local financial institutions, the CEE is garnering a reputation as a hub for specialist investment. This is particularly true of deep tech, including quantum computing and healthcare discoveries, with traditional logistics and real estate development also performing well.
I talk to Jakub Leonkiwicz of AVIA Capital, a Private Equity firm based
in Warsaw, about what he is seeing on the ground.

JP: ‘The Central & Eastern European area appears to be becoming a hot topic for overseas
investors, what is happening in your region?’

JL: ‘I guess there are two questions to answer here: why is CEE attractive and how is this manifesting itself?
Firstly, in terms of attractiveness, we have to talk about talent. We have a well-educated workforce, which I guess is no great surprise, but costs are still below what we could consider the usual EU level. Similarly lower land values, material prices and other costs do leave room for returns.
There are relatively large home markets, Poland alone is a useful size, but there is still a lot of focus on export. So maybe we are seeing a geography where investors can have the best of both worlds?
This does lend itself to the prevalence of production and engineering firms, with the region acting as a hub for Western Europe. Here we have the key automotive components producers, a major packaging hub, a major IT outsourcing hub and so forth.
I guess one further thing we have seen is a trend towards increased “in-sourcing”, at least within the EU as opposed to sourcing from China for example. The disruption seen in the supply chain caused by COVID19 protocols increases the need for local production. Investors will follow these macro trends and this is a major reason we are seeing this surge in interest.’

JP: ‘Are we seeing a trickle-down from traditional Private Equity investment, are investors also looking at technology firms for example?’

JL: ‘Yes and no. I think we still need to work on increasing the availability of a tech-focused workforce like younger generation engineers, IT specialists and technicians, before we start to see tech investment really take off here. There are a few structural issues that still are a little behind the curve, such as legacy legislation and regulatory systems that are not necessarily helpful in the creation or promotion of these firms.’

JP: ‘How would you rate the local fundraising landscape in Poland, aside from those structural issues?’

JL: ‘It depends exactly what you are doing. For VCs looking to raise a first or second fund, we certainly would anticipate a good outcome due to local and EU support (EIF, EBRD) as well as a handful of active local CEE investors and family offices.’
It is a slightly more difficult environment for private equity. This is not an indication of returns, but more a question of the relatively small size of local PE funds, tending to be below minimum equity tickets of large international investors. Also, there are very few local fund-of-fund style investors. It is no secret that there have been many restructuring initiatives with local Pension Funds and we hope that in the long term we may be able to have more interaction with these groups, and this will go hand in hand with the general success of the economies in our region.
Encouragingly, the Polish economy has been growing continuously, year-on-year, since the 90s. In fact, the market has recorded its first GDP contraction in 2020, due to the pandemic, but only around 3%. That is one of the least affected economies in Europe.
Outside of Poland, but still in the CEE, the GDP of the Czech Republic per capita outpaced Spain for the first time this year. Nearby, Estonia is building one of the most digitalised nations worldwide so we feel in a good place, figuratively and literally.’

JP: ‘Are there specific sectors that you see as emerging more quickly than others?’

JL: ‘ESG (Environmental, Social & Governance) is becoming a very important topic in the wider CEE and Poland. Poland has had an historic dependence on coal. In reversing this, a lot of effort and funding has been put into moving the country towards what we would recognise as a green economy. As an example, Krakow’s leadership has replaced around 95% of coal-fired heating for around 1 million inhabitants in the city within one year. This has significantly improved the air quality in the winter months.’

JP: ‘Sounds like a very positive long term outlook?’

JL: ‘Yes, the direction of travel is positive. Investors into this market get exposure to demonstrably and constantly growing economies. Now, what we need is the emergence of local LPs and investors to get things moving.’

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