ANALYSIS – Bulgaria May See Rise in Private Equity Deals in 12-18 Months

Yet, some officials believe that other sectors of the economy like industry, renewables and infrastructure could be more enticing for potential investors in private equity, considering the small size of the country's market and the perception of higher risk associated with Southeastern Europe when compared to other parts of the continent.

“Exits have increased dramatically in the past 18 months and will increase also in the next year or 18 months,” Hein Van Dam, partner at financial advisory services with Deloitte Central Europe told the international conference Private Equity in Bulgaria: The Year Ahead conference (www.bulgariaprivateequity.com) held in Sofia earlier this month.

Kamen Shoylev, partner at London-based law firm New Balkans Law Office, believes there will be a rising confidence in private equity in 2010.

“The worst is over. […] 2010 will not be fantastic […] but will be on the positive side,” Matteo Patrone, senior banker corporate equity with the European Bank for Reconstruction ann Development, told the conference.

According to Patrone, the economic downturn in Bulgaria will hit the bottom in the fourth quarter of this year but the country will pass through a slow and difficult recovery due to the sharp rise in unemployment and the volume of non-performing loans as a result of the crisis.

“The [private equity] industry is perceived to be growing,” Patrone said and added: “The trend is that we are going back to normal pricing.”

“On the one hand, there are plenty of reasons to be optimistic,” Dimitar Gurdjilov, investment director with London-based NBGI Private Equity said, citing Bulgaria's macroeconomic stability, the stability of the lev currency secured by its peg to the euro, and the government's pledge to keep the stability in the long term.

“On the other hand, there are certain aspects of the economy at micro and macro levels that are negative”.

A major disadvantage is the much higher share of services in Bulgaria's GDP as compared to the share of value-added industrial production, Gurdjilov added. Services generated around 52% of GDP in the first nine months of 2009, while industrial production had a 26% share in GDP, according to official statistics.

However, there are grounds for optimism if institutional risk becomes more manageable and legal proceedings improve in terms of speed and transparency.

“Bulgaria is not a very big market … but transactions will come,” Tom Higgins, managing partner at private equity Balkan Accession Fund, told the conference.

“Maybe next year we’ll see deals across the board. […] I will expect deals in all sectors, not only in some of them,” Gurdjilov said.

Van Dam believes that there is a lot of money on the market and expects intense competition in certain areas like energy services, export-oriented and niche industrial companies.

Toby Iles, economist at the Economist Intelligence Unit, sees infrastructure and renewable energy sectors as most attractive for private equity investments in Bulgaria.

“In a lot of sectors there is lots of development still to take place […] in renewables, in infrastructure and that can relate with EU funds which will gradually build up for the next four-five years,” Iles told SeeNews.

“Definitely the [renewable energy] sector is interesting and we will look for projects in it,” Irina Simeonova, investment manager with private equity group GED, told SeeNews.

The development of renewable energy resources in Bulgaria has gained momentum since the country joined the European Union in 2007, and is expected to intensify further. Bulgaria must cover 16% of its gross energy consumption with electricity generated from renewables by 2020 to meet the requirements of the bloc.

Bulgaria has just 3.0 MW of solar energy capacities and 330 MW of installed wind farms. Electricity generated from renewable resources, mostly water, currently cover less than 10% of Bulgaria's gross electricity consumption.

Bulgaria, which joined the European Union (EU) in 2007, is set to receive billions of euro in EU aid to build roads, develop regions and support its economy.

Industry officials assess the economic meltdown has had a sobering effect for the private equity market. According to Valeri Petrov, partner at Bancroft Private Equity, namely the valuation gap has been preventing deals from happening.

The expectations of a number of sellers prior to Bulgaria’s entry into the EU were “sky high”.

Petrov thinks that the post-privatisation diversified conglomerates in Bulgaria that were formed after the voucher privatisation of state assets in late 1990s are “a unique opportunity to go in these conglomerates looking to exit non-core assets”.

According to Martin Paev, owner of Sofia-based consultancy Sortis Invest, private equity investors will look at companies which plan to take advantage of the market recovery and expand.

“Bulgaria is a small market and the potential is in export-oriented companies – not only manufacturing but also services – the IT sector for example,” Paev said.