For Your Consideration: Poland’s Financial Services

Central and Eastern European (CEE) countries haven’t had much good economic news of late, with low growth giving investors a reason to shy away from the region.

But there are some bright spots, particularly in Poland, which is outperforming other countries in the bloc—a trend expected to continue through 2015.

Home to more than 38M people and a GDP on par with Norway, Poland is among the largest of the CEE nations. The country has private equity investment, a wealth of mid-cap investment opportunities, a liquid stock exchange, and a banking system that is on solid footing.

Another reason for PE investors to take a look at Poland is the maturity of its local managers, with a number having operated in the country for 10 years or more.

“There is a decent pool of managers,” says Arek Podziewski, principal of Darby Private Equity CSEE. “It is a good bet to invest with people who have done it before.”

For Jim Strang, a managing director at Hamilton Lane, there are five elements to evaluating any private equity market: the overall economic picture, the fundamental drivers of PE, the valuation of assets, the cultural acceptance of PE, and the governance. Viewed through these lenses, Poland fares relatively well, Strang says.

While the marketplace in Poland is not necessarily deep enough to support a sector-specific investment strategy, for Strang the financial services arena is particularly attractive. He points to the near-nonexistence of mortgages as an example of an untapped market with potential.

“Private equity will be an interesting mechanism for supporting that growth,” Strang says.

Podziewski agrees that Poland’s financial services have growth potential but calls the sector a “mixed bag.” He specifically likes online customer lending, which is an unregulated market. Podziewski says regulated markets are, by nature, typically not favorable to the private equity model of business. That’s not to say regulation is a negative aspect of the Polish economy; Podziewski points out that Polish economic regulation has contributed greatly to his country’s banking system holding up during the financial crisis.

Monika Morali-Efinowicz, a managing director and head of Advent International’s Warsaw office, also sees financial services as an area of opportunity for investors.

“Overall, financial services is a growing area in Poland,” she says. “Advent is a global investor with significant experience in the financial services sector, and we source opportunities where we see potential for value creation and growth.”

Last August, Advent sold portfolio company Ultimo, a Polish debt purchaser and collection business, to strategic buyer B2Holdings. During its 10 years of ownership, Advent helped Ultimo increase revenue by more than four times, while EBITDA experienced a five-fold boost, according to the firm.

However, not everyone sees financial services as ripe for PE investment.

“There is a lot of regulation in that sector,” says Piotr Noceń, a managing partner at Resource Partners, “and that never helps private equity investments.”

Noceń, who is also president of PSIK, the Polish private equity and venture capital association, focuses on consumer plays such as retail and distribution, as well as on food processing.

From 2012 to 2013, private equity investment in the CEE dropped 22 percent to €783 million, according to the latest findings by the European Venture Capital Association (EVCA). Meanwhile, fundraising declined 37 percent to €433 million while the rest of Europe saw capital raisings more than double to €54 billion. This was the second straight year fundraising in CEE countries contracted.

The EVCA’s findings also show that financial services investment dropped sharply to €24M in 2013 from more than €110M the year before.

Fortunately for investors looking to put money to work in an emerging marketplace, private equity is more about what lies ahead and not what’s in the past.

“The financial services industry [in Poland] should gradually grow over time as the economy continues to develop,” Strang says. “I would be certain of it.”