According to 86% of participants in a Deloitte Private Equity (PE) survey, economic conditions will worsen in the coming months as COVID-19, the war in Ukraine and inflation affect procurement, supply chains and interest rates. Pessimism is even stronger than during the first pandemic, and none of the respondents expects the general economic climate to improve.

The study also shows a significant drop in confidence index, which typically changes with economic sentiment, from 149 in the summer of 2021 to 58 in the summer of 2022, the second lowest since October 2008 during the global financial crisis (when it hit 48). A key difference compared to 2008 is that the region’s PE market is now very sophisticated, both in terms of team members and institutions, the study highlights.

Despite the growing uncertainty, private equity firms are still showing appetite for deals, with roughly half of deal participants expecting focus on new investments (compared to 61% in winter). This is due to the expectation that evaluations are falling, as 14% of respondents believe that suppliers have reduced theirs price expectations in the past six months, and 65% believe they will continue to do so. The study highlights that this marks a departure from the high-price environment in Europe and around the world, as input prices rose before the pandemic, then stalled and rose sharply again. The most popular target companies for dealers are: market leaders (53%), at the same time startups make up only 8%.

“Our research shows that we are going through a buyer-dominated phase. The fact that valuation multiples are falling makes it a good time to buy. Nevertheless, private equity firms remain cautious as we see an increase in the share of those focusing on portfolio management (43%), indicating increased defensiveness in anticipation of future challenges. Currently, inflation and the cost of financing are among the main challenges facing the Central European market. In Romania, we do not expect to see anything different from the rest of the region, although I firmly believe that our country is best suited to receive the investments that many Western European countries (or investors from other continents) are considering in the near future,” he said. Radu Dumitrescu, Responsible Financial Advisory Partner, Deloitte Romania.

PE firms in Central Europe expect to struggle to attract deals in the coming months, with over two-thirds (71%) expecting cuts existence of debt, which significantly increased from 30% in winter. While banks are lending less or at a very high cost, debt funds are emerging in the Central European region, which were popular in the US and started to appear in Europe around 2010.

I saw the last year ESG (Environmental, Social, Governance) From a “nice to have” to a must-have for both businesses and dealmakers, according to the study. More than half of participants (53%) have implemented an investment policy that specifically includes ESG factors, compared to 30% in the winter. On the other hand, companies have realized that a focus on sustainability can be a powerful source of growth as well digitizationwhich can increase the company’s valuation to international buyers.

As far as deal size Central Europe is generally a medium-sized market, and more than two-thirds of deal-makers (69%) expect it to remain the same over the coming months, despite the worsening situation.

The Deloitte Central Europe Private Equity Confidence Survey reflects the development of the private equity market since 2003 twice a year.

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