Confidence in the economy is starting to recover after the 12 months of decline following the onset of the conflict in Ukraine, according to the most recent Deloitte Central Europe Private Equity Confidence Survey.

The proportion of respondents anticipating an improvement in the economic climate has increased to 15%, up from just 3% in December 2022, and at the same time, the proportion of those anticipating a deterioration has halved, decreasing from 79% at the end of 2022 to 43%.

Although confidence levels plummeted as dramatically as they did immediately after the global financial crisis last summer, the recovery is slower, most likely due to persistent inflation and a cautious attitude that comes with experience, the study highlights.

This confidence is fueling optimism among private equity firms in Central Europe about their sector, with over a quarter (26%) of them anticipating an increase in transactions, more than double the number from December 2022. Additionally, an encouraging aspect is that the number of those expecting a decrease has halved, from over two-thirds at the end of 2022 (69%) to one-third (34%).

Survey participants are also confident that 2023 will be a good year for investments (77% of respondents), and the proportion of those expecting to focus on new investments has increased to 43% (up from 40% in December 2022).

Another sign of returning confidence highlighted by the study is the reduction in the proportion of those expecting to focus on managing the current portfolio, which typically represents a defensive attitude during difficult periods. Regarding sales, the study shows low interest from private equity firms (15%), while the appetite for buying remains high (51%).

"The local private equity market has evolved at a sustained pace in the first half of this year and has recorded several notable transactions, including Innova Capital's acquisition of NETOPIA Group and Value4Capital's investment in Clarfon," said Radu Dumitrescu, Coordinating Partner, Financial Advisory, Deloitte Romania.

Access to funding seems to be stabilizing, with 51% of private equity firms in Central Europe anticipating that it will remain the same or improve. Given that interest rates affect the accessibility of bank loans, non-bank financing is becoming more widespread in Central Europe. Increased activity in this area is likely to be increasingly supported by credit funds, a popular source of financing in the US and Western Europe, as 45% of respondents are looking for non-bank lenders more often to finance acquisitions.

Additionally, 15% state that they now need more lenders than before to finance a transaction, which may indicate a decreasing appetite among lenders for larger transactions, as explained by the study. Another notable development in the region is that loans tend to be denominated in euros more often, even when the company to be acquired is located in a country with a different currency.

Transaction sizes seem to be stabilizing, with over two-thirds (66%) of private equity firms anticipating that they will remain the same. According to the study, the private equity market in Central Europe is traditionally of medium size, with numerous small transactions and only occasional large transactions, which usually attract global private equity firms or multiple investors with complementary skills and networks, especially in cross-border transactions.

The study also highlights the increasing importance of environmental, social, and governance (ESG) factors. Over a quarter of respondents have set carbon footprint reduction targets and have committed to achieving them, while one-third have started defining such targets.

Furthermore, almost three-quarters of private equity firms in Central Europe have investment policies that include ESG factors. On the other hand, the study also emphasizes that over half (57%) of respondents do not consider sustainability when evaluating a company because ESG-related information is not of sufficient quality.

Deloitte Central Europe Private Equity Confidence Survey has been analyzing the private equity market since 2003, twice a year.