New fund emerges from DKB

Dresdner Kleinwort Benson (DKB) plans to hold an initial close for DKB Emerging Europe LP before the year end, with the ultimate aim of raising between $100 million and $250 million (euro 96 million to euro 240 million) for the fund, whose primary target markets are Poland, Hungary, the Czech Republic and the Baltic states.

Despite the banking group’s strong market presence in its key target markets – BNP Dresdner has a network of 16 offices with some 600 staff in the region – the new fund is DKB’s first dedicated LP offering for emerging Europe.

Outlining the rationale for the vehicle, director Janusz Heath of DKB’s Central and Eastern European private equity team provides a clue regarding the timing of the fund.

“There is a tendency to overuse the phrase emerging markets,” says Heath. “The central European economies are not only growing – the upward trend is quite clear, despite the Czech Republic’s recent economic own goal’ – but are working hard to conform to the EU model as they prepare for membership within the next five to ten years.”

Factors pointing towards further economic growth in the region include ongoing privatisation; the increasing importance of the consumer sector; a highly educated labour force; the development of pensions markets and their impact on capital markets; and the emergence of an increasingly entrepreneurial mindset.

DKB Emerging Europe, which is targeting a gross IRR of at least 35 per cent per annum, will focus on enterprises with regional, rather than purely national, potential, and will assist their expansion strategies. Such investments should, theoretically at least, prove easier to exit than smaller, more locally-based deals. “We’d like to build businesses to a size where they are listable entities,” Heath says.

Nevertheless, DKB will not be pinning its best exit hopes on the public markets: its exit route of choice will be the trade sale. “Ideally, by supporting and developing an investee’s regional expansion strategy, we will have created a solution – or at least done the bulk of the legwork – for a major corporate seeking to cover the region,” Heath explains.

The fund will focus primarily on consumer-driven sectors including media, telecommunications, retail and distribution services. Precision engineering companies will also rank as a preferred target, reflecting the region’s highly developed engineering skills base. The fund will have local management teams based in Warsaw and Budapest. When sourcing and evaluating investments, the managers will benefit from the group’s status as an LP in an existing private equity vehicle, Hungary Equity Partners, as well as from the bank’s established network of regional connections.

DKB started work on the Emerging Europe fund in March of this year and began formal marketing at the end of the summer. The group expects the fund to appeal to a broad spectrum of investors beyond DKB’s existing client base, and is marketing the vehicle to both European and US institutions.

On paper, the fund’s target size range seems unusually broad, reflecting the refreshingly pragmatic approach adopted by DKB. Heath explains that GBP250 million ($407 million) is the absolute maximum the managers would realistically be able to invest, while a total of less than $100 million would make the fund an uneconomic proposition in view of the infrastructure it requires. Within these limits, DKB sounds relatively relaxed regarding fund size because, as Heath points out, if a smaller vehicle is deployed quickly in quality deals, LPs tend to be happy to come back for more.

One wonders how many other funds, which reportedly raise double their original target’, are in fact conceived along similar lines, and why their managers are so reluctant to say so openly.