Switzerland’s Vontobel Group in August launched 5E Holding (5E), a quoted fund-of-funds targeting Central and Eastern Europe. 5E, which stands for Excellence in Eastern European Emerging Equity, seeks to raise CHFr 250 million to CHFr 350 million (ecu 150 million-210 million). The offer was scheduled to close at the end of August.
5E will seek to diversify its portfolio by development stage, industry sector and investment strategy of the funds selected. In principle, the fund will invest in all countries in which the European Bank for Reconstruction and Development operates. In practice, it will prioritise Hungary, Poland and Russia, markets which Dominik Meyer, a private equity advisor to bank J Vontobel, said would probably account for two-thirds of the fund.
In contrast with the Western European and US markets, there are few private equity funds in Eastern Europe primarily focused on high-technology sectors. In general, venture funds in the region target “standard” technologies, and mainly invest in development-stage opportunities, often involving a degree of restructuring. A number of vehicles also undertake “company build-up” investments, which 5E defines as industry consolidation deals, fundings for high-technology companies and investment in businesses transferring from Western Europe. 5E will seek to diversify its portfolio among privatisations, asset-based and infrastructure-related investments and consumer driven expansion and company build-ups.
Two thirds of 5E Holding will be invested in private equity fund positions. The balance will be split between direct co-investments in unquoted companies alongside investee funds and selected small-cap listed stocks. Through co-investment, 5E aims to achieve additional exposure to the star performers in individual portfolios. The fund will only make direct unquoted investments in companies that have defined an exit strategy and expect to execute it within three years. For its listed investments, 5E will select companies with market capitalisations of less than $100 million (ecu 90 million), which are usually illiquid and consequently attractively valued. A legacy of the mass privatisations that took place in the region, the majority of small-cap stocks in Eastern Europe share many of the characteristics of typical private equity situations.
5E will invest only in funds managed by groups with a proven track record in its target region. The managers have pre-selected a portfolio of private equity funds to which 5E will make commitments as soon as possible after its closing.
These are: Baring Communications Equity (Emerging Europe); Innova 98; Hungarian Equity Partners; Hungary Venture Fund; Societe Generale Romania Fund; Sun Capital Partners II; and Telco Management’s Telecommunications and Media Fund.
These vehicles will absorb combined commitments totalling some $110 million if 5E secures its target allocation to each fund.
Vontobel has committed $22 million to the fund. The balance is being offered to both institutional and private investors, principally in Switzerland and Germany. Extrapolating from the composition of other Vontobel Group funds, such as Private Equity Holding, Dominik Meyer expects around 25% of 5E’s capital to be drawn from private individuals. He pointed out that, as a quoted company, the vehicle provides access to an asset category that is otherwise inaccessible to most private investors.