see regional investment climate

Where Opportunities Emerge

SEE Regional Investment Climate

Dr. Edilberto SeguraDirector and Chief Economist

SigmaBleyzer/The Bleyzer Foundation


Recent developments in the SEE region with a significant impact on investment climate

Improving prospects of closer association or EU membership for several countries in the region.

Good progress in fighting corruption and accelerated modernization of judiciary - two reform areas which were identified as the most urgent issues for improvement in Bulgaria and Romania to ensure EU membership.

Liberalization of business regulations and cross-boarder capital movements.

Reduced tax burden (i.e., downward revisions of the corporate profit tax and personal income tax in Bulgaria and Romania).

Significant decrease in the level of political risks and improving image of the region.

Investment ratings of many countries have been recently upgraded.


PE Fundraising for Emerging Markets 2003-2005, USD billions

2.2

0.4 0.4 0.4

3.42.81.8

0.7 0.5

5.8

15.4

2.71.3

2.7

22.1

0

5

10

15

20

25

Asia* CEE/Russia Latin America Africa/Middle East Total EmergingMarkets

2003 2004 2005

Source: Emerging Markets Private Equity Association

Region 2004 2005Asia* 27% 452%CEE/Russia 338% 53%Latin America 71% 78%Africa/Middle East 56% 397%Total EM 73% 279%

Growth over the previous yearRegion 2004 2005

Asia* 27% 452%CEE/Russia 338% 53%Latin America 71% 78%Africa/Middle East 56% 397%Total EM 73% 279%

Growth over the previous year


PE Investments in Selected Countries(EUR million)

Source: EVCA

20.1

95.7

130.

0

23.9

4.2

4.5

4.021

.4

1.4

24.2

24.1

154.

0

58.3

46.7

0

40

80

120

160

200

CzechRepublic

Hungary Poland Romania Slovakia BalticStates

Croatiaand

Slovenia

2004

2005


PE Investments as a Percentage of GDP

Central and Eastern Europe private equity investments make up only a fraction of their GDP compared to the West

Source: EVCA

0.07

9

0.07

3

0.06

4

0.05

5

0.05

3

0.04

1

0.02

2

0.00

40.24

7

0.40

3

0.45

3

0.66

2

0.86

1

0

0.15

0.3

0.45

0.6

0.75

0.9

Swed

en

Uni

ted

Kin

dom

Fran

ce

Eur

ope

Ger

man

y

Irel

and

Rom

ania

Pola

nd

Bal

tics

Hun

gary

Cro

atia

and

Slo

veni

a

Cze

ch R

epub

lic

Slov

akia

2004

2005


Performance of Global Market for Private Equity, MSCI Standard Index (January 2000 = 100%)

Eastern European markets have considerably outperformed developed countries in the last five years

0

100

200

300

400

500

Jan

-00

Ap

r-0

0

Jul-

00

Oct

-00

Jan

-01

Ap

r-0

1

Jul-

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Oct

-01

Jan

-02

Ap

r-0

2

Jul-

02

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-02

Jan

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Ap

r-0

3

Jul-

03

Oct

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r-0

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r-0

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Jul-

05

Oct

-05

Jan

-06

Ap

r-0

6

Jul-

06

EASTERN EUROPE LATIN AMERICA ASIA USA EUROPE


Cambridge Associates’ Emerging Markets Private Equity Index, December 2005

Returns on Private Equity in Emerging Markets have been steadily increasing

Eastern European markets show the highest returns for the Emerging Economies

1 Year 3 Year 5 Year 10 YearEmerging Markets VC and PE Index 21.87 19.24 4.95 4.06Asian PE Index 13.78 16.47 5.06 3.67CEE Russia PE Index 50.26 30.58 15.34 10.25Latin America PE Index 14.71 10.95 -6.81 -3.62US PE Index 27.35 24.93 10.07 13.37US VC Index 7.90 7.30 -9.89 39.34Western Europe PE Index 24.70 28.42 19.91 21.13MSCI EM Index 34.54 38.35 19.44 6.98S&P 500 4.91 14.40 0.54 9.07

1-, 3-, 5- and 10-year returns

PE – Private Equity, VC – Venture CapitalSource: Emerging Markets Private Equity Association

-5

0

5

10

15

20

25

1 Year 3 Year 5 Year

Dec-03

Dec-04

Dec-05

Return horizons

Emerging Markets PE IndexReturns Evolution in 2003-2005


INVESTMENT DRIVERS IN SEE

Three main drivers of value creation in South Eastern Europe:• Macroeconomic expansion (5% to 10% annual GDP growth) – top line business expansion;

• Inefficiently run Eastern European companies provide significant opportunity for value creation through improved operations, marketing, finances, customer and quality focus – bottom line growth;

• Valuations expected to rise when Bulgaria and Romania join EU in 2007 – multiples expansion.


Average Real GDP Growth in 2000-2005 by Selected Countries

Source: IMF

SigmaBleyzer’s countries of operationUkraine 7.4%Bulgaria 5.0%Romania 5.1%

EU new frontier countriesAlbania 5.7%Bosnia and Herzegovina 5.1%Croatia 4.1%FYR Macedonia 1.9%Serbia and Montenegro 5.1%

New EU countriesEstonia 7.65%Latvia 8.13%Lithuania 7.12%Poland 3.17%Slovak Republic 4.4%Slovenia 3.5%Hungary 4.2%Czech Republic 3.7%

Russia

Other developed countries

Canada

USA

EU 15

Japan

0 1 2 3 4 5 6 7

6.8%

5.9%

5.2%4.4%

3.0%3.0%

2.8%1.8%

1.7%


SigmaBleyzer’s countries of operation New EU countriesEU new frontier countries

0

2

4

6

8

10

12

14

Uk

rain

e

Bu

lgari

a

Ro

man

ia

Alb

an

ia

Bo

sn

ia a

nd

Herz

eg

vin

a

Cro

ati

a

FY

R M

aced

on

ia

Serb

ia a

nd

Mo

nte

neg

ro

Esto

nia

Latv

ia

Lit

hu

an

ia

Po

lan

d

Slo

vak

Rep

ub

lic

Slo

ven

ia

Hu

ng

ary

Czech

Rep

ub

lic

Ru

ssia

2003 2004 2005 2006*

SEE is one of the fastest growing regions in Europe Real GDP growth, % year-over-year

* IMF projectionsSource: IMF, National Statistical Offices


SEE - one of the most attractive regions in the Eastern Europe

Well educated labor force (i.e., university enrolment ratio is around 50%, which is good comparable with Western European countries);

Low level of wages compared with Western European countries (around EUR 200 per month)

Political risks have been notably reduced and local governments’ commitment to market-oriented reforms has been significantly strengthened.

Prolonged period of significant economic recovery and growth is expected.

Acquisition multiples of 1–4 times EBITDA are possible in the region

Exit multiples in 5 years should approach current Western European multiples of 6–10 times EBITDA

The path is more important than destination


Low Labor Costs in Eastern Europe Create Investment Opportunities for Europe

0 1 2 3 4 5 6 7 8 9 10

Latvia

Lithuania

Estonia

Slovakia

Poland

Hungary

Czech

Slovenia

NMS-8 (average)

Moldova

Albania

Ukraine

Macedonia

Bosnia

Bulgaria

Serbia

Romania

Croatia

EU border (average)

EU (15 countries) 24

Source: Eurostat, ILO, National Statistical Offices

Hourly labor costs in 2004, €


SBF IV – SigmaBleyzer Southeast European Fund IV

Fund IV in a family of funds Regional fund

• Focusing on Bulgaria, Romania, Ukraine • Other Balkan countries (exceptional opportunities only)

Based on proven business model of investing in emerging markets

• Successful track record of creating value

Regional fund taking advantage of regional synergies and country diversification

Opportunities in new EC Frontier countries Target size: €200 million Focus: Private Equity Transactions (control or near control)


Adding Value to PE Investments

Double inefficiency play:• Macro-economic inefficiency

• Micro (Market and Business) inefficiency Must have:

• Improving business environment

• The right team of local and western professionals

In the next 10 years EM PE will provide a unique opportunity to achieve superior returns while making socially responsible investments


Adding Value at the Macro Level



The Bleyzer Foundation Investment Drivers

1. Macroeconomic Stability

2. Liberalization and Deregulation of Business Activities

3. Stable and Predictable Legal Environment

4. Privatization, Public Administration reform and Corporate Governance

5. Removal of International Capital & Foreign Trade Restrictions

6. Facilitation of Business Financing by the Financial Sector

7. Reducing Corruption levels

8. Minimization of Political Risks

9. Improving Country Promotion and Image


Country Ratings: Macroeconomic stability

0

10

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80

90B

osni

a

Alb

ania

Mol

dova

Ser

bia

Mac

edon

ia

Ukr

aine

Rom

ania

Cro

atia

Pol

and

Rus

sia

Bul

gari

a

Cze

ch R

ep

Est

onia

Hun

gary

Slo

vak

Rep

Slo

veni

a

Recent Developments:

▪ Strong economic growth ▪ Stable national currencies and low inflation

▪ Strengthened fiscal discipline ▪ Declining public debt and prudent debt service


Country Ratings: Business Liberalization and Deregulation

0

10

20

30

40

50

60

70

Ser

bia

Alb

ania

Mo

ldo

va

Bosn

ia

Mac

edo

nia

Russ

ia

Ukra

ine

Rom

ania

Bulg

aria

Po

lan

d

Cro

atia

Cze

ch R

ep

Hun

gar

y

Slo

ven

ia

Slo

vak

Rep

Est

on

ia


▪ Liberalized business regulations

▪ Enhanced bankruptcy procedures

▪ Reduced tax burden


Country Ratings: Stability and Predictability of Legal Environment

0

10

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40

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70

80

Alb

ania

Bos

nia

Ser

bia

Mol

dova

Rus

sia

Ukr

aine

Mac

edon

ia

Rom

ania

Bul

gari

a

Cro

atia

Pol

and

Slo

vak

Rep

Cze

ch R

ep

Hun

gary

Est

onia

Slo

veni

a


▪ Accelerated judicial reforms

▪ Deeper integration of EU laws into national legislation of accessing countries

▪ Lower corruption in courts


Country Ratings: Corporate and Public Governance

0

10

20

30

40

50

60

70

80A

lban

ia

Mol

dova

Bos

nia

Ukr

aine

Rus

sia

Mac

edon

ia

Cro

atia

Ser

bia

Bul

gari

a

Slo

vaki

a

Rom

ania

Cze

ch R

ep

Hun

gary

Slo

veni

a

Pol

and

Est

onia


▪ Improved regulation and supervision of public companies

▪ Better disclosure procedures

▪ Deeper public administration reforms and better privatization practices


Country Ratings: Liberalization of Foreign Trade and Capital Movements

0

10

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30

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90

100B

osni

a

Mac

edon

ia

Mol

dova

Alb

ania

Serb

ia

Rus

sia

Ukr

aine

Rom

ania

Bul

gari

a

Cro

atia

Slov

enia

Pola

nd

Hun

gary

Slov

ak R

ep

Cze

ch R

ep

Est

onia


▪ Liberalization of foreign trade regulations and enhanced efficiency of customs administrations

▪ More flexible foreign exchange markets

▪ Accelerated liberalization of capital accounts


Country Ratings: Financial Sector Development

0

10

20

30

40

50

60

70

80

90B

osni

a

Mol

dova

Mac

edon

ia

Serb

ia

Alb

ania

Rus

sia

Ukr

aine

Rom

ania

Slov

enia

Bul

gari

a

Cro

atia

Slov

ak R

ep

Pola

nd

Est

onia

Cze

ch R

ep

Hun

gary


▪ Fast expansion of the banking sector with increasing foreign participation

▪ Improved efficiency of local Stock Exchanges

▪ Rapidly growing capitalization of the listed companies


Country Ratings: Corruption Level

0

10

20

30

40

50

60

70

80A

lban

ia

Mac

edon

ia

Ser

bia

Mol

dova

Rus

sia

Ukr

aine

Bos

nia

Rom

ania

Cro

atia

Pol

and

Bul

gari

a

Cze

ch R

ep

Slo

vak

Rep

Hun

gary

Slo

veni

a

Est

onia


▪ Significantly lower corruption levels in the region

▪ Improved capacity of authorities to fight high-level corruption

▪ Better transparency of government’s activities


Country Ratings: Political Risk

0

10

20

30

40

50

60

70

80

Mac

edon

ia

Bos

nia

Serb

ia

Mol

dova

Ukr

aine

Rus

sia

Alb

ania

Rom

ania

Cro

atia

Bul

gari

a

Pola

nd

Cze

ch R

ep

Slov

enia

Hun

gary

Slov

ak R

ep

Est

onia


▪ Lower political instability

▪ Strengthened commitment of national authorities to advance with market oriented reforms that improve investment climate and establish business-friendly environment


Country Ratings: Country Promotion and Image

0

10

20

30

40

50

60

70

80

90

Mol

dova

Bos

nia

Mac

edon

ia

Ser

bia

Ukr

aine

Rus

sia

Alb

ania

Rom

ania

Cro

atia

Bul

gari

a

Pol

and

Cze

ch R

ep

Slo

veni

a

Hun

gary

Slo

vak

Rep

Est

onia


▪ Improved investment ratings of the countries

▪ Many countries were granted a status of market economy by US Senate and EU

▪ Higher prospects of EU accession


SigmaBleyzer's Aggregate Investment Climate Index – Country Ratings

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Bos

nia

Mol

dova

Alb

ania

Mac

edon

ia

Serb

ia

Rus

sia

Ukr

aine

Rom

ania

Cro

atia

Bul

gari

a

Pola

nd

Cze

ch R

ep

Slov

ak R

ep

Slov

enia

Hun

gary

Est

onia


Adding Value at the Micro Level



Micro-Level Risks

Company-Specific Deterrents

• Waste of resources and inefficiencies

• Mentality of management and employees

• Lack of transparent information, inadequate accounting

Broken supply chains Illiquid markets – difficult exits


Transaction Examples (1)

Sevastopol Shipyard (SSY)• Largest Naval Yard in Ukraine with over 18,000 employees in late

80s; 15,000 by late 90s• UGF acquires 50.4% for $2M in multiple transactions• Local press, local authorities, management, employees react with a

lot of concern about the future of SSY• Company restructured into five profit centers from 39 companies,

streamlining intracompany business flows • Shift in focus from naval to commercial ship repair• Payroll reduced to 3,600• Annual revenues up over 100% • From 4 ships repaired in one year to 60 ships!• Multiple smaller enterprises created around SSY • Exit for $6.8M; All funds combined: 230% gain; 34% IRR (5.7x

cash and 45% IRR for UGFIII)



Poltava Confectionery• Initial investment of $1.1 million by UGF III to buy control, followed

by second round investment of $4 million to build new factory• Annual sales up 300% since 1999 from $12 million to over $50 million,

EBITDA up 500% to $6.1 million • Production volumes up more than five times since 1997• Valuation up over 500%

Softline (Software Developer)• Annual sales up 500% since 2000• 75 programmers to 450+ programmers• Successful outsourcing business development in US• Valuation up 300%• Leading Ukrainian systems developer



Volia Cable• Largest cable operator in Ukraine

- Over 80% of the cable market in Kiev- 850,000+ homes passed / 560,000+ subscribers

• Company created through the consolidation of several separate buyouts and additional investment in network build-out

• First cable operator in FSU to offer digital cable, PPV, VOD, and Broadband Internet

• Value Added- Management Replaced- New fiber optic network built / Call Center constructed- Huge cost reductions (through consolidation)- Network consolidated around a single digital head-end, improving

operational efficiency- Tariff methodology developed and government approved - now utilized

by the entire Ukrainian cable industry - Increased revenue by over 3 times

• Valuation up 300% and expectations are for even more growth


SEE Regional Investment Climate more information on www.sigmableyzer.com


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