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Financing solutions for SMEs in the CEE region

Magdalena Śniegocka, Investment Director,  CVI analyses how small and medium sized enterprises in Poland and other CEE countries can finance growth or business reorganization in 2022 and beyond. 

Over the last two years – since the pandemic officially broke out – the global economies have been experiencing elevated uncertainty and recent geopolitical developments certainly add to the overall complexity. The recurring Covid-19 waves and disruptions in global supply chains triggered a quick stimulus response, which resulted in dynamic economic recovery in 2021. Given global interconnections, the situation also impacted the CEE countries, which in 2021 demonstrated strong economic recovery with the region’s GDP growing at 5.2%.

2021 bounce-back in CEE economic activity


In Poland the first 9 months of 2021 brought record financial results for medium and large enterprises. Aggregated net income for the first 3 quarters of 2021 reached over PLN 162bn (over EUR 35bn), which represents the highest ever result, and almost 90% higher than the aggregated net income for 12 months of 2020. These results were achieved with healthy margins, again higher than ever before in the recent 10-year history. The companies were able to successfully capitalize on strong demand pressures, effectively passing the inflationary effects in costs onto the final customers. In addition, in the first 9 months of 2021, Polish medium and large firms increased their investment activity by 12% versus the full year of 2020. If we compare this uptick in investment activity to the y-o-y increase in loans granted by the banking sector to large enterprises in Poland the picture looks quite consistent. The value of such investment loans increased in December 2021 by 12% compared to December 2020 levels.

SME financing on the sidelines?


However, the situation looks entirely different when we analyse the investment loans provided by banks to Polish small and medium sized enterprises. It is a y-o-y decrease of 11%, in spite of positive financial results. Historically, banks have been cautious with SME financing, scaling down their activity at the time of economic uncertainty. There is a clear funding gap between the needs of SMEs and the actual funding provided by the traditional financial institutions. CVI has been trying to address this gap, by providing financing solutions for SMEs in the CEE region. Such financing, called private debt, encompasses mainly bilateral, private transactions with financing terms tailored to the specific needs of a company. As a leading private debt player in CEE, CVI estimates that the overall demand for such financing across the region is more than EUR 10bn.

Since 2012, CVI has been actively investing across the CEE countries, including Poland, Romania, Czech Republic, Slovakia, the Baltics and Hungary. Since then, we’ve completed over 670 private debt investments and allocated over EUR 2.5bn in capital to the region’s SMEs. In 2021 alone, CVI deployed over EUR 270m in private debt financing, investing in 67 companies. We were also early on to restart investments after initial covid-related shocks, and included financing for companies from sectors which were perceived as badly hit, like hospitality or fitness chains. It is natural for the CVI team to be in regular interactions with our portfolio companies, which at the start of the pandemic proved to be the right strategy and helped to address potential risks early on.

Promising outlook for 2022, yet increasing challenges on the horizon


Although 2022 still presents a positive outlook, challenges are mounting, including high raw material and energy prices, a labor shortage, wage increases or uncertainty in the regulatory environment in some sectors. Interest rate hikes became a natural response to counter inflation in many countries. In Poland, the 3m Wibor rate at the end of February 2022 was close to 3.5% while only a few months earlier, in July 2021, it was at 0.21%. This obviously has an impact on the overall cost of financing, which makes the SMEs situation even more complex. In order to address challenges with increasing interest rates, companies can consider interest rate hedging (full or partial) or financing with an appropriate currency mix, adding where relevant a EUR-denominated financing where currently interest rates are not under such pressure (in particular in case of exporters or companies with EUR-denominated revenue).

CVI is ready to provide bespoke financing solutions for SMEs in CEE.
CVI currently manages EUR 1bn in assets, and invests between EUR 2-20m equivalent per company. Investment tickets of EUR 20m and above can also be considered by the team thanks to the existing cooperation with our trusted international partners. CVI’s financing can be used for multiple purposes, including working capital, capex investments, refinancing, M&A, business reorganization, shareholder buyouts and dividend payments. We can finance companies with an asset-light business model or at the holding structures. We can arrange financing that pushes amortization closer to debt maturity or alleviates debt service costs thanks to partial capitalization of interest. Higher risk structures do not always require equity financing, hence private debt allows entrepreneurs to raise capital without the need to sell shares in the business. We offer fast execution, that is key for many companies running competitive M&A processes or in need of bridge financing. It usually takes between 6-8 weeks from the start of the analysis to actual funds’ deployment. In addition to real estate and financial services, where we see a consistent, regular deal flow, examples of high activity sectors also include renewable energy, logistics, e-commerce driven services, industrial production, consumer goods or healthcare. We expect that in 2022 alone we will be able to invest over EUR 300m across the CEE region.

Magdalena Śniegocka
Magdalena Śniegocka
Investment Director at CVI13 years of experience in leveraged finance from Lehman/Nomura (London) and equity investments (Kulczyk Investments).
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