BlackPeak Growth Equity Insights January - February 2023

As growth equity investors, we always try to balance inborn optimism with constant re-evaluation of the risks ahead. Our first newsletter is one of optimism. In the context of war at the border of our investment region and multiple global risks, we have picked some of the good news, trends, and policies that each of our countries has delivered.

Start with Romania, which has made impressive economic progress over the past 5+ years to firmly establish itself as CEE’s 2nd largest market after Poland. In some economic indicators, it has overtaken Hungary, something unthinkable 10 years ago (Article 1). Constant economic growth of 5+%, including 4% in Q3 2022, has brought Romania’s GDP/capita and average salary levels very close to its CEE peers. Very importantly, Romania has reached 19th place globally in an authoritative ranking done by Harvard’s Atlas of Economic development measuring a country’s economic complexity, which also points to expected continued future growth (Article 2). And guess what – rapid economic progress has helped Romania become the most improved European country in the Annual Global Happiness Index.

We strongly believe that a country’s economic progress is best judged by the quality of life in its most remote villages and not by how the center of its capital looks. And if you visit a Slovenian village, you will know that Slovenia has established a developed, inclusive, and balanced economy. A recent article in the Financial Times called “The US and the UK are poor societies with some very rich people” underscored the point (Article 4). While the richest 15% in the US and the UK are much richer than the rest of us, the poorest 15% are poorer than their counterparts in Slovenia. Inclusive, balanced growth is what the US, the UK, and the rest of Europe need to learn from Slovenia.

It has certainly been a great year to feel proud to be Croatian. Another stellar performance at the World Cup and recent entry into Schengen and the Eurozone will be a boost to move Croatia forward. One of Croatia’s most significant assets, its tourism industry, is also one of its potential traps, as tourism is less likely to see substantial productivity gains. Croatia’s recent successes in developing home-grown innovators in the IT and manufacturing spaces – the country is already home to a few unicorns in these – are a likely recipe to avoid the perils of the middle-income trap.

Serbia has become an example of how a country can successfully implement policies to overcome some of its disadvantages. As the only non-EU country in our target investment region, it does not benefit from significant EU funding. Regardless, Serbia has implemented a welcoming FDI attraction policy, which has helped the country attract world-class, export-oriented manufacturing and R&D operations, which are already helping to transform its economy. Not surprisingly, Serbia has consistently ranked in the top 10 countries globally in FDI Intelligence’s Greenfield FDI Performance Index.

Bulgaria has recently seen a period of political instability with multiple early elections. Despite this, the country’s GDP growth will top 3.3% in 2022, and exports have hit an all-time high in Jan-Nov 2022, surpassing Jan-Nov 2021 levels with 40.2%! One of Bulgaria’s policy successes has been the development of a sizeable IT sector and a vibrant VC/PE ecosystem. A recent report by the The Bulgarian Private Equity and Venture Capital Association (BVCA) and Dealroom underscores the leaps forward that the SEE and the Bulgarian VC ecosystem are making. Bulgaria’s IT sector now accounts for an impressive 4.5% of the economy. (Article 7)

The one lesson for our region is that there are very good policy examples in each of our countries – all we have to do is promote them pan-regionally to help entire Southeast Europe move forward much faster.

We wouldn’t be ourselves if we didn’t mention risks. There are many risks still facing the region, but if we have to pick one which we consider gravest, it would be the risk of Orbanization of our countries. Our countries are moving forward, but our democracies are still fragile and reversible. If anyone doubts the impact of autocratic governments on development, there is one statistic worth mentioning. The only country, which is not oil-rich, to ever achieve developed status under autocratic rule is Singapore. All others, in due time, get set back by either inflation, social unrest, or war.

We remain confident in the prospects of our region and we are looking to execute 3-5 new deals in 2023.

Read the full first edition of BlackPeak Growth Equity Insights here and sign up for the next issue by signing the form below.