Roundtable on south-east Europe: Edge funds

‘Exotic’ investors and opportunities for legal work beyond M&A feature in The Lawyer’s high-level roundtable debate on south-east Europe 

As Vladimir Putin squares up to Kiev’s new government, Russian troops pour into the Crimea confining their Ukrainian counterparts to barracks and its navy blockades to Sevastopol, it is easy to flash back to Europe’s last catastrophic post-communist bloc conflagration. 

For a decade from 1991 the former Yugoslavia tore itself apart. But just 10 years after the carnage ended, somewhat miraculously the Balkans were seen as fertile investment fields. Last July Croatia even joined the EU. 

Where there is economic and social rehabilitation there will be lawyers. And the Balkan states – and south-east Europe more widely – have spawned a growing profession and attracted global law firm attention.

But the region’s road to salvation is far from smooth. Delegates at The Lawyer’s recent roundtable on opportunities in south-east Europe say that while “exotic investors” are buoying a market that would otherwise have been badly hit by the financial crisis when Westerners dropped out, there are still profound rule of law concerns. Lawyers speculate that local legislation is often confused and the judiciary and courts systems inadequate.

That is not to cast a pall on all optimism.


“We got involved in the region because our clients told us we needed to,” explains Sebastian Lawson, a corporate partner in the Moscow office of Freshfields Bruckhaus Deringer. “Over the years, we’ve seen the region grow as an increasingly interesting source of clients.” 

Projects and infrastructure 

Global law firm partners consider south-east Europe to be a rich vein of opportunities in project finance, infrastructure and M&A work. 

“I’m seeing conflict searches coming up as often as three times a week on opportunities in the region,” comments Hugh Owen, a partner in the Budapest office of Allen & Overy.

Rounding out an upbeat message from the magic circle at the roundtable is Clifford Chance Frankfurt office partner Loren Richards: “I’m enthusiastic. We’re seeing lots of conflict checks as there is a lot of activity – not just intra-regional or EU-facing, but also from China, the Middle East and Turkey.” 


Indeed, so-called exotic investors – effectively those hailing from anywhere apart from Western Europe or North America – are viewed as the latest saviours of the region. Patricia Gannon, a founding partner of Belgrade-based Karanovic & Nikolic, says there has been a “huge jump” in investment in the region from Asia, the Persian Gulf and even Israel. 

While she describes those investors as sometimes “challenging to manage” as clients, they are very much valued. 

“Investments in all shapes, sizes and varieties are welcome,” says Gannon. “They are confidence boosters for a region that suffers from lack of confidence.” 

Exotic investors are those who had money when the West was broke, during the financial crisis, with some of the biggest spenders being the Chinese, the United Arab Emirates and the Azeris. 


“These investors had money and they were looking for what they needed most of all – agriculture, hotels and airlines,” says Eversheds partner Greg Hammond.

Middle East and Chinese investors especially have been scouring the world for opportunities to deploy capital, and south-east Europe is at a stage ripe for investment because it is perceived as having good growth potential. Investors are looking at targets such as hotels instead of sectors such as finance or energy.

Indeed, the cadre of exotics is not interested in the same sectors as older, more traditional investors, and are therefore driving the regional market in different directions.

“Whereas 15 years ago we’d have seen a wave of western banks coming to the region to buy local banks in privatisation deals, having a bank is of much less interest to the new investors,” says Lawson. “The Chinese are not looking to buy banks, so western investors looking to sell can’t find a buyer.” 

Some exotic investment is opportunistic. For example, the 2011 Arab Spring triggered a significant boost to south-east Europe’s agribusiness sector. Concern in the Gulf states and elsewhere that a crucial source of food might evaporate in the heat of social unrest spawned a rush to south-east Europe.

“The region was the nearest and most fertile agricultural land to the Middle East,” explains Hammond. “It was cheap and top quality – and the investors had their pick.” 

Hydrocarbon footprint

But hope for the region is not pinned exclusively on chequebooks waved in Beijing, Abu Dhabi and Baku in a bid to pick up great tracts of land. Lawyers at the roundtable pointed to considerable activity in the energy sector – specifically around hydrocarbons – and not just confined to the Balkans, but in Bulgaria and Romania as well. 

Josip Marohnic, who works in co-operation with Karanovic & Nikolic in Croatia, describes energy as “an untapped market in the region”. 

He claims that, while it has taken some time, Croatia and Montenegro have finally developed a legal structure to develop hydrocarbons.

“There’s huge potential for offshore oil and gas,” he says, pointing out that experts estimate Croatia so far has built only about 10 per cent of the offshore platforms that Italy has on its side of the Adriatic. 

In the wider regional economy there is increased consolidation of businesses, despite a history of being a fragmented region, consisting of small, essentially poor markets
at various stages of EU accession.

“We’ve started to see businesses feeling more comfortable doing business with each other,” maintains Gannon. “It’s taken some time, but the opportunity [for law firms]
is in consolidating businesses, with local counsel in each of the markets to do proper due diligence.” 

Regional co-ordination

While Gannon expects to see that trend continue, she acknowledges that much of that work will remain of little interest to global law firms, which will only be attracted to larger deals. 

Indeed, international law firm partners at the roundtable agreed that the size of deals is one of the biggest constraints on the south-east European market. 


“The deals are too small for clients to make bets on risky jurisdictions,” comments Dechert litigation partner Timothy Lindsay. “So there needs to be regional co-ordination around commercial markets and how they operate.”

Owen adds: “Some – though by no means all – of the transactions in the region are too small. But if you can somehow consolidate, creating a homogenised regional approach, that’s much more attractive.” 

The icing on the cake of a small deals, high-cost investment environment for those taking a negative view of the post-Yugoslavia region is enforcement difficulties with local courts. 

“Some countries adopted whatever international treaties suited them,” says Hammond. “There was total confusion.” 

But, he points out, there is a positive side to that patchwork. 

“Some of these markets are lightly regulated,” he explains, pointing to agribusiness. “It doesn’t register on the M&A tables because that sort of deal is slightly below the radar, but it’s an area where there is activity. It’s just not the financial services deals or the big IPOs.” 

Nonetheless, issues around local legislation and courts cause concern. International lawyers point to sporadic implementation of EU regulations in jurisdictions that are members of the club, as well as “huge problems” with local laws. 

Even more problematic are regional judges. 

“There’s a difference between the halo effect of being part of the EU and having to rely on the local judiciary for enforcement,” says Lindsay. “A legal right isn’t a right until you can rely on its enforcement.” 

Hammond agrees: “The quickest way to attract investors is to make sure the rule of law is maintained and the political situation is sorted. When you have a level playing field, investors are more likely to come. But when you have foreign investment laws that don’t stack up,
investors wonder what their rights would be and that obviously creates problems.” 


Croatia’s EU accession is a case in point. There was much optimism in the run-up to accession but, as Gannon comments, “The economy hasn’t reached the advertised rewards and heights of EU accession yet – it will be a longer process.”

Hammond puts a slightly more negative slant on things. 

“Going into 2007, everything was keyed up to make the region the launch pad for Europe – everyone was going to set up factories in the region because it was so cheap,” he says. “But for a couple of countries that had lined themselves up for EU membership, it became a millstone around their neck. They were pulled down by the eurozone crisis.” 

Others see EU accession on balance as a positive and the outlook for south-east Europe as bright. They point to developing infrastructure, trends towards renewable energy, a willingness to bring legislation into line with international standards, macro-economic improvement and revived interest from private equity and other West European strategic investors. 

“Add all that up,” says Owen, “and it represents an interesting opportunity. There will be dips along the way, but it’s generally positive.”


Around the table 

Hugh Owen, partner,
Allen & Overy

Carol Osborne, partner,
Bryan Cave

Loren Richards, partner,
Clifford Chance

Timothy Lindsay, partner, Dechert

Greg Hammond, partner, Eversheds

 Sebastian Lawson, partner, Freshfields Bruckhaus Deringer

Dejan Nikolic, partner,
Karanovic & Nikolic

Josip Marohnic, lawyer, in co-operation with Karanovic & Nikolic

Patricia Gannon, partner, Karanovic & Nikolic

Andrej Babace, director, MidEuropa Partners 

Anna Korneva, senior associate, Stephenson Harwood

Joanne Harris, special reports and Europe editor

In association with

Karanovic & Nikolic