New opportunities for private equity investments in Romania, Practical Law UK Articles...

New opportunities for private equity investments in

Romania
by Ioana Hategan and Ruxandra Eva Ciucur, Hategan

Law stated as at 01 Nov 2019 • Romania

This article considers trends in the Romanian PE market, looking at deals from 2017 to 2019; key
laws and regulations affecting PE investors; typical PE transaction structures; PE investors' potential
liabilities; the future development of the PE market in Romania.

This article is part of the global guide to private equity. For a full list of jurisdictional Q&As visit
global.practicallaw.com/privateequity-guide.

Market trends
Main players and sectors

CEE market statistics: 2017 to 2018

Significant PE transactions: 2017 to 2018

Impact of December 2018 emergency ordinance

PE market trends and developments: 2019

Key laws and regulations affecting PE investors

Typical PE transaction: overview
Transaction strategies and structure

Majority acquisitions

Typical provisions and mechanisms

Negotiation stage

Completion

PE investors' potential liabilities

Director liability

Liability of private investors

Tax

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Perspective on the future development of the PE market in Romania

Contributor details
Ioana Hategan, Managing Partner

Ruxandra Eva Ciucur, Partner

Banks and family resources were the main financing sources for the ordinary Romanian company for many years after the
Romanian revolution in 1989. Since then, Romanian companies have increasingly accessed bank financing and private
equity (PE) funding. Since the global economic crisis in 2008, however, banks select their clients more carefully when
granting credit and they avoid financing unpredictable businesses. This has naturally led to companies seeking alternative
financing sources, such as PE funds, which appear to be more flexible in terms of risk-taking when targeting a company.

As a post-communist country, Romania started to become attractive for investors only after becoming an EU member state
(in 2007), so Romania's development in this regard was certainly influenced by the development of the Central and Eastern
Europe (CEE) region.

Throughout its two-and-a-half-decade history, the CEE PE market has been firmly focused on the mid-market, with large
deals the exception rather than the norm. Many businesses in the region grew with the backing of a PE owner, sometimes
with multiple PE funds as the businesses matured and reached various growth milestones.

The most relevant PE transactions have involved UiPath (robotics), Profi (retail), Noriel (toys), Nextebank (banking),
Millennium Group 2000 (real estate), Regina Maria (medical services), Superbet Betting & Gaming (sports betting, virtual
sports betting, and gaming services), Star Storage (IT), among many others.

This article considers:

• Trends in the Romanian PE market, looking at deals from 2017 to 2019.

• Key laws and regulations affecting PE investors.

• Typical PE transaction structures.

• PE investors' potential liabilities.

• The future development of the PE market in Romania.

Market trends
The PE market in CEE has been very dynamic recently and has boomed in some European countries, such as Poland,
Romania, the Czech Republic and Slovenia. The market continues to grow and ongoing investments, exits and fundraising
news are constantly reported by deal-doers and investors. A growing regional economy, continued liquid leverage markets
and a high number of mature owner-managed businesses, ready to generate consistent profits, all encourage PE investors
to further develop transactions in the region. In addition, Romania has fewer developed competitors than in other markets.

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Investors value this, as in a highly competitive market the value of the transactions increases accordingly, because the value
of the investment is to a large extent determined by the challenges and competitiveness of the relevant market.

According to a survey of the Emerging Market PE Association (EMPEA) (www.empea.org), fund managers in the CEE region
disclosed exits of 98 companies from 2015 to 2017. This total includes 47 strategic sales, one fewer than the number of such
exits completed in the previous seven years combined. Further, public markets have proven to be an increasingly viable exit
pathway. In the past two years, managers have completed six initial public offerings (IPOs) in CEE, including the first PE-
backed listings in Bucharest and Budapest recorded by EMPEA.

While both foreign and local PE investors are active on the Romanian market, it is vital for foreign investors to understand
not only the market and sector in which they plan to invest, but especially the Romanian economy and cultural particularities,
for the transaction to be closed successfully.

PE in public-to-private (PTP) transactions is no longer common in the local market, since the vast majority of listed companies
have already been taken over, mainly by strategic buyers and PE investors, shortly after the Bucharest Stock Exchange
reopened actively in 1995. The very few PE investors still involved in PTP transactions must observe the capital markets'
regulations, especially in terms of valuation of the target companies and the execution of the buyer's due diligence. For
transactions to meet the legality requirements, they must be performed and executed in a transparent manner, while access
and use of privileged information are prohibited and sanctioned.

The PE market in Romania shows aspects similar to those found in the entire regional CEE market. It also displays certain
particularities in terms of investment levels and their structure. For example:

• Leveraged loans are more common.

• Romania has not transposed the "whitewash proceedings" in Directive 2006/68/EC on the formation of public limited
liability companies and the maintenance and alteration of their capital, and Directive 2012/30/EU on the coordination
of safeguards in respect of the formation of public limited liability companies and the maintenance and alteration of
their capital.

• Romanian company law expressly prohibits financial assistance granted by way of advancing funds or providing
security interest right.

• Financial assistance restrictions are regulated only with respect to joint stock companies and are not applicable to
limited liability companies.

Main players and sectors

There are about six major PE players in Romania. Some of these entered the Romanian market in its very early stages (in the
1990s) and some are newer (2015). The newer entries accounted for the largest PE transactions in the past couple of years:

• The acquisitions of Profi retailer by Mid Europa Partners (for an equity value of EUR533 million).

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• The acquisition of a 30% stake in E.On Distributie Romania by Allianz Capital Partners GmbH (for an equity value of
USD270 million).

• The acquisition by Advent International of the Zentiva Group (for an estimated consideration of about EUR287
million).

In the second half of 2018, one of the main PE investments was the financing of the company UiPath, a successful Romanian
start-up, which became the first Romanian "unicorn" company, with a value of over USD1 billion. The company was involved
in two significant PE transactions in 2018, in March (see above, Significant PE transactions: 2017 to 2018) and September.
In September, UiPath received USD225 million in the funding round led by CapitalG and Sequoia Capital at a USD3 billion
valuation. These investments confirmed that a start-up company has great potential in Romania.

The volume of PE transactions in Romania has increased and so have the minimum amounts that an investor can purchase
when investing in a company. Several relevant PE transactions of at least EUR100 million have been closed in the last
few years, such as those involving UiPath, Profi and Superbet. Global players were already present in the region, but they
have now shown interest in the local market assets as a single jurisdiction transaction and not as a part of other regional
transactions.

In 2017, Romania had many significant PE retail transactions. As Romania experienced its most significant economic growth
in the last few years (culminating with the highest GDP growth in Europe last year), and since this growth mainly resulted
from increased consumption, retail has become the most effective industry in Romania. Therefore, the most significant PE
transaction last year was in the retail industry and amounted to about EUR500 million. We expect that this will lead to other
important transactions in the market in the near future.

Other significant PE investments occurred in services and healthcare. PE investment in healthcare experienced particularly
fast expansion, as private medical services are generally preferred. In previous years, PE funds preferred investments in
their area of comfort and expertise. Recently there has been increasing interest in new sectors in which growth is anticipated,
such as healthcare, pharmaceuticals, fast-moving consumer goods (FMCG), e-commerce and logistics services.

CEE market statistics: 2017 to 2018

According to the Central and Eastern Europe PE Statistics compiled by Invest Europe, PE investment in the CEE region
reached EUR3.5 billion in 2017, an increase of 113% year-on-year and a record high level for the region. CEE PE investment
measured as a percentage of the region's gross domestic product (GDP) increased significantly from 0.122% in 2016 to
0.239% in 2017.

The growth in CEE investments underlines the wider trend across Europe, where total PE investments in 2017 increased by
29% year-on-year to EUR71.7 billion. The CEE region's share of the European total amount invested in 2017 rose to around
5% from 3% in 2016. The total number of CEE companies receiving funding dropped by 25% in 2017 to 257, largely due
to another annual decrease in the number of companies receiving venture capital. Further, CEE buyout investments rose
in the last few years by 135% to a record EUR2.8 billion in 2017, while buyout investments across Europe increased 37%
year-on-year to EUR51.2 billion (the highest level since 2007).

As part of the EU, Romania offers remarkable market opportunity in terms of size (9th largest in the EU) and population
(7th largest in the EU), offering investors good market potential. It is also the second largest country in CEE and the largest
in the European Economic Area (EEA). Further, Romania was the best performing country in the EU in 2018, registering

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the highest growth in the third trimester of 2018, and it is "recommended for investment" by three major international rating
agencies (MSCI, FTSE Russell, and EMPEA).

In the CEE region, Romania ranks second in terms of the evolution of PE and venture capital (VC) investment, with 14%
of CEE investment value total, EUR500 million of PE/VC investments in 2017 and an increase of over 200% compared
with 2016. According to the latest Deloitte Central Europe Private Equity Confidence Survey, 2019 has registered a lower
deal activity in the CEE PE markets and an increased number of exits. Although less marked by exits than Poland and
Serbia, Romania also experienced a few significant exits: Oresa sold Fabryo and Somaco, Abris Capital sold Urgent Cargus,
Enterprise Investors sold Profi. Further exits are expected for investment cycles now reaching maturity. Therefore, Romania
remains attractive for PE investors in the last quarter of 2019 and in 2020.

Of the EUR495.8 million invested in Romania in 2017, 64% was reflected in company takeovers, 35% in growing investments
and the rest was attributed to start-ups. Retail and services accounted for three-quarters of the total investments in CEE,
while IT&C accounted for 11%.

In 2017, the selling of shareholdings in Romanian companies amounted to EUR133 million. This ranked Romania third
in terms of the exits in the region. PE investments in the Romanian companies represented 0.265% of the GDP, slightly
exceeding the CEE average (0.239%).

According to Invest Europe's latest market analysis, PE investments in the CEE region in 2018 reached EUR2.7 billion,
Romania taking the largest share (12%).

Significant PE transactions: 2017 to 2018

In the last few years, Romania has become particularly interesting to foreign investors. Since 2017, the number of PE
transactions has steadily increased, some of them having a significant value.

2017. The main transactions in 2017 were:

• Axxess Capital (a Romania-based PE and venture capital (VC) firm) acquired a 65% stake in Rom Waste Solutions
(a Romania-based waste disposal company) for an estimated minimum consideration of EUR6.4 million. Vitruvian
Partners (an independent European PE firm) then acquired a significant minority stake of about 30% in the
Romanian company Bitdefender, from the existing shareholder Axxess Capital, for an estimated consideration of
EUR180 million.

• Mid Europa Partners LLP (a UK-based PE firm) acquired the company Profi Rom Food (a Romania-based owner
and operator of retail stores) from Enterprise Investors Sp zo o (a Poland-based PE and venture capital firm) for an
equity value of EUR533 million.

• Allianz Capital Partners GmbH (a Germany-based PE branch of Allianz SE (a listed Germany-based provider
of insurance, banking, and asset management services) acquired a 30% stake in E.On Distributie Romania (a
Romania-based owner and operator of gas distribution pipeline system and electricity distribution grid) from E.On
SE (a listed Germany-based company engaged in the field of electricity, oil and gas) for an estimated consideration
of about USD270 million.

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2018. 2018 was also significant for the Romanian PE market. Important transactions were disclosed in the second half of
2018, most being the result of negotiations in early 2018, following economic indicators in 2017. A study in this regard shows
that the transactions market with disclosed deal values was dominated by strategic investors, who were involved in 56% of
the total transactions, while PE investors were involved in 39% of the total transactions.

A leading transaction in real estate was concluded, when the retailer Dedeman purchased The Bridge office building from
Forte Partners, for EUR200 million.

The biggest transactions were:

• The acquisition by Advent International of the Zentiva Group, including Zentiva SA Romania (ex- Sicomed), with an
estimated consideration of about EUR287 million.

• The acquisition of Agricost by Al Dahra Group, with a value of EUR200 million. This was the biggest transaction in
the agricultural sector.

• The acquisition of 7.5% of UiPath by a consortium of investors led by Sequoia Capital, with a transaction value of
USD225 million. The first PE transaction regarding UiPath took place in March 2018, when the company received
USD153 million and became the first Romanian "unicorn" company by reaching a value over USD1 billion.

• Abris Capital Partners exiting Urgent Cargus, which was bought by Mid Europa, with an estimated value of
EUR150 million. This exit was an important event in Romania, as it was facilitated by and reflected the continuous
development of the market and the positive economic indicators in 2018.

There were over 90 PE transactions in 2018, with an average value of EUR50 million, according to a Deloitte survey. That
survey indicates that the total value of PE transactions in 2018 was over EUR1.1 billion, as the Romanian PE market
continued to develop. Currently, the PE investors focus on the retail, healthcare, pharmaceutical, production, energy, and
banking and financial services sectors.

Impact of December 2018 emergency ordinance

An emergency ordinance regulating specific fiscal measures, Government Ordinance no. 114/2018, which the government
announced on 21 December 2018, temporarily led to a rapid decline of the Bucharest Stock Exchange. This ordinance
came into force in 2019.

The ordinance refers to a new tax on local banks' assets and to the possibility for the almost 7 million participants to withdraw
their funds from mandatory private pension funds, after having contributed for at least five years. In Romania, pension funds
manage about EUR10 billion worth of net assets, 19% of which are invested in local or foreign stocks, and 3.3% in corporate
bonds. Under these new fiscal measures, the pension funds could be forced to sell part of their assets, which would put
pressure on the stock prices on the Bucharest Stock Exchange. Further, the government set a ceiling and a new revenue
tax for energy companies.

Following the announcement of the ordinance, the shares of two banks and two energy companies, all listed on the Bucharest
Stock Exchange, severely dropped in value, so that the Bucharest Stock Exchange appeared to have lost the entire advance
registered in 2018.

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Although the end of 2018 and the beginning of 2019 was not as strong as expected in the third trimester of 2018, no major
consequences on the M&A market in the first half of 2019 occurred. The most dynamic sectors on the Romanian market (that
is, retail, technology, real estate, pharmaceutical, health and medical services, and sales) have only been slightly affected.

PE market trends and developments: 2019

PE investors' interest in Romania remained significant in 2019, some having already opened an office in Bucharest (for
example, Highlander in 2018 and Mid Europa Partners in 2019), while other local players invested in Romanian SMEs (for
example, Morphosis Capital in 2018 and Blackstone in 2019).

The most important transactions on the Romanian mergers and acquisitions market in 2019 were the EUR568 million
financing raised by UiPath (following their 2018 transactions (see above, Significant PE transactions: 2017 to 2018)), and
the acquisition by EximBank (owned by the government through the Ministry of Finance) of Banca Românească.

Other relevant transactions include:

• The PE fund Blackstone's acquisition of a minority stake in Superbet, the biggest player on the Romanian sport bets
market (EUR175 million).

• The acquisition by the Paval brothers (Dedeman owners) of The Office building in Cluj Napoca (undisclosed value).

• The investment of close to EUR60 million announced by CEE Equity to modernise and develop 15 grain silos and
logistic hubs of the Brise Group.

The M&A market in Romania revealed significant growth in the second quarter of the year, compared to the first quarter and
to the same period in 2018. Deloitte estimates that the total market value, including transactions with undisclosed value,
was between EUR1.4 billion and EUR1.6 billion, while the value of disclosed transactions reached around EUR790 million.

Further, at the end of September 2019, the Bucharest Stock Exchange was promoted by FTSE Russell to secondary
emerging market, after a period of three years in which Romania was included on the Watch List. This decision was taken
after the main players on the Romanian stock exchange (that is, Romgaz, Banca Transilvania and BRD-Groupe Societe
Generale) met the eligibility criteria to be included in the FTSE Global All Cap Index. The reclassification as a secondary
emerging market becomes effective in September 2020.

Due to the reclassification, it is expected that Romania will become even more attractive for larger international investment
funds. It should also encourage local companies to increasingly consider PE transactions.

Key laws and regulations affecting PE investors

Romania does not have specific laws regarding PE transactions. The Investors must comply with the:

• Romanian Civil Code and the Companies Act No. 31/1990, which provide the applicable rules for the sale and
purchase of shareholdings in Romanian companies.

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• Articles of association of the target company, as they may clearly regulate the sale and purchase conditions.

• Romanian Competition Law No. 21/1996, particularly if a PE investor intends to finance companies acting in the
same sector. The Competition Law contains provisions on notifications to the Competition Council and the European
Commission, and the related requirements and thresholds.

• Romanian Capital Market Law No. 297/2004, as it regulates the setting up and the functioning of the financial
instruments markets.

• Law No. 24/2017 regarding issuers of financial instruments and market operations, as it represents the legal
framework applicable to:

• the market operations of admitted (or soon to be admitted) financial instruments for trading on a regulated
market, a multi-lateral trading system, or an organised trading system supervised by the Financial Supervisory
Authority (and the issuers of these financial instruments);

• public offers for securities;

• operations regarding market abuse.

Typical PE transaction: overview

Transaction strategies and structure

PE transaction strategies in Romania are mainly leveraged buyout (LBO) oriented. Share and stock purchases are also
notably preferred to asset deals, the latter being rarely used. Setting up a Romanian special purpose vehicle (SPV) is not
common, due to the relatively large tax burden applying to them, and Romania's lack of fiscal stability in relation to some
other jurisdictions. Multi-layer holding structures are often used for tax purposes.

Over the past two years, it has become clear that the main driver for the acquisition structures are the funding needs of the
target and preferred PE funds, as opposed to banking and project financing requirements.

Majority acquisitions

PE transactions in Romania are diverse with a large spectrum of investments, from majority to minority investments.
Decisions on an opportunity are taken after disclosure of the significant key information on the target company and its funding
needs, as well as availability and flexibility of the existing shareholders. However, the typical PE transaction structure has
remained constant throughout the years, with nearly 80% of PE transactions being majority acquisitions. Minority acquisitions
are less common, as the legal framework on minority rights is disputable and insufficient, and therefore lacks protection for
PE funds. In addition, the seller usually offers a rollover for its minority stake.

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Typical provisions and mechanisms

Earn-outs (that is, an arrangement under which all or part of the purchase price of the shares in a company is calculated by
reference to the future performance of the business or company being purchased), sized depending on key performance
indicators (KPIs), are usually granted to management holding minority equity. Further, closing adjustments (that is,
adjustments made to the purchase price of the shares that depend on a number of factors at closing) are commonly used
in private transactions. Equity adjustments and employee share schemes are not common. PE investors prefer locked-box
structures (that is, mechanisms through

which the parties to an acquisition agree a price payable for the target, generally based on a balance sheet, drawn up and
settled between the parties to an agreed date in advance of signing) when they sell.

Negotiation stage

Typical negotiations in PE transactions usually start with the closing of a non-binding memorandum of understanding (MoU)
(only a few key provisions are generally regulated as binding). Closing of the MoU may be followed by a subscription
agreement, depending on the structure of the transaction, or directly by a shareholders' agreement.

The shareholders' agreement should be included in the target company's articles of association, which are public. If they
are not, they will have no effect in relation to third parties, unless the investors can prove that the third parties were aware
of the content of the shareholders' agreement and chose to ignore this fact and act in bad faith.

To avoid deadlocks, the investing company usually requires that the voting rights of the minority shareholders at the
shareholder level are aligned with each other, and that the local management's position in the board of directors is aligned
with that of the other members of the board. This is often a challenge.

Romanian target companies' local management is usually reluctant to accept the limitations of their minority voting rights,
both in the shareholders' meetings and on the boards of directors, in cases where the investors appoint international directors
who will form a majority against the local management. This type of two level management, which is extremely common,
can trigger delays in negotiations and can lead to a deal-break. However, investors are aware of this perspective of the local
management, and of the sellers, and are therefore careful not to abusively or dramatically dilute the minority shareholders.
As a result, following negotiation, a minority seller may still obtain a put option (that is, a type of option which grants a right
for a potential seller to sell an asset to a buyer either at a pre-agreed price or at a price to be determined in accordance with
a pre-agreed formula), a call option (that is, a type of option which grants a right for a potential buyer to acquire an asset
from a seller at a specified price), a tag-along right (enabling them to force other shareholders (who wish to sell their shares)
to procure an offer for the shares benefiting from the rights) and leverage in key decisions.

Completion

If the transaction is structured as a share transfer, it cannot be completed sooner than two months following the first
registration of the procedure with the competent Trade Register. This is because corporate law gives potentially interested
creditors of the target company 30 days to object to the transfer of shares, and the rest of the procedure takes about a
further 30 days.

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If the transaction is structured as a capital infusion in the target company, the transaction can be completed in two days after
all necessary documents are submitted to the competent Trade Register.

If the target company has entered into banking contracts, prior approval for the change of control of the company is usually
required.

If anti-trust clearance is also necessary (that is, the cumulated turnover of the investing companies and the target company
exceeds EUR10 million and at least two of the investing companies exceeded an EUR4 million turnover in Romania), the
related procedure with the Competition Council may delay the transaction by four to six weeks, up to a maximum of five
months if the Competition Council decides an extended investigation procedure is necessary.

The target company's former management is usually kept in place, while the management also holds the minority equity
rights, management fixed compensation and performance-based bonus schemes. Extended comfort and protection for the
investors, and sufficient comfort for the sellers, are the main drivers in this respect.

PE operations teams play a crucial role in the relationship between CEOs and the PE investor. They are often able to
get closer to management than the deal team because they speak a similar business language. They can also provide
hands-on support in crafting value creation plans. However, PE operations teams sometimes take a highly interventionist
approach in the relationship with a CEO. This generally proves to be unproductive and ineffective, if the CEO does not
accept direct control or authority (which is often the case). Therefore, as long as the PE operations teams support the CEO
with a framework that provides clear working structures, roles and responsibilities, in which decisions are taken as a result of
straightforward and open discussions, relationships are generally perceived as constructive. Many of the relationship issues
are rooted in personality clashes and different working styles, particularly when experienced, authoritative professionals sit
on both sides of the table.

PE investors' potential liabilities

Director liability

Directors can be held jointly liable with the target company, between themselves or together with the shareholders of the
target company, on a case-by-case basis, for the target companies' liabilities in an insolvency procedure.

Romanian corporate law also regulates corporate criminal offences and contraventions by directors and shareholders who
do any of the following, negatively impacting the target company:

• Undertake a specific type of conduct.

• Engage in illegal activities.

• Fail to meet their obligations.

Directors who undertake HR-related obligations can be held liable if they fail to ensure that the social security contributions
of the target companies' employees and collaborators have been correctly calculated, retained and paid.

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These risks and liabilities can also be incurred by de facto directors (that is, individuals who act as directors and perform
related management activities in the same way as the formally appointed directors do).

Under Romanian legislation, directors should abstain from voting in the shareholders' meeting if there is a conflict of interest.
It is good practice to inform the other members of the board regarding the reasons for abstaining. However, their primary
duties under the Romanian corporate law relate to the protection of the target company's legitimate interests and not the
interests of the party who nominated them.

Management agreements, articles of association and shareholders' agreements drafted by an experienced legal counsel
usually contain detailed procedures a director should undertake in the case of a conflict of interest.

Liability of private investors

Under Romanian insolvency procedure, a PE investor can be held liable jointly with the target company, by creditors of the
target company who meet specific requirements. The creditors must comply with the burden of proof and show that the
PE investor has either:

• Caused or has knowingly contributed to the insolvency of the target company willingly.

• Failed to implement remedies in due time to avoid bankruptcy.

Management equity shareholders and non-equity directors are more exposed to potential liability claims, as they are
managing the target company. The governance and regulatory documents of the target company must therefore limit the
target company's shareholders' liability.

Recent case law indicates that the courts increasingly focus on and analyse more strictly the circumstances leading to a
company's insolvency, with an in-depth review of the shareholders', managers' and directors' actual activity. It is therefore
important for PE investors to ensure that all decisions adopted in the course of the company's activity are according to the
articles of association and for the company's benefit.

Portfolio companies are not usually held liable for the liabilities of another portfolio company, unless the former has secured
the liabilities of the latter.

Tax

Under a share transaction in Romania, the buyer takes over the target company together with all related liabilities, including
contingent liabilities. Therefore, PE investors usually require more extensive indemnities and warranties than in an asset
acquisition. Where there is a significant valuation, the buyer usually starts a due diligence procedure, which usually includes
a review of the target's tax affairs, to quantify the potential risks.

Capital gains obtained by Romanian-resident companies are taxed at 10%, while dividend payments made by a Romanian
company to a Romanian resident shareholder, or to a non-resident shareholder, are subject to 5% dividend tax. However,
dividend payments made by a resident legal entity to an EU legal entity can be tax-exempt, subject to certain conditions (for
example, the relevant shareholding must be at least 10%, with at least a one-year holding period).

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The Romanian Fiscal Code (which became effective in 2016) introduced new moderate tax measures:

• Foreign companies with their management structure operating in Romania are considered to be Romanian
contributors.

• Tax on dividends was reduced from 16% to 5% where dividends are distributed between Romanian companies.

From 2016, stricter conditions have applied for a partial spin-off to qualify as neutral for direct tax purposes, while mergers
and spin-offs are by default outside the scope of value added tax (VAT) (with no additional conditions to be met, as was
the case up to 31 December 2015).

Regardless of this, it appears that the tax legislation is likely to be more developed and predictable in relation to its application
to investments in Romania, to reflect the development of the Romanian PE market.

Management agreements are taxed similarly to individual labour agreements, so the decision to opt for one rather than the
other is not tax driven.

Perspective on the future development of the PE market in Romania

An emerging PE market has its challenges, such as:

• Lack of depth of alternative growth financing. The market has not yet reached its maximum development potential,
as there is still a high degree of reluctance and hesitancy for PE funding.

• The lack of predictability of the tax legislation and regulations.

• Identifying highly competent and proficient management to ensure the growth of the company after the takeover.
This represents a particular challenge, as expert management culture has not yet developed.

• Political risk and currency risk. This often dominates the discourse among investors about the perils of investing in
emerging markets and these risks remain high for the Romanian PE market.

These challenges appear to be acceptable for many investors (although proper infrastructure is still missing), in light of the:

• High potential for development in multiple industry areas such as retail, transport, e-commerce, medical services,
and to some extent agriculture, pharmaceutical and clinical studies.

• Relatively well-educated workforce available at competitive wages.

• Strategic location. Romania is located at the crossroads of three major markets: the European Union, the
Commonwealth of Independent States and the Middle East. It also has direct access to the Black Sea and is
crossed by the Danube River. Therefore, Romania provides an important connection between Europe and the

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Middle East, ensuring access to an active consumers’ market. Romania could therefore become an important hub
for the CEE region, which may play a significant role for the future investors in Romania.

There has been considerable development in the PE industry in CEE over the recent years, evidenced by the more accessible
and non-problematic exits, as well as higher returns. Industry has oriented itself increasingly towards larger funds.

The high growth rate of GDP, growing consumption, developing infrastructure, the possibility of regional expansion of local
high-developing companies, and the business maturity of several companies allowing exits and buyouts, are all promising
attractive returns for the PE investors.

While it is likely that strategic sales will remain the main exit option for general partners (GPs) of PE funds in CEE, the ability
to tap capital markets gives fund managers flexibility and visibility to the region's private capital industry.

Further development of PE transactions is expected in the region, with significantly more consistent related values. It also
appears that growth will mainly occur in the retail, healthcare, pharmaceutical, production, and banking and financial services
sectors. Fewer exits and the stabilisation of deal sizes are expected.

The major acquisitions and exits in 2017 and 2018 confirm that Romania is increasingly attractive for foreign and local
investors, and that Romania (although its PE market is still emerging) has already gained investor confidence, to become
a major PE market in the CEE region.

Contributor details

Ioana Hategan, Managing Partner

Hategan
E ioana.hategan@hategan.ro

W www.hategan.ro

Ruxandra Eva Ciucur, Partner

Hategan
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W www.hategan.ro

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