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Nesib Serhatlić

Preparing rough wood

A woodsman sharpens his saw

Equity investment breaks ground in Bosnia

Maglaj, Bosnia--Nesib Serhatlić swivels left, then right in his chair as he unconsciously illustrates his initial ambivalence about the EBRD investing in 39 per cent of his Primus building supplies company.

“It was a very new thing in Bosnia, this idea that rather than lending you money and taking collateral for it, a financial institution would take an equity stake in your company,” says Mr Serhatlić.

In its transition from a command to a market economy, Bosnia has made a rapid success of building up a very sophisticated and highly-regarded banking system. But investment options other than taking loans are almost unheard of. Enter the EBRD’s Direct Investment Facility (DIF), backed by donor governments*. Through it the Bank typically will invest in a 25-35 per cent interest in the company. The value of the investment is usually between US$ 400,000-US$ 2.5 million, for about five years.

Mr Serhatlić’s company had already borrowed €275,000 from an EBRD-backed local bank in 2002. A year later, when he saw another growth opportunity requiring finance, the window-and-door manufacturer and building contractor didn’t want the cash flow burden of increased bank loan payments. But selling a piece of Primus equity to anyone, let alone a powerful international organisation, seemed a dangerous proposition. He was worried about losing control of the firm he had built up so painstakingly.

Breaking ground takes time

“The EBRD had to check us out and we had to check them out,” says Mr Serhatlić. “There was a lot of research and evaluation. But I can appreciate that the EBRD needed to know we have a good company here, that we know our markets and technology and can handle our finances and that we won’t misuse their money. Fair enough. And to tell you the truth, we also needed time to do our research, to be sure the EBRD wasn’t taking advantage of us.”

“Doing an equity deal is not as straightforward as arranging a loan, particularly in transition countries that are still developing the institutions, laws, regulations and experience necessary to attract investors and protect the rights of minority investors,” says Ulle Müürisepp, the EBRD’s operations leader for the Primus investment. “The EBRD takes greater risk with direct investment than it does with its lending programmes, so we are very thorough in our evaluation. We also have to educate the client in what an equity investment is and its implications, and build a trusting relationship with them.”

“Along with building individual companies through direct investment, our aim is to demonstrate to other potential investors that this is a good way to build capital for all concerned.” Ms Müürisepp points out that a consultant funded by the European Union via the EBRD’s technical cooperation programme provided advice on manufacturing technology, marketing and the building supplies market place in the region.

“I know many, many companies in this country that would like the EBRD to invest directly in them, provided they could get comfortable with the deal,” says Mr Serhatlić.

More than just the money, his association with the EBRD paid off in burnishing Primus’ reputation. “Newspaper reports about our equity investment, a first for Bosnia, led to a doubling of customer enquiries about Primus products,” says Edin Sose of the EBRD’s Sarajevo office, who worked on the Primus deal.

Rebuilding Bosnia

Like many successful Bosnian business people, Mr Serhatlić started operations during the conflict involving three republics of ex-Yugoslavia: Croatia, Bosnia-Hercegovina and Serbia-Montenegro. The conflict in Bosnia left 250,000 dead between 1992-95, and one million houses destroyed.

“In 1995, it became clear that the war was about to end, and it did later that year with the Dayton Peace Accords,” said Mr Serhatlić. “So even before the war stopped we started making construction materials in anticipation of peace. In 1997 we entered a new project with a German company to produce PVC and aluminium windows and doors using up-to-date technology. In 1999, we started to produce doors and windows from wood,” readily supplied by the vast forests covering Bosnia’s mountains.

“We have annual sales of €3.25 million. Thirty per cent of that is for export to Italy, Slovenia and Germany which mostly want our wood products,” says Mr Serhatlić. Primus has 120 employees and also has a building construction wing. Mr Serhatlić expects the EBRD investment will boost his sales by 15-20 per cent this year.

*Donor governments supporting DIF in Bosnia include Canada, UK, and the Balkan Region Special Fund (Canada, Denmark and Taipei China).

15 April 2005