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Equity Operations
July 2017
Since its founding, the European Bank for Reconstruction and Development (EBRD) has used equity investments to catalyse co-investment and improvements in firm-level performance, in order to contribute to wider transition impact. Equity holdings – both direct and in private equity funds – accounted for 15-20 per cent of the EBRD’s portfolio from 2005 to 2016.
Equity has recieved both greater attention and greater scrutiny in recent years. Investment levels were ramped up after the global financial crisis, in line with an increase in lending. The Stuck in Transition report (EBRD, 2013a) argued for greater use of instruments, such as equity, to pursue institutional objectives. Declines in the competitiveness of the EBRD debt post-crisis, and a lack of equity in countries of operations, reinforced this view.
At the same time, equity returns have been low and deteriorating, and the EBRD’s current portfolio presents numerous concerns. At the end of 2016, the active equity portfolio’s investment cost was €6.0 billion, compared with a fair value of €5.5 billion, and it accounted for about 20 per cent of the EBRD’s total portfolio of €29.7 billion. Direct equity, accounting for 76 per cent of the equity portfolio, returned 0 per cent on investments made between 2005 and 2014; the internal rate of return (IRR) for the vintages for 2014-16 has become increasingly negative, accompanied by large, unrealised losses.
The EBRD Management has intensified its focus on its equity business in recent years, introducing several initiatives to strengthen performance. The Institutional Investment Partnership was established in 2013 as a mechanism for the EBRD to partner with institutional investors; this was intended to attract large long-term institutional investors, such as sovereign wealth funds. An equity participation fund, the first of an anticipated series of institutional investment partnership co-investment funds, achieved its first closing in September 2016 having raised €350 million from two sovereign wealth funds. And earlier in 2017, the Management presented the Enhanced Equity Approach, intended to elevate the strategic profile of equity and set out broad directions for better performance and value creation.
This evaluation focuses on the Bank’s equity portfolio approach and developments between 2005 and 2016. It identifies significant and difficult issues regarding performance and approach and, on the basis of these findings, makes several recommendations for consideration by the Board and Management.