From baby steps to a very considerable footprint
Innovative small and medium-sized enterprises (SMEs) are vital for a well-functioning market economy. In 1991, after decades of planned economies, the EBRD needed to help rebuild the conditions that would allow such private entrepreneurship to thrive in its countries of operations.
As a supplement to traditional debt financing, the Bank’s work with private equity funds filled an important gap, aiming to provide capital and strategic support at all stages of the growth of a company through to public listing. The EBRD’s support for private equity funds helped channel much-needed equity capital to promising businesses in all sectors, locations and business models. At the same time it helped to develop on the one hand the infrastructure that supports such companies, and the private equity management industry and capital markets on the other.
But how could the EBRD unleash the potential of the private equity sector and of these promising companies in the nascent open-market economies of 1991?
Developing equity funds in central and eastern Europe
“Our first goal was to plant the seeds of an environment where the activities of our funds could grow,” explains Anne Fossemalle, EBRD Director of Equity Funds. “Our guiding principle was to follow the best practices of the private sector so as to set a concrete example and develop a sustainable industry in the long run.”
The EBRD started to invest through a range of fund structures. The equity stakes allowed the Bank to be represented on the advisory boards of funds. This enabled close oversight of the fund managers’ activities and brought opportunities to provide advice on corporate governance, management composition, market positioning and other important business aspects of running private equity funds. The earliest funds were backed by donor funds which included the early Enterprise Funds.
Polish Energy Partners is among many examples of the long-lasting impact of these activities on investee firms. The Polish Enterprise Fund, managed by Enterprise Investors and in which the Bank was a key investor, invested in the business in the mid-1990s and later helped it to enter the renewable energy market. By the mid-2000s, the company had been involved in various windfarm projects and had become a highly successful firm in the sector, with a listing on the Warsaw Stock Exchange.
Attracting private investors
The EBRD’s work quickly started to bear fruit: with average annual returns of around 10 per cent for these investments, the central and eastern European region increasingly drew institutional investors.
“The EBRD needs to attract investments from the private sector to be successful,” Ms Fossemalle stresses. On average only 20 per cent of a fund’s investment comes from the EBRD, while third-party investors provide the remaining 80 per cent. This means that there is an important and constant review by the financial markets of what the EBRD does in the sector.
“Our activities have a transformational impact; we don’t merely mobilise funds, but we also help advise fund managers, especially first-time teams, through our hands-on involvement in the fundraising process.”
Working closely with companies in their portfolio, fund managers can have a transformative impact by adding value through a range of activities over and above the provision of finance, Ms Fossemalle says. “For example, improved management can help companies generate better returns and grow their businesses. This, in turn, makes them more competitive, creates new employment opportunities and provides a boost to the wider economy.”
This was, for example, the case for Belarusian IT service provider EPAM, which began as a small venture in Minsk, Belarus. The company was supported by Russia Partners, with which the Bank has a longstanding business relationship. Russia Partners went on to sell part of their stake in EPAM through a successful initial public offering. The company is now listed on the New York Stock Exchange, having evolved from a small start-up to an international business that employs some 14,000 people globally.
In 2014 the EBRD established a €100-million programme, the Early-Stage Innovation Facility (ESIF), to boost the knowledge economy and provide financing for early-stage venture capital funds. Jordanian-based Silicon Badia was the first fund manager to receive EBRD support under the ESIF programme and has already supported young and innovative start-ups, such as 3D printing specialist Mixed Dimensions and specialised weather forecast provider Arabia Weather.
“A dynamic economy relies on innovative enterprises, which in turn require capital and advice in their initial stages,” says Ms Fossemalle. “This is a prime example of how the EBRD addresses the lack of early-stage venture capital financing and helps to develop an ecosystem of mentoring for such young, pioneering enterprises.”
“We have continuously generated new ideas to develop and grow the market – from kick-starting activities with the first private equity fund to be raised in a country or establishing the first sector-specific fund focused on our region (such as for clean energy) – and we will continue to do so in the future,” she adds.
The EBRD invests between €150 million and €250 million in private equity funds each year. In total more than 170 funds and 1,400 underlying investee companies have benefited from these transactions.