The European Bank for Reconstruction and Development (EBRD, with its 66 shareholders) pursues, among its various tasks, a critical mission: supporting micro, small and medium-sized enterprise (MSME) development, particularly in environments marked by liquidity constraints and market distortions. This fundamental goal of the EBRD, in conjunction with the Government of Italy, has also been pursued through the Local Enterprise Fund (LEF), and has been particularly successful in areas characterized by high risk and low profitability: the Western Balkans, Croatia, Turkey, Romania, Bulgaria and the southern and eastern Mediterranean (SEMED).
LEF is a regional framework providing equity, quasi-equity and tailor-made debt financing solutions to support MSME growth. Founded in 2006, LEF specifically addresses limitations in long-term access to finance (i.e. the funding gap) faced by local MSMEs, across sectors, aiming to restructure, expand or acquire existing private businesses. MSMEs in the regions where the LEF operates are characteristically smaller in size and usually in the formative stages of development. LEF was therefore designed with a specific emphasis on enhancing competitiveness and product quality, and improving corporate governance standards.
To achieve these objectives, LEF employs an intensive business model. Following extensive project development, the EBRD takes an equity stake of 20-35% of a company’s capital or provides a loan conditional on an agreed timeframe and terms. After the release of funds, the EBRD engages in a particularly intense monitoring and post-investment assistance activity with the investee company. Often, if agreed by both parties, it also appoints an expert or a banker to the investee’s Board of Directors or hires technical consultants to help in the project implementation and provide further support and value creation. The EBRD relies on its teams of dedicated bankers in its resident offices for this project execution and support activity. By virtue of this process, the investee company expands its capital base and enhances its business standards and corporate practices, becoming more “bankable”. After 5-6 years, the EBRD is usually able to exit the company.
LEF represents a unique partnership between the EBRD and the Italian government; the facility boasts a total capital endowment of €400m, combining €380m worth of EBRD resources with €20m worth of bilateral donor support from Rome. It also benefits from Technical Cooperation (TC) funds from Italy, Norway, the Bank’s Shareholder Special Fund and SEMED Multi-donor fund. These funds, totalling €13m are essential for the facility’s affordability and success by providing pre/post investment technical assistance, project development and due diligence support. With this strong backing from Italy, LEF epitomises effective international cooperation.
Indeed, since its creation, LEF has supported 56 local enterprises, through €245m worth of investments in 104 transactions. It has also represented an essential support to MSMEs through the challenging global financial and economic climate of the last few years. After the 2008 financial crisis, compounded by the on-going sovereign debt crisis, the funding gap experienced by MSMEs was exacerbated further: deleveraging, particularly in the Western Balkans, increasingly disincentivized commercial banks from lending to local businesses, engendering an acute demand for liquidity. Unsurprisingly, LEF’s investment pace accelerated in 2008-2009 and again in 2010-2012.
Unlike other initiatives aimed as MSME support, LEF is unique in terms of structure and geographical scope. Structurally, the facility focuses on smaller MSME projects (on average between €1-4m, but investments can reach up to €10m) relative to the average EBRD investment, honing in on leader companies across sectors. This focus ensures high demonstration effect: improved corporate governance, financial reporting and increased transparency transform leaders into role models, raising their profiles among possible new investors and reinforcing the project’s visibility. For instance, through a €5m investment, the EBRD helped Forma Ideale, a Serbian furniture company to consolidate its business, transforming it from a high-potential business to a frontrunner in the furniture industry, with an extensive export market and 1,100 employees. Furthermore, this demonstration effect is coupled with a strong transition impact. By restructuring MSMEs through LEF, not only their management standards improve, but they also produce significant backward linkages, from knowledge transfers to market expansion.
In terms of geographical scope, the LEF’s successful model in the Western Balkans has been expanded to Turkey and Croatia in 2009, Romania and Bulgaria in 2010 and to the SEMED region in 2012, adapting to the needs of local MSMEs in each context. Concerning the latter, the SEMED expansion is currently supported by €4m of TC funds directed towards project implementation and capacity building for full-fledged LEF operationalization. A robust LEF pipeline in the new region is materialising, with future projects across Egypt, Morocco, Tunisia and Jordan, totalling €40m in a broad range of sectors. Notably, the first SEMED project under the LEF umbrella was approved in December 2012: a €2.5m loan to a leading producer of edible oil and soap in Morocco. Even with expansion, LEF’s roots in the Western Balkans remain stronger than ever, particularly in the current global downturn. In 2012 alone, €46mwas invested into the Western Balkans via 19 LEF projects.
LEF has also evolved towards multilateral engagement, namely through the newly established Western Balkans Enterprise Development and Innovation Facility (EDIF). EDIF is a €145m initiative led by the EU, European Investment Bank and EBRD to coordinate IFI support for innovative and high-growth MSMEs in the Western Balkans. Beginning in 2013, LEF will become an integral part of the EBRD’s leadership in the EDIF through the EDIF’s Enterprise Expansion Fund (ENEF) which aims to expand equity investments in high-potential MSMEs. The EBRD will use LEF to co-finance projects with ENEF and will also act as a dedicated Investment Advisor via its LEF management team. This feed-in will also help target higher policy objectives, for instance, to create the optimal conditions for private equity and venture capital to thrive in the region, through enhanced policy dialogue and structural reforms.
Since its foundation, LEF has proven to be an effective model for MSME growth – a cornerstone of private sector development in particular, and economic growth in general. Through its carefully executed projects, LEF has consistently achieved strong demonstration effects and transition impacts whilst remaining additional to alternative financing sources. With an initial focus on the Western Balkans, its success and profitability have engendered regional diversification and cross-platform cooperation, maximising the impact that LEF (and the EBRD) can have across its operating regions. LEF, a symbol of international collaboration, will therefore remain an essential instrument in the EBRD’s development approach in the Western Balkans and beyond.