Building blocks

By Kathryn Gaw and Lisa Barrington

21 Nov 2011

The Arab Spring has really taken its toll on North Africa’s investment prospects, with institutional money largely choosing to stay away. However, the European Bank for Reconstruction and Development (EBRD) is determined to develop the potential of a post-crisis North Africa and its equities division is ready to make allocations of up to €2.5bn ($3.5bn) per year to the region’s fund managers in an effort to fire up its waning financial sector.

Following its success in 29 other countries, the EBRD is now preparing to start a multi-billion euro investment programme in the Southern and Eastern Mediterranean region, with fund managers in Tunisia, Morocco, Egypt and Jordan first in line to benefit. “After the Arab Spring, the international community got together and thought OK, so this is what is needed: more of a private sector oriented approach,” says Anne Fossemalle, director of equity funds at the EBRD. “I think there are already good things happening in these countries and if we can play a role in that then that’s fantastic.” A unique international financial institution (IFI), the EBRD aims to rebuild economies in volatile environments, offering particular assistance to economies ravaged by the global financial crisis. It began to assess North Africa’s investment prospects in February this year, when regional unrest triggered an ongoing period of market instability.

“At the moment, we are drawing up our strategy and we haven’t got a strategy precisely for each individual sector yet,” says Jonathan Charles, director of communications at the EBRD. ”But we have teams going onto the ground in all these countries at the moment in order to help with the drawing up of that strategy.” The upcoming investment round was confirmed in July, and the board of governors is due to confirm the final details by 2 October. After this point, they will have 60 days to agree the resolution, and it is hoped that the company will have begun its first investment activities by the end of the year. “Two of my colleagues are going to Tunisia in mid-September to meet fund managers,” says Fossemalle. “I suspect that we will organise similar trips in Egypt, Morocco and Jordan before the end of the year.” However, initial enquiries have begun, and Fossemalle has already met with some of the region’s fund managers, including TunInvest, Swicorp, ECP and Abraaj Capital. “We have run into several of them already in different conferences,” she says. “We have not had formal meetings in their offices and getting down to the details, but we’ve met a fair number of them already.”

Manager selection process

The EBRD has had plenty of experience of working with fund managers in frontier and emerging markets. It has been investing in equity funds for 20 years and is today the largest limited partner investing into equity funds in Central and Eastern Europe. As such, it knows exactly what it is looking for from its chosen managers. “The main thing is the team,” says Fossemalle. “And alignment of interest and a structure that makes sense.” She adds that track record is important, as is the chemistry of the team. “What puts us off? A poor track record,” she says. “People who obviously don’t get on and you can see that the chemistry between the people isn’t going to work for the next 10-15 years. “The integrity and reputation of who we are investing with is hugely important,” adds Fossemalle. “If we are investing with local money we want to make sure we invest with clean and reputable local money. High integrity and reputation are top of the agenda.” The EBRD is biased towards local fund managers with on-the-ground expertise, and first-time funds are not discounted.

“Our due diligence process is extremely thorough,” says Fossemalle. “We try to understand the fund managers’ track record as well as we can. If it’s a first-time fund, we look at the track record of individual members: if they weren’t in a fund before, we look at whatever investment track record they may have had in different positions.” The firm has no typical investment amount when it comes to new fund managers. It will normally take a stake of 15-25% in its funds, although this figure is flexible. “In the last couple of years, we found ourselves in the position where, to keep good fund managers going, we have had to take a higher portion of the funds’ total committed capital,” says Fossemalle. “We want these funds to survive, so we are happy to take more on appropriate commercial terms if necessary.” Having said this, the aim of these investments is to enable the fund manager to attract private capital rather than rely on money from IFIs, so the smaller the investment the better, according to Fossemalle. Once commercial investors start showing an interest in the fund, the EBRD will gradually exit its positions.

Stimulating growth

The EBRD’s investment time horizons vary from fund to fund, and the vast majority of the funds it invests in are generalist, although over the past few years it has been looking at more sector funds. Investments are not intended to be permanent, but a conduit for further growth for fund managers which would otherwise struggle to raise additional capital. “The target from the start was to create an industry operating in accordance with international best standards and to channel value additive equity into the countries, particularly into small and medium-sized enterprises, and also to attract institutional investors to this region,” says Fossemalle. “The developmental goal is not to provide subsidised financing. The developmental goal is, among other things, to attract institutional investors and to demonstrate that it is possible to make attractive risk adjusted returns in this asset class by investing into funds in this region.” Although a preference towards private equity is stated, all equity-driven fund managers are invited to make contact with the investor. “We are hugely excited to meet all of them very soon and we hope that we’re going to be learning a lot from them since we don’t know their region,” says Fossemalle. “We really have an open door policy.

We are very open and people should feel free to call or email any time. If people travel to London, come and see us, we are excited about learning about the private equity industry in this region.”

For the time being, the firm is concentrating on building its understanding of its new areas of investment ahead of the first allocations. “We need to understand these countries, which we don’t right now,” says Fossemalle. “I think everyone at the EBRD is well aware of the fact that these are different countries. It is a region but it’s also a group of countries that are each quite different and have their own history and their own way of working, so I think we need to go there completely with open eyes and a willingness to learn and a willingness to meet people and understand how they work.”There will surely be no shortage of fund managers keen to welcome the investor into the region and win a rare mandate for growth during a period of prolonged distress. Equities managers take note.


What is the EBRD?

Established in 1991, the European Bank for Reconstruction and Development (EBRD) now claims to be the largest financial investor in its region of operations. It is operational in 29 countries in Eastern Europe and Central Asia and its reach will soon be extended to cover the Southern and Eastern Mediterranean region. It is owned by 61 countries, the European Union and the European Investment Bank. The aim of the company is to support the development of market economies and democracies, particularly those impacted by the global financial crises and other such factors. Its focus is on rebuilding the financial sectors of struggling economies through investing in private enterprises.

Since its establishment, the EBRD has worked on more than 3,100 projects, with a total project value of €178.8bn ($251.7bn). It has an overall capital of approximately €30bn and owns 34 regional offices across the region, employing more than 1,500 members of staff. In 2010 the Bank signed 386 projects worth €9.1bn. “This year so far we have signed five commitments,” says Anne Fossemalle, director of equity funds at the EBRD. “For instance, we have signed a transaction in the first mezzanine fund in Russia called the Volga River Growth Fund.” EBRD also supported the first private equity fund in Mongolia, the Mongolia Opportunity Fund. In addition to the imminent Southern and Eastern Mediterranean seeding round, the EBRD is currently looking at some funds in Russia, technology funds and a cleantech fund in Turkey.