EBRD: a finance partner to Small and Medium Enterprises · Direct Financing for Small and Medium Enterprises – what can EBRD do for you 27 October, ... Bulgaria, Croatia, FYR Macedonia,

EBRD: a finance partner to Small and Medium EnterprisesOctober 2014

Contents

EBRD at a glance

The EBRD’s Small Business Initiative – an integrated approach to SME finance and development

Direct Financing for Small and Medium Enterprises – what can EBRD do for you

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What is the EBRD

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A multilateral development bank, established to promote transition to market economies

Operating in 35 countries from central Europe to central Asia

Owned by 65* countries and two inter-governmental institutions

Having a Capital base of €30 billion

Triple-A rated by the major rating agencies

In 2011, the Bank expanded its operations to Egypt, Morocco, Tunisia and Jordan (Southern and Eastern Mediterranean – SEMED region)

In 2014, the EBRD welcomed Cyprus and Libya as a recipient country and member respectively.

*Libya is yet to become a fully ratified member of the EBRD

EBRD at a glance Small Business Initiative Financing opportunities

The EBRD’s objectives

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Objectives:

• To promote transition to market economies by investing mainly in the private sector

• To mobilise significant foreign direct investment

• To support privatisation, restructuring and better municipal services to improve people’s lives

• To encourage environmentally sound and sustainable development


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ABI (reported rate)Number of operations (#)

EBRD’s objectives achieved through financing the private sector

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EBRD invested nearly €90 billion in more than 4,000 projects since 1991

Results in 2013:

€8.6 billion invested in 392 projects

Private sector accounted for 79% share

Debt 81%, Equity 14% & Guarantee 5%

Note: Unaudited as at 31 July 2014


Where we invest

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EBRD: Shareholding Structure

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The EBRD has a triple-A rating from all three main rating agencies (S&P, Moody’s and Fitch)

Shareholding Structure

As at 13th July 2012(1) Includes European Community

and European Investment Bank (EIB) each at 3%. Among other EU countries: France, Germany, Italy, and the UK each holds 8.6%

(2) Russia at 4%

EU 27 Countries63% (1)

EBRD region excluding EU

7% (2)

Others11%

USA10%

Japan9%


Sector portfolio distribution

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Note: Unaudited as at 31 December 2013

Financial Institutions30%

Power and Energy16%

Transport14%Agribusiness

11%

Manufacturing and Services

11%

Natural Resources7%

Municipal & Env Inf7%

Equity Funds4%

Investments of the EBRD by sector


Geographic portfolio distribution

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Note: Unaudited as at 31 December 2013

Russia24%

South-eastern Europe

24%

Eastern Europe & Caucasus

19%

Central Europe & Baltics16%

Turkey8%

Central Asia7%

Southern & Eastern Mediterranean

2%

Investments of the EBRD by country / region


Key strengths of the EBRD

Operational

Extensive knowledge of local economy, business environment and practices, local presence

Engaged minority partner for business

A business partner who shares risks, including political

Catalyst to access additional equity, debt and trade finance

Provides finance to both private and public sector clients

High standards for corporate governance and compliance

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Institutional

Strong, internationally recognisedfinancial partner with long-term perspective

Close working relationships with governments and shareholders

Political leverage due to EBRD’s unique mandate and shareholder structure

Preferred Creditor Status

Triple-A credit rating

Close cooperation with market sources of capital to fill “market gaps”


Contents

EBRD at a glance


Direct Financing for Small and Medium Enterprises – what can EBRD do for you

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What is the Small Business Initiative?

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A strategic initiative of the EBRD – formally set up in 2014

Aimed at providing comprehensive support to small businesses (SME andmid caps), through:

Access to finance – directly or through intermediaries

Consultancy support – for implementation of various measuressupporting the corporate governance, acquisition of know how,investment in equipment, etc.

Policy dialogue with the local authorities – to improve the conditions fordoing business and creating a more favourable investment environment

Building upon the significant experience of the Bank in this sector


The 5 Pillars of the SBI


PILLAR 1Indirect

financing

PILLAR 2Co-financing/

Risk-sharing

PILLAR 3Direct

financing

PILLAR 4Business

Advisory

PILLAR 5Policy

Dialogue

Financing of financial

intermediaries for on-lending

to MSMEs; investments in equity funds with focus on

SMEs

MSME credit lines;

Energy Efficiency credit

lines

Trade Facilitation

Equity Funds

Co-financing of or risk-sharing on SMEs with local partners, whether banks,

equity funds (for corporate)

MCFF; VCIP; various ad hoc

structures

Direct, tailor-made debt and

equity financing of SMEs with strong post-investment

value creation potential

Direct investments

Up to EUR 10 million

Various business advisory

activities in support of

MSMEs

SBS

Policy dialogue initiatives aimed

at improving SMEs’ business

environment and access to

finance

LTT; RO/OCE/VP

Policy activities


Contents

EBRD at a glance


Direct Financing for Small and Medium Enterprises – what can EBRD do for SMEs

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Eligibility for financing


Geographic expansion of the Bank’s region of operations

A delegated facility for equity and quasi-equity investments, as well as tailor-made debt financing

Established jointly by the EBRD and the Italian Government in 2006

For investments in the Balkans (Albania, Bosnia & Herzegovina, Bulgaria, Croatia, FYR Macedonia, Kosovo, Montenegro, Romania, Serbia), Turkey, and the SEMED region (Egypt, Jordan, Morocco, Tunisia)

To meet the growing financing needs of dynamic local SMEs, not sufficiently supported by other financing sources

Eligible investments: expansion, restructuring or acquisitions of existing private businesses

Eligible sectors: a wide range of sectors, with a few exceptions (weapons, spirits, tobacco, gambling, etc.). All investments must be in line with sound environmental principles

Size of investments: individual investments range between EUR 1 million and EUR 10 million (larger amounts also available)

Time horizon: a period of 3 to 10 years (up to 15 years for project finance deals)

Target Stake (for equity): in the range of 20 to 35% of the capital of the company


What are the key objectives?



Enhancing competitiveness and product quality: strengthening ability to compete and improving the quality of goods and services

Innovation: introducing new, replicable products and technologies to achieve better use of labour, higher productivity and efficiency improvements

Setting standards for corporate governance: encouraging investee companies to apply higher standards

Improving energy efficiency and resource utilisation


Available Financing Instruments

Equity and quasi-equity

Common shares - minority position only (up to 35%)

Preferred shares

Mezzanine loans (with or without warrants)

Subordinated loans

Convertible loans

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Loans

Senior loans, including on project finance basis

Long-term (up to 10 years for corporate loans and up to 15 years for project finance)

Floating or fixed interest rates

Choice of currencies - €, US$, LCY (in some cases)

Market-based pricing

A full range of instruments, tailored to the needs of the company


Equity vs. Debt transactions







In an equity deal EBRD contributes to the share capital of the company and becomes a partner of the owners. The consequences are as follows:

The owners of the Company and EBRD agree to develop the business together and bring the company to the next level (a growing, well organised and competitive company);

They share proportionally the benefits (profits, dividends) of the enlarged company, but also the associated risks;

The company does not need to pay any interest or provide collateral for the additional capital received from the EBRD, but needs to facilitate its exit;

In a debt deal the company receives a loan from the EBRD and is responsible for its repayment out of its revenues (or the agreed collateral).


Investment Process (1)


Preliminary Discussions Screening Due Diligence

and Structuring

• Initial meetings and site visits.

• Discussions on mutual interest for cooperation.

• Entrepreneurs provide information about their company and the project.

• EBRD Bankers prepare a Concept Review Memorandum for approval by the Investment

Committee.

• EBRD and outside consultants conduct technical, environmental, legal and financial due diligence on the company and the project.

• Bankers and the entrepreneurs define and agree on the transaction structure and valuation/ pricing.

• Final Decision of the Investment Committee

Mandate Letter Term Sheet

Pre-investment phase


Investment Process (2)


• Legal Agreements are drafted and executed.

• Subscription and disbursement take place.

• EBRD appoints a member of the Board of Directors (if agreed).

• EBRD could hire (if needed) consultants to assist the company in its project implementation.

• Company provides EBRD with regular updates on financial performance and project

progress.

• EBRD sells its stake in the Company in one of the following ways:

- trade sale;

- sale back to the entrepreneur;

- IPO;

- secondary buy-out;

- re-leveraging of the Company.

ExitInvestment Management and Monitoring

• Decision of the Investment Committee to exit its investment in the company (the timing is usually coordinated with the entrepreneur)

Post-investment phase (from 3 to 10 years)


Valuation Methodology (for equity)







Valuation of the investee company depends on its sector and stage of development.

Usually, the valuation is based on (at least) one of the following three methodologies:

1. Valuation multiples for a sample of comparable companies (usually EV/EBITDA and EV/Sales multiples)

2. Discounted Cash Flow analysis based on projections for the future revenues, costs and profits of the company

3. Project Cost – for start-up companies with significant uncertainty about revenues and profits

Company value is calculated on the basis of the latest available financial statements, with possible (ex-post) adjustments in case of material differences between actual performance and projections.


Value Creation post-investment







EBRD has strong commitment to improving the corporate governance of the companies it invests in and increasing their value. To do so, it:

Proposes an experienced industry expert/ banker to sit on the Board of Directors of the company (if agreed) in order to advise on strategic issues Hires suitable technical consultants (if necessary) to help the company in the

implementation of the project Encourages management to adopt rules and procedures for good corporate

governance and increased transparency (IFRS accounting, etc.) Encourages management to commit to a value creation plan to achieve

capital appreciation over timeAs a minority shareholder and a financial investor, EBRD does not interfere with the day-to-day management of the operations of the companies it invests in. Yet, it looks for shared corporate governance when it comes to strategic and major financial issues


Exit (1)







When the company reaches maturity, EBRD will sell its stake, as its role in helping the company would have been achieved.

The exit method as well as the time of the exit should be agreed in advance with the majority owners.

Exit can be done in one of the following two ways:

Sale to a third party: commercial sale (to a strategic investor), IPO, secondary buy-out

Sale back to the original owner(s): through put and call option agreement or re-leveraging of the company


Exit (2)







When the exit is done through a sale to a third party:

the other owners can decide to sell their stakes together with the EBRD (to maximize proceeds), but they are not required to do so and can retain control of the company

the valuation is determined after negotiations with the potential suitors

When the exit is done through a sale back to the original owners:

the valuation is usually based on the same methodology as at entry. In some instances also the same multiples’ values (as at entry) can be applied


Contacts

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For all further enquiries, please contact:

Nikolay AngelovPrincipal BankerSME Finance and DevelopmentTel: + 44 20 7338 7060Email: [email protected]

Pablo Gallego CuervoResearch AnalystBusiness DevelopmentTel: + 44 20 7338 6361Email: [email protected]

EBRD, One Exchange SquareLondon, EC2A 2JN United Kingdomwww.ebrd.com

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EBRD: a finance partner to Small and Medium Enterprises · Direct Financing for Small and Medium Enterprises – what can EBRD do for you 27 October, ... Bulgaria, Croatia, FYR Macedonia,