European development bank raises $391m through debut equity fund

21 September 2016, Public Finance International

The European Bank for Reconstruction and Development has raised €350m ($391m) in the first round of fundraising for its debut Equity Participation Fund.

The fund aims to attract long term institutional capital into the private sector of those countries where the EBRD works. It allows large institutional investors to take 20-30% of the interest in all of the EBRD’s eligible investments above €10m ($11m) during a five-year period.

The EBRD said this mobilises private sector investments across central and eastern Europe, Central Asia, the southern and eastern Mediterranean and Turkey, fostering market-orientated economies and supporting business.

“The EPF will enable leading institutional investors to join us in seeking equity opportunities which boost growth and promote change in our countries of operation,” said Suma Chakrabarti, EBRD president.

The two main investors in the fund currently are China’s State Administration of Foreign Exchange and the State Oil Fund of Azerbaijan.

Chakrabarti added that the fund will provide EBRD with additional equity investment capacity by mobilising investors to invest alongside the bank through a “ground-breaking structure”.

The fund uses derivatives and equity return swaps to acquire indirect economic interest in portfolio companies, while the bank remains the named shareholder. This enables it to fully use the EBRD’s governance, expertise and resources, as well as reputation and institutional risk mitigation.

The EBRD will retain 70-80% of each investment, which it said will guarantee an alignment of interest between itself and the fund. It is hoped this will, in turn, strengthen the sustainability of long term capital flows to EBRD countries.

Equity investments are a strategic priority for the EBRD as they enable the bank to combine investments with engagement in corporate governance reform, the bank said.

Hassan El-Khatib, EBRD managing director, explained that there is significant demand for the bank to support private sector growth, due to the underdeveloped nature of capital markets in EBRD countries and reduced capital flows since the financial crisis.

He said the fund will allow the EBRD to play an important role in growing equity markets in the region and targeting market returns.

Meanwhile, analysis by the watchdog CEE Bankwatch has argued that one in four Euros lent by the bank in 2015 went to authoritarian countries.

It used ratings from the Economist Intelligence Unit to determine which countries were authoritarian. These included Belarus, Turkey, Russia and Egypt.

In some of the countries identified, CEE Bankwatch said the bank restricts investments, including Turkmenistan and Uzbekistan. However, in others it does not. It also criticised the bank for failing to impose conditions that would garner improvements in democracy and human rights.

In a blog on CEE Bankwatch’s website, Fidanka Bacheva-McGrath, EBRD policy officer, said the bank has chosen to go against its own mandate – to promote market economies in countries committed to multiparty democracy and pluralism – because otherwise it would have to shrink its business considerably.