A new “private equity” fund to come soon – A Chance for companies in Serbia to acquire fresh capital and improve corporate management

Companies from Serbia, Bosnia and Herzegovina, Macedonia and Albania which are local partners of IFC for the development of corporate management have decided to join forces and found a regional “private equity” fund. This fund will be used to invest both in companies going through financial troubles, which nevertheless have good growth potential, and in family-owned and other small and medium enterprises whose annual income is EUR 1-10 mil.

- The main feature of this “equity fund” is the focus on establishing good corporate management – says Vladimir Pavlovic, manager of consulting company WM Equity Partners, for eKapija. The company has been a local partner for the development of corporate management of IFC in Serbia for three years.

There are several funds in the region which have been established in order to provide investors with big profits. The new fund is the result of the wish to target those investors who desire lower risks and lower required profits, which can be done through improving corporate management in each company they might invest in.

- This is why the funds we might establish in this region won’t invest money in companies until all their regulatory boards have been structured in a satisfactory manner and the issues of internal control, transparency of operations, protection of minority shareholders and everything needed for the investments to pay off has been addressed – says Pavlovic.

Interviewee of eKapija explains that, on one hand, there are many companies who want to receive loans, and on the other hand, banks whose liquidity has never been stronger. The big gap between these two groups is the result of the banks’ unwillingness to finance companies with high risk factors. Additional capitalization of these companies and improved corporate management would surely reduce this imbalance in the opinion of the manager of WM Equity Partners.

(Vladimir Pavlovic) - Whenever you ask a successful owner of an enterprise in Serbia if they wish to secure the capital for further development of their operations, they say “of course”. But when the time comes for the evaluation of the enterprise, they usually estimate their company to be much more valuable than the market does at the stock exchange – says Pavlovic.

Companies in Serbia, however, are becoming increasingly aware that they can’t rely on loans and banks solely, but that they also need someone to receive additional capital from.

Sectors

Pavlovic says that our region is rather small, which is why it’s impractical to limit the investments in individual sectors. On the other hand, they are sure that they wouldn’t like to invest in any industry which “has a big player at the end of the chain”. This, for example, is the case with commercial chains, which are financially superior to the suppliers which are forced to do business with them, often with operational losses.

“Private equity” funds usually prefer to be majority partners, but the newly founded one, according to our interviewee, won’t be limited that way, but might also be a minority owner of a company.

- Our goal is for the size of the fund, in the initial stage, to not go below EUR 10-20 mil. Since we want to invest in at least 10 to 20 companies, these would mostly be individual investments of between 200,000 and a million euros. We will focus on small and medium companies, which make EUR 1-10 mil of income – said manager and partner of WM Equity Partners.

Share capital of the fund

When it comes to testing this concept, Pavlovic mentions that closed investment fund Fima Activist is operating in a similar manner. Following the drastic fall in interest rate on citizens’ savings, there is a large number of clients who wish to use a part of the money from the banking sector to invest in one such financial product.

As this concerns the region, it is expected that all IFC’s partners in the project of improving corporate management will contribute with their already established pool of clients.

- Several international financial institutions have, also, expressed their desire of participating in such a fund, but under the condition that we first select companies with good prospects which want to improve their corporate management – explains Pavlovic.

Our web portal’s interviewee believes that all the partner countries will select their candidates by the end of the year, and that this is when the fundraising will start.

The most common mistakes in corporate management

Considering the experience that his company has in advising companies, eKapija’s interviewee says that one of the most common mistakes that Serbian companies make in the field of corporate management is that it’s hard for the majority owner not to try to make all the decision. In this case, supervisory boards exist only formally, if at all. When only one person makes decisions, it’s nearly inevitable that strategic mistakes will be made regarding whether to keep the current scope of activities or expand the production through “favorable” acquisitions. Then there are those who wish to own luxury immovable property, to have the company’s headquarters set in “marble and glass”, which is often accompanied by unsustainable borrowing.

Company owners usually think nothing of spending a lot of money on luxury cars, but become frugal when more money is needed to draw adequate human resources in the sectors of finances, accounting, internal control, adequate ERP system.

- If there is no adequate Supervisory Board which strategically coordinates the company’s development, nor the internal control to keep an eye on operational risks, it’s easy to end up with NPLs – warns Pavlovic.

Jelena Djelic

WM Equity Partners doo Beograd

Fima See Activist Beograd

WM Equity Partners

Vladimir Pavlovic

regional investment fund

IFC

corporate management

Fima Activist