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  • Adnan Mededovic

Why Equity Finance share in total financial assets in the Western Balkans is very low?

Equity finance accounts around 5.8% of the total financial assets in EU, while in Western Balkans only 0.05%


Equity Finance, SMEs, EBRD, EIB, Private Equity.


Equity financing refers to the process of raising funds for a company by selling ownership interests in the company, usually in the form of stocks or shares. In exchange for providing the company with capital, equity investors receive a share of ownership and the right to participate in the company's profits, typically through dividends or capital appreciation.

Equity financing is different from debt financing, which involves borrowing money that must be repaid with interest. In contrast, equity financing does not involve debt or interest payments, but rather represents a long-term investment in the company's growth potential.

Equity financing can be raised through a variety of sources, including individual investors (such as angel investors or venture capitalists), institutional investors (such as private equity firms or pension funds), and public equity markets (such as stock exchanges).

Equity financing can be an important source of funding for companies, particularly for startups or high-growth companies that may not have sufficient cash flow to support their growth plans. However, equity financing can also dilute existing shareholders' ownership stakes and can come with additional reporting and governance requirements.




As of the end of 2021, the size of equity finance in the Western Balkans region, which includes Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia, was relatively small compared to other regions in Europe. According to a report by the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) in 2019, the Western Balkans region faces a significant shortage of equity finance. The report highlighted that equity finance accounted for only 0.05% of the total financial assets in the region, which is significantly lower than the EU average of 5.8%. The limited availability of equity finance is a challenge for the region's economic development, as it constrains the ability of businesses to access long-term financing for growth and innovation. However, there have been some recent initiatives to promote equity finance in the Western Balkans, such as the establishment of private equity and venture capital funds supported by international financial institutions and local governments.


The European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) are largest investors in Western Balkans. Both financial institutions have invested in equity funds in the Western Balkans to support the development of the private sector and promote economic growth in the region. For example, the EBRD has established a number of equity funds in the region, including the Western Balkans Fund and the South Eastern Europe Fund of Funds, which invest in local small and medium-sized enterprises (SMEs) and help to develop the local private equity and venture capital market.

Similarly, the EIB has also invested in equity funds in the region, such as the Mid Europa Fund III, which focuses on investments in the Western Balkans and other countries in the region. In addition, the EIB has provided financing to local banks and financial institutions to support SMEs and entrepreneurship in the region. These investments aim to provide much-needed long-term capital for businesses in the region, which can help to stimulate job creation, innovation, and economic growth.


The Western Balkans Fund and the Southeast Europe Fund of Funds were both established by the European Bank for Reconstruction and Development (EBRD) to provide equity financing to small and medium-sized enterprises (SMEs) in the Western Balkans and Southeast Europe regions.


The Western Balkans Fund was launched in 2016 with an initial capital commitment of €145 million, which was provided by the EBRD, the European Union, and other international financial institutions. The Fund focuses on making equity and quasi-equity investments in SMEs across the region, with a particular focus on Serbia, Montenegro, and North Macedonia. The size of the Western Balkans Fund may have increased since its launch due to additional commitments or follow-on investments.


The Southeast Europe Fund of Funds was launched in 2010 with an initial capital commitment of €80 million, which was also provided by the EBRD, the European Union, and other international financial institutions. The Fund aims to support the development of local private equity and venture capital markets in Southeast Europe, including Albania, Bosnia and Herzegovina, Croatia, Kosovo, Montenegro, North Macedonia, and Serbia. The Fund invests in local private equity and venture capital funds that focus on SMEs in the region. As of 2021, the Southeast Europe Fund of Funds has committed over €800 million in investments to more than 80 local private equity and venture capital funds in the region.


Equity finance plays an important role in the European Union's economy, providing long-term financing to companies, especially small and medium-sized enterprises (SMEs), to support growth, innovation, and job creation. According to a report by the European Investment Bank (EIB) and the European Commission in 2020, equity finance contributed significantly to the EU's economic growth and job creation over the last decade.


 

Equity finance helped to support economic growth in the EU, with the report estimating that every €1 of equity invested in SMEs generated €4.40 of additional turnover and €1.50 of additional value added. Equity finance also supported job creation in the EU, with the report estimating that every €1 million of equity invested in SMEs created an average of 22 jobs over a five-year period.

 

Equity finance played a crucial role in supporting innovation in the EU, with the report estimating that SMEs that received equity financing were more likely to introduce new products and services, adopt new technologies, and expand into new markets. SMEs are a critical part of the EU's economy, accounting for 99% of all businesses in the EU. The report found that equity finance was particularly important for SMEs, as it provided them with long-term financing that was less dependent on collateral and allowed them to pursue growth and innovation strategies.


Overall, equity finance has had a significant positive impact on the EU's economy, supporting economic growth, job creation, and innovation, particularly for SMEs. Equity financing is an important source of financing for EU companies, particularly for small and medium-sized enterprises (SMEs). According to the European Commission, equity financing accounted for around 16% of all financing for EU businesses in 2018, with SMEs being the largest recipients.


The EU has a well-developed equity market, with a number of exchanges across the region, including the London Stock Exchange, Euronext, Deutsche Börse, and Borsa Italiana. In 2019, the total market capitalization of the EU's stock markets was around €15.2 trillion.


The EU has a number of initiatives in place to support equity financing for SMEs, including the European Fund for Strategic Investments (EFSI) and the European Investment Fund (EIF). The EFSI aims to mobilize private investment in strategic sectors across the EU, while the EIF provides financing and guarantees to SMEs and small mid-caps.


The COVID-19 pandemic had a significant impact on equity financing in the EU, with many companies facing reduced access to funding as investors became more risk-averse. However, the EU responded with a number of measures to support businesses, including the €100 billion SURE program and the €750 billion Recovery and Resilience Facility.


The EU is also committed to promoting sustainable finance, with a focus on environmental, social, and governance (ESG) factors. In 2020, the EU launched its Sustainable Finance Strategy, which aims to mobilize private capital towards sustainable investments and to support the transition to a low-carbon economy.


Overall, equity financing is a significant source of funding for EU companies, particularly SMEs, and the EU has a number of initiatives in place to support this form of financing. The COVID-19 pandemic had a significant impact on equity financing in the region, but the EU responded with measures to support businesses, and there is a growing focus on sustainable finance and ESG factors.


 

Companies looking to attract equity financing need to demonstrate that they have a strong business model, a clear growth strategy, and the potential to generate attractive returns for investors.


Here are some of the key factors that companies should focus on to attract equity financing:

  • Scalability: Companies seeking equity financing should have a scalable business model that can grow rapidly in size and profitability. Investors are typically looking for opportunities to generate high returns on their investments, and scalable companies have the potential to deliver these returns.

  • Strong leadership: Investors are typically looking for companies with strong leadership teams that have a track record of success and a clear vision for the future. Companies seeking equity financing should demonstrate that they have a talented and experienced management team in place.

  • Competitive advantage: Companies seeking equity financing should have a clear competitive advantage that sets them apart from their peers. This could be in the form of proprietary technology, a unique business model, or a strong brand.

  • Clear growth strategy: Companies seeking equity financing should have a clear growth strategy that outlines how they plan to use the funds to grow the business. Investors want to see that the company has a clear plan for achieving its growth objectives and that the plan is realistic and achievable.

  • Financial performance: Companies seeking equity financing should have a strong financial track record and a clear plan for achieving profitability. Investors want to see that the company has a solid financial foundation and that it is capable of generating attractive returns over the long term.

By focusing on these factors, companies can increase their chances of attracting equity financing and securing the funding they need to grow and succeed.

 

Strategy consultants can support SMEs in accessing equity finance in a number of ways.


Overall, strategy consultants can play a valuable role in supporting SMEs in accessing equity finance by providing market insights, investor targeting and preparation, due diligence and deal structuring, and post-deal support. This can help SMEs to secure the funding they need to grow and succeed, while also minimizing the risks associated with equity fundraising.

  • Market research and analysis: Strategy consultants can conduct market research and analysis to help SMEs identify potential sources of equity finance. They can also provide insights into market trends, investor preferences, and valuation metrics, which can help SMEs prepare for equity fundraising.

  • Investor targeting and preparation: Strategy consultants can help SMEs prepare for equity fundraising by developing investor targeting strategies and creating investor materials, such as pitch decks and financial models. They can also advise on how to best position the company and the opportunity to potential investors.

  • Due diligence and deal structuring: Strategy consultants can support SMEs through the due diligence process, helping to prepare data rooms and responding to investor requests for information. They can also advise on deal structuring and negotiation, ensuring that the terms of the deal are favourable to the SME.

  • Post-deal support: Strategy consultants can provide ongoing support to SMEs after they have secured equity finance. This can include helping to develop and implement growth strategies, advising on financial management and reporting, and supporting the SME through subsequent rounds of fundraising.

Equity financing significantly contributes to revenue generation and business profitability.


Growth of equity finance in total financial assets in Western Balkans represents strong platform for faster overall economic development. SMEs through this financial product can enhance their credit rating, manage their faster growth, introduce new technologies, and can benefit in multidimensional ways. However, SME has to be prepared for potential equity investor and ready to respond to investor's requirements and therefore should enhance their corporate governance practices and overall organizational development.


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