Private Sector Investment in the Balkans


This conference session is based on the following background information:

  • Private Sector Investment Depends on Access to Capital
  • Sources of Capital for Private Sector Investment
  • Balkan Sources of Capital
  • Interest Rate Outlook
  • Factors That Influence Private Sector Investment
  • Links to Balkan Country National Investment Information

Private Sector Investment Depends on Access to Capital

Private sector investment depends heavily on access to capital which, for a variety of reasons and despite the recent period of low interest rates, has often been difficult for businesses to access in many parts of the world, and this has limited the pace of economic expansion. These reasons may include a lack of commercial feasibility or unacceptable labour standards and conditions of the capital-seeking enterprise; the regulatory or business environment of the host country (e.g. according to the International Finance Corporation Western Balkans Regional Manager in November 2015, Serbia assesses 41 types of taxes requiring an average of 270 hours per year of administrative time by a business enterprise to calculate and record); a heightened degree of scrutiny of enterprises seeking capital by financial institutions and other investors; and/or available alternative investments of capital in an array of emerging economies or developed economies that are recovering from the recent global financial crisis.

The low interest rates set in the wider Balkan region during the recent recessionary and slow growth periods were designed in part to encourage commercial banks to borrow money from the central banks at very low interest rates and allocate these funds for the banks’ conventional lending practices to their clients at correspondingly low rates of interest in order to stimulate private investment in their communities and thereby contribute to economic recovery and growth. Critics allege that some banks did not strictly follow this path but, instead, invested funds elsewhere rather than with their customary targeted clientele in order to achieve more favourable or secure returns for the banks’ own investment portfolios. The critics argue that this resulted in a credit market that was tighter than necessary for borrowers which, in turn, impacted the rate of economic recovery in many countries. It must be noted, however, that the problematic access to capital from conventional sources in the region and the difficulty accessing commercial bank credit in particular – along with the heightened scrutiny imposed by banks on loan applications – are attributable to a number of factors including the high rate of regional non-performing loans which necessitated the imposition of a higher level of scrutiny by financial institutions.

Regardless of the underlying reasons for the difficulty experienced by many entrepreneurs in accessing capital from conventional sources, the effect of this has led Balkan entrepreneurs to turn to alternative or supplemental sources of capital to finance their plans for start-up operations, new product/service introductions, company expansion or an eventual initial public offering. Access to capital is vital for private sector investment which is the engine for economic growth that leads to better educational opportunities, reduced unemployment and poverty, regional security and a strengthened Balkan business network.

Sources of Capital for Private Sector Investment include:

  • Conventional bank loans. It is worth noting that the U.S. Agency for International Development (USAID) provides loan guarantee programmes to commercial banks in certain Balkan regions to spur economic growth in the private sector. Two regional examples are Bosnia and Herzegovina and Kosovo in which the agency’s programmes support post-conflict socio-economic recovery.
  • Capital arranged through the support of international institutions such as the International Finance Corporation (IFC) of The World Bank Group, the European Investment Fund (EIF) and the European Bank for Reconstruction and Development (EBRD). The IFC, which was established in 1956, is the largest global development institution that finances private sector investment in developing countries. The EIF, which was established in 1994, is an EU agency that provides financing for SMEs through private banks and funds, mainly through the use of venture capital and guaranteed loans. EBRD, which was founded in 1991, provides directly or through financial intermediaries loan and equity finance, guarantees, leasing facilities, trade finance, and professional development through support programmes in countries with EBRD operations.
  • Angel Capital – Angel capital consists of funds provided by an angel investor who invests his/her own money in a start-up or growing enterprise in exchange for convertible debt or ownership equity. Angel capital is also provided by an increasing number of angel investors who organise themselves into angel groups or angel networks in which they pool their investment capital, share knowledge and provide advice to the management of their portfolio companies. Although sometimes difficult to source, angel capital is frequently procured as a second round of financing for high-growth start-ups which may be rated as high risk requiring high returns on investment. Angel investors are often retired entrepreneurs or executives who are motivated to invest their capital for reasons other than just for a monetary return. These reasons may be associated with a desire to (i) stay involved in a particular business sector with which they have specialised experience, (ii) provide management advice and network contacts, and/or (iii) remain professionally active on a part-time basis. As there are usually no public exchanges listing their securities, private companies meet angel investors in several ways, including referrals from the investors’ business sources; at investor conferences; and at angel group meetings organised so that angels and capital-seeking enterprises can meet and confer directly. Angel capital can fill the gap between the small amount of capital typically provided by family/friends and more robust, formal venture capital. Angel investors can be found globally including in the US, Russia and Europe. A study by William R. Kerr and Josh Lerner from Harvard Business School and Antoinette Schoar from the Massachusetts Institute of Technology (MIT) provides evidence that these investors are as significant a force for high-potential start-up investments as venture capitalists. This study demonstrates the specific importance of angel investments to the success and survival of entrepreneurial firms:
    1. Angel-funded firms are significantly more likely to survive at least 4 years and raise additional financing outside the angel group.
    2. Angel-funded firms are also more likely to show improved performance and growth as measured through growth in website traffic and website rankings. The improvement gains typically range between 30 – 50%.
    3. Investment success is highly predicated upon the level of mentoring and interest shown by angels in the entrepreneur’s enterprise and by the entrepreneur’s subsequent due diligence and follow-up to the recommendations and advice given.
    4. Access to capital per se may not be the most important value-added factor that angel groups bring. Some of the “softer” features, such as angels’ business advice and/or contacts, may help new ventures the most.
  • Venture capital – Venture capital is money provided by a group of investors whose investment funds are pooled in a venture capital fund that is professionally managed. Venture capital is typically sought by start-up firms and small businesses which have a limited operating history and perceived long-term growth potential but which cannot raise funds by issuing debt. It is not unusual for venture capitalists to have a voice in company decisions in addition to an equity position in the company. This private equity capital can be provided as: seed-funding to high potential start-up enterprises, enterprise expansion funding, or funding prior to an initial public offering or company sale which enables investors to achieve an exit strategy and recoup their investment with a profit commensurate with the risk undertaken. Sources of venture capital include investment banks and other financial institutions that pool such investments or partnerships. The current trend indicates that global venture capitalists are expanding their investment focus to include emerging economies such as China and India while retaining a variable foothold in established markets such as Silicon Valley in California. The expanded focus may in some cases prompt a reduction in the venture capital amounts previously available to certain regions. For example, in 2014, 12% of global venture capital was invested in Europe – down from 15% during the previous year – with Germany as the leading European host country for these investments.
  • Revenue-based financing (RBF) typically provides capital to business owners of small and/or growing companies. With RBF, business owners pay a fixed percentage of their future revenue as repayment for the invested capital. It is technically a loan whereby repayment installments are directly related to the amount of revenue generated by the company; however, there are usually no fixed monthly payments, no set time period for repayment, and no set interest rate. The loan is deemed to be fully repaid when the total payments reach the “repayment cap” which is a number or formula that is established when the loan is funded. The repayment cap is often equal to 1.5 – 2.5 times the principal amount invested. Although many RBF lenders expect the repayment cap to be met in the relatively short term such as 4-5 years, the repayment period depends entirely on the growth and performance of the company. Businesses with high rather than low gross margins are better suited for this financing model because the investors are being paid a percentage of revenue, effectively compressing gross margins. While bank loans are among the least expensive financing sources and usually represent comparatively low-risk, they are often difficult for small business owners to obtain. Equity investments, on the other hand, are associated with high risk and high return. RBF falls somewhere in the middle in terms of expense to the borrower and risk to the investor. RBF was very popular in the early-to-mid 1900s, especially in the oil and gas industries in which it was common to provide large sums of cash up front in exchange for a percentage of the future royalties generated. Today, the RBF model is still used, such as in the pharmaceutical, publishing, movie and music industries.
  • Crowdfunding – Crowdfunding, which has been estimated to be a growing $5 billion global industry, is the practice of funding a project or venture by raising small amounts of money from a large number of individuals, typically via the Internet, using an intermediary known as a platform. There are 2 primary types of crowdfunding:
    • Equity Crowdfunding – in which backers receive shares in a company. In this process, borrowers typically apply online, usually for free, and their application is reviewed and verified by the platform software, which also evaluates the borrower’s credit risk and determines the interest rate. Investors buy into securities, and this, in turn, facilitates the loans to individual borrowers. Investors make money from interest on the unsecured loans; the platforms make money by charging a percentage of the loan and a loan servicing fee; and the borrower gains access to capital.
    • Reward Crowdfunding – in which entrepreneurs pre-sell a product or service before delivery in order to launch a business concept without incurring debt or sacrificing equity/shares. (A third lesser-used type of crowdfunding is money pledged as a donation.)
  • Other sources include leasing rather than purchasing equipment; programmes of governments, foundations and international institutions; credit from suppliers; advance payment by customers; family and friends.

Balkan Sources of Capital:

There are numerous sources of capital which are available to Balkan entrepreneurs and vary by country. The following represent a few examples of capital sources for private sector investment in the Balkans. The Balkan Economic Forum is not in any way directly or indirectly associated with, and does not have any pecuniary or non-pecuniary interest in, the following. It is strongly recommended that anyone interested in sourcing financing should thoroughly vet the legitimacy and operations history of the available sources by relying upon the authorities having jurisdiction in order to ensure the integrity and reliability of the financing sources.

  • The Balkan Economic Forum LinkedIn Group published an article earlier this year about The World Bank Group Investment Readiness Programme which is financed by the European Commission under the Western Balkans Enterprise Development & Innovation Facility. This programme is currently in the process of reviewing applications submitted by entrepreneurs who are seeking financing for start-up enterprises or whose SMEs plan to introduce a new, innovative product. Programme representatives have been touring the Balkans and will be considering semi-finalists and finalists in mid-November and December 2015, respectively. The programme has offered selected applicants: (1) the opportunity to meet and present their business plan to more than 100 international and regional venture capitalists and angel investors and (2) access to comprehensive training and preparation resources to support their start-up enterprises.
  • The Western Balkans Enterprise Development and Innovation Facility was launched in December 2012 by the European Commission, the European Investment Fund (EIF), the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB), acting as co-lead international financial institutions, to provide additional capital resources and technical assistance for private sector development as well as infrastructure and energy efficiency investments. The Facility provides loans and guarantees through local financial intermediaries such as venture capital funds, micro-finance institutions and other financial institutions providing finance to SMEs established and operating in Albania, Bosnia and Herzegovina, Croatia, Kosovo, FYR Macedonia, Montenegro and Serbia.
  • The Crimson Development Foundation (CDF), which is a registered, non-profit FYR Macedonia foundation owned and operated by Crimson Capital Corp., supports entrepreneurship and employment creation through the provision of innovative types of financing for SMEs across all sectors of the economy, and especially targets those that are not being adequately served by existing financial institutions, including rural businesses, entrepreneurs and enterprises owned by women and minorities. The CDF was recently awarded a Cooperative Agreement for the Innovation Financing Vehicle project by USAID Macedonia.
  • The Croatian Business Angel Network (CRANE) is a non profit association which brings together private investors interested in investing in innovative companies in their early stages of development. CRANE is the principal organisation of business angels in Croatia. Since its establishment in 2008, the angels have invested more than twenty million kuna in at least twenty-five Croatian companies. CRANE is represented by its President in the Council for Economic Affairs of the Croatian President.
  • The Business Angels Association of Turkey, which was established in 2011, represents 70% of the angel investment community in the country and aims to invest $400 million annually in the near term.
  • In 2014, an international panel of judges from Switzerland, Portugal, Finland and Turkey selected KosBAN, the Kosovo Business Angel Network, as “the most promising Business Angel Network in South Eastern Europe”, which is an award that was given by the Business Angels Association of Turkey as reported by the European Business Angels Investment Forum. KosBAN was established in 2014 with the support of Universum College in Kosovo and BiD Network, Netherlands, to support the promotion of entrepreneurship and innovation through means of financing start-ups and other early stage businesses.

Interest Rate Outlook:

The feasibility of financing a company start-up or expansion is dependent upon several factors, not the least of which is the cost of capital. As the cost of capital, and corresponding rate of return required for various investment types, will fluctuate depending on market forces, interest rates set by influential financial institutions as well as the interest rate outlook are noteworthy.

Interest rates are expected to increase slowly and modestly as wage growth picks up; global demand for credit rises faster than global savings; and the cost of food, alcohol, tobacco and services rose at an annualised rate of 1.2% and the cost of industrial goods rose at an annualised rate of 0.6% in August 2015 in the Eurozone countries according to Eurostat which went on to report that inflation remained low due to the large drop in energy prices during the same period. Usually rising interest rates are associated with measures to curb rising inflation; however, the wider European region including the Balkans is experiencing relatively low inflation rates except for Turkey where inflation reached 6.8% in July 2015. (Turkey sharply increased interest rates in January 2014 in order to strengthen the country’s currency and reduce inflation; however, Turkey then cut rates in February 2015 in a bid to spur economic growth.)

Provided that the 2015 Chinese stock market slump and economic slow-down do not significantly impact global economies, current interest rates in the wider European region are expected to rise in a limited and gradual manner in 2016 due in part to the region’s emergence from the global financial crisis and also the approximate 18-24 month lag time between the action of central banks and the impact of such action on the real economy including price increases. The current rate of gradual economic recovery and growth in key markets is anticipated to result in higher inflation in the near future. These forecasts, however, are data dependent: if an economy falters, then a rate hike will be postponed. If an economy strengthens, a rate hike will likely be implemented according to the degree of resilience within the economy, with the unemployment rate being a key factor for consideration.

The European Central Bank expects an average eurozone growth rate of 1.9% in 2016 and 2.1% in 2017, while Moody’s economic growth forecast for the G20 nations is 3% in 2016 due in part to relatively low oil price expectations. The countries included in these forecasts represent significant export markets as well as sources of Foreign Direct Investment for the Balkans and are, therefore, useful indicators. It is also worth noting that China’s slower economic growth and Greece’s financial crisis are not expected to have a significant impact on Balkan economies for reasons including the fact that the direct trade exposure of countries trading in the euro to China is small (3-4% of total exports) and the Greek economy at less than 2% of eurozone GDP is just too small to put material downward pressure on eurozone activity; however, if the Chinese middle class continue to rein in their spending as they did in 2015 and if this impacts trade with countries that, in turn, trade with the Balkans, then an economic slump in China has the potential to indirectly affect Balkan economic recovery.

Factors That Influence Private Sector Investment

There are a myriad of factors that influence the level of private sector investment in Balkan countries. These factors include, without limitation, the following:

  1. the structure and level of income taxes, value added taxes, business registration fees, and other assessments affecting business operations;
  2. access to open markets; the enforcement of laws protecting competition in an open market economy;
  3. access to capital, the availability of investor incentives (e.g. grants, tax credit or deferral, access to loans, reduced cost of land, employee wage subsidies), and the level of investor protection including the existence of laws prohibiting acts of nationalisation, expropriation or requisition, except in the event of superceding public interest;
  4. the stability and reliability of the banking system;
  5. the degree of judicial efficiency, expediency and independence from political interference; the effectiveness and enforcement of laws protecting contract and property rights (including real, personal and intellectual property);
  6. The level of education, skills and training of the labour force; labour market flexibility; labour costs and regulations, including laws pertaining to employee health and safety; the extent to which hiring and promotions are based on merit rather than cronyism in the business culture;
  7. the extent and cost of administrative bureaucracy (i.e. “red tape”) in the registering, licencing and regular reporting requirements of enterprises;
  8. the degree of transparency in private as well as public sector business operations;
  9. the extent of corruption and the outlook for its continuation or diminution, as reflected in part by the effectiveness of actions or omissions of the government;
  10. the types, costs, availability and reliability of energy supplies, telecommunication services, transportation infrastructure, raw materials and engineering/construction services; and
  11. the levels of national government competence and stability, ethnic tensions, and regional cooperation especially concerning enterprises which rely on regional networks such as customs, energy supplies, inter-state transportation of goods and Free Trade Zones or tax treaties;

In broad terms, to foster private sector investment in a country, businesses need to have confidence in the business environment such that contracts will be respected, licences and permits will be issued in a transparent and timely manner, labour as well as property rights will be respected and, where relevant, goods will clear customs quickly.

Links to Balkan Country National Investment Information: