The European Bank for Reconstruction and Development has launched an unusual €350m investment fund, deepening ties to China as it raises money to take direct minority stakes in businesses across a sphere that stretches from Ljubljana to Ulan Bator.
Designed to make long-term investments which advance the aims of the multilateral bank, the structure of the fund could offer a model for others to expand investment programmes by offering participation in an institution’s activities.
The EBRD said this week it has completed a first financing round for its so-called Equity Participation Fund with two cornerstone investors, sovereign wealth funds from China and Azerbaijan: the State Administration of Foreign Exchange (Safe), which has committed €250m; and the State Oil Fund of Azerbaijan (Sofaz), responsible for the remaining €100m.
Suma Chakrabarti, EBRD president, said there was significant demand for investment from the bank due to reduced capital flows into developing countries since the financial crisis. “The EPF will enable leading institutional investors to join us in seeking equity opportunities which boost growth and promote change in our countries of operations,” he said.
The EBRD is seeking further long-term investors for a fund which offers a 20 per cent to 30 per cent “economic interest” in new equity investments of more than €10m made by the EBRD over five years, with the option to sell back undivested investments at the end of that period.
Rather than establish a typical fund structure with separate management to invest alongside the EBRD, investors in the new vehicle instead receive an equity return swap, a contractual arrangement to share in the value of new investments made by the bank in the ordinary course of its activities.
Based in London, the EBRD was established in 1991 as a response to the collapse of communism in eastern Europe, and reports making €11.2bn of direct minority investments over 25 years.
Now owned by 65 countries, the bank lends and invests across central and eastern Europe, Turkey, Russia and central Asia as part of commitment to “market-oriented economies and the promotion of private and entrepreneurial initiative”. In recent years it has extended its area of operation to include north Africa and Greece.
The investment from Safe deepens a relationship with China, which became a member of the institution in January.
For Azerbaijan, the commitment to the fund is the latest sign of a softening of attitudes to the West following a collapse in oil revenues which has been followed this year by the country’s attempts to reform its economy.
This comes at a time when international investors more broadly have begun to return to emerging markets. For instance, the Institute of International Finance has indicated investors poured $24.4bn into emerging markets in August, taking cumulative net portfolio flows since June to $76.6bn, with the bulk of this going into listed equities. According to Morningstar, July flows into emerging market mutual funds were the largest in more than three years.
The MSCI Emerging Market index has risen 14 per cent so far in 2016, after losing a fifth of its value the previous year.
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