How ESG champion EBRD works with PE firms
The European Bank for Reconstruction and Development, a London-based development finance institution (DFI), plays a key role in building the private equity markets in its focus regions – namely Central and Eastern Europe (CEE), North Africa and Central Asia.
And its investments, like those of other DFIs, are becoming ever more important as large pension plans and sovereign wealth funds increasingly shy away from smaller developing markets, says Anne Fossemalle, the EBRD's director of private equity funds.
She explains how the bank invests and why it is achieving more exits these days.
Q. How big is your private equity fund portfolio?
EBRD’s total portfolio (operating assets plus undrawn commitments) is more than €46 billion ($51.2 billion). Equity (funds plus direct deals) represents €6 billion of this.
About 15% of our private equity portfolio is in investments alongside funds; the rest is in direct, standalone deals.
As of mid-2019, we had a total of about €2.5 billion in around 120 fund commitments across 80-90 GP relationships, with roughly 600 companies in the portfolio.
We have about €2.6 billion of disbursements, money in the ground.
Q. How much do you invest annually?
EBRD commits around €10 billion a year of new commitments across all sectors, countries and financial instruments.
We make a total of €200 million to €250 million of commitments to between 10 and 15 funds annually – and about a third of those are first-time strategies.
We also placing €12 billion in bonds a year.
Q. How big is EBRD’s private equity team and how is it set up?
We have one managing director covering equity as a whole, then I do funds and two other colleagues cover co- and direct investments. All of our research is done in-house – we don’t use consultants at all.
Q. To what extent do asset owners seek to partner with you?
If an asset manager is looking to raise money in our markets, if EBRD doesn’t invest, they probably won’t raise it. And if we do invest, then everyone who wants to invest in the strategy will be talking to us.
We work very closely with other development organisations, such as IFC [International Finance Corporation, EIF [European Investment Fund], EIB [European Investment Bank], [Paris-based] Proparco and [the UK’s] CDC.
Because private capital shies away from emerging markets nowadays, development organisations’ backing of emerging market private funds is even more critical.
Q. How has your PE portfolio performed?
The 2008 crisis had a big impact on central European funds, and even 10 years on there are still difficulties in exiting some of these portfolios, which normally would be completely exited after that length of time.
But we are getting to the stage where some of the post-2008 crisis vintages of funds are managing to achieve significant liquidity. We’ve seen some spectacular exits from our Russian portfolio, for instance.
[Hence] our returns fell [after 2008], but have started to do better again. In terms of net returns since 1992, we were hitting the 12% mark annualised until 2008, but then they dropped and now have stabilised around 8% annualised since inception.
Q. How big a driver of your activity are returns?
Returns are an important driver of our decision-making. If a transaction – whether a direct investment, loan or a fund – crashes, we don’t help the development of the country or region. Our goal is to support positive development and we try to do things that have a positive impact.
Q. Is ESG (environmental, social and governance) core to your approach?
Yes. We are the only development finance institution to have ESG ingrained as part of our status and everything we do. Even when we are financing a gas field, we have a team of people looking at the potential ESG impact.
We have a department dedicated to this. We train our [external] fund managers on how to look at ESG. The name of the game is to make them understand that this is a core part of the risk assessment – it’s not just to tick boxes.
Our latest report [published in January] states that 46% of our new business qualifies as green economy investments, the highest level yet.
Q. Does EBRD invest in public markets?
My direct investment colleagues also invest in listed assets, but there we would always be looking to add value to and transform the companies we invest in. Similarly, we always look to add value to the funds to which we allocate.
Q. For EBRD, does PE include other private markets?
We seek relevant risk-adjusted returns across different asset classes and strategies. For instance, we have a team looking at real estate, and we invest in property funds on a regular basis. We also invest in agribusiness and infrastructure, general economy or financial institutions.
Q. How about private debt?
Private debt is not yet a very developed industry in emerging markets. If we find convincing proposals, we will happily invest. If we can invest and support the development of a new asset class, we will do so.
Q. Presumably emerging market infrastructure is core for EBRD?
We invest in a greenfield infrastructure fund run by Meridiam, a large global private infrastructure fund manager. We have a sleeve with them that is committed to central Europe and Turkey.
Q. Do you use segregated accounts with general partners?
No. When we invest in a fund, it’s because we believe in a fund manager and that they will continue to develop into a player able to raise money even if EBRD were to disappear.
We don’t go around looking for people to manage money for us – we invest in specific proposals, whether a direct equity proposal or a fund allocation.
Q. Do you or would you invest alongside other asset owners?
No. I can’t quite yet imagine a consortium of LPs [limited partners] buying something in our markets, even in central Europe, the most developed of our regions. The ticket sizes are too small.
Q. You must have misses as well as hits in terms of funds?
Absolutely. Our returns include everything, including the complete dogs that didn’t survive very long. We don’t have a survivor bias. In the early 1990s, they weren’t all big successes, as you can imagine.
A full interview with Anne Fossemalle will appear in the upcoming (Spring 2020) issue of AsianInvestor magazine.