A rise in investment by private equity firms can support transition country economies by boosting company growth and productivity, according to the EBRD’s latest Transition Report.
The report outlines steps policy-makers can take to stimulate private equity investment which remains an under-utilised source of finance in a region that includes central and south-eastern Europe, the former Soviet Union and the southern and eastern Mediterranean.
It says that private equity investment in companies in the transition region has a strong positive effect on employment, capital investment and productivity, in fact stronger than in more advanced economies.
The report for 2015-16, Rebalancing Finance, calls for a shift in the financing model for the EBRD region, including a greater focus on equity investment at a time of excessive reliance on debt.
Two of the report’s chapters are dedicated to private equity, drawing on unique data on approximately 300 investments by almost 100 private equity funds in the region.
Underscoring the high potential for growth that private equity has in the region, the report notes that the share taken by the EBRD region in private equity invested in emerging markets has recently fallen to one-tenth from one-fifth before the crisis.
Private equity investment accounts for more than 1 per cent of GDP in large developed economies but for less than 0.1 per cent in EBRD countries of operations such as Poland, Russia and Turkey, which is much less than in the emerging markets of Brazil and India.
The report specifically addresses concerns linked to the role that private equity investment plays in economies, noting: “Analysis shows that private equity funds in the transition region have a positive impact on both profitability and employment levels.”
“Increases in operating revenue are 35 per cent stronger for (transition region) firms that receive private equity investment relative to their peers,” it adds.
These firms also experience stronger labour force and productivity growth and, contrary to widely held views, private equity funds in the EBRD region substantially increase capital expenditure.
The report says that up to 40,000 firms in the region could potentially attract private equity funding, more than 50 times the number of companies that have actually received such financing in recent years.
Policy-makers can attract private equity firms in the region by taking steps including support for the protection of minority shareholders and the strengthening of information disclosure rules.
The establishment of stock exchanges specifically designed for smaller companies can help make investment in small and medium-sized enterprises more attractive by enhancing access to equity financing and improving exit opportunities for funds.
Stricter enforcement of insider trading laws is another crucial driver of stock market development and an area where significant work remains to be done across the region.
It is also important to revitalise bank lending in the region, as private equity firms and other equity investors rely on complementary debt financing to fund investment underpinning the growth and modernisation of firms.
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