ICT, Wine, and Fintech: What USAID Moldova Can Teach Other Countries About Private Sector Engagement Approaches During COVID-19

By Emily Langhorne, INVEST Communications Specialist

When former U.S. Secretary of State John Kerry visited Moldova in 2013, Cricova Winery presented him with a unique gift: an entire shelf of wine. A small country with a population of about 3.5 million people, Moldova has a well-established wine industry, exporting around 67 million bottles a year. Secretary Kerry’s 500-bottle collection is kept at the winery, and bottles are shipped to him upon request.

At the time of Secretary Kerry’s visit, Moldova, then the poorest country in Europe, was pursuing a free-trade agreement with the European Union. In response, Russia, the largest consumer of the nation’s wine, banned imports of Moldovan wine. In the eyes of many Moldovans, Kerry’s visit reinforced the United States’ support of their country’s economic development.

“It’s an interesting country,” says USAID INVEST’s Strategic Investment Advisor Eric Adams, who leads the initiative’s Moldova work. “For years, it was known as the ‘wine cellar of Russia.’ It has some of the largest wine cellars in the world with huge, massive caves that you drive into. There’s a photo of John Kerry drinking a glass of Moldovan wine with the former prime minister, and many people I encountered remembered his visit and told me about that photo.”

USAID has been working in Moldova for 30 years. The nation remains among the poorest countries in Europe. It struggles with large external debt, the fallout from the nation’s 2014 banking crisis, mass emigration, and a reliance on remittances, which make up about 10 percent of GDP. Nevertheless, the nation has made progress in recent years in terms of poverty reduction and promoting inclusive growth. Democratic and free-market reforms have created economic opportunities, resulting in Moldova moving from 86th on the Ease of Doing Business Index in 2012 to 48th in 2019. It has also established a well-respected IT sector known for the development of new applications.

Together, INVEST, a USAID initiative that mobilizes private capital for better development results, and USAID’s Mission in Moldova are working to increase private capital flows into the nation and financing options for businesses in key sectors.

“About 30 percent of the population now lives outside of the country, having left to seek economic opportunities elsewhere,” explains Adams. “In trying to address two decades of population decline, the Government of Moldova is working to attract investors by setting up special economic zones and tax benefits. They want that investment to create opportunities that encourage people to stay in the country. They see that as critical to the growth and prosperity of their country, and they feel like they have a lot to offer in terms of their winery, tourism, creative industries, ICT, and other sectors.”

In August 2019, USAID Moldova was developing a new five-year strategy and seeking to integrate private sector engagement into their long-term planning.

“There was a lot of excitement and optimism that the newly elected government was ready to take Moldova in a different direction,” says Adams. “I think the Mission saw the importance of and need for what INVEST does, and they wanted us to look at those key sectors and decide out of all these options which were the best areas for engaging the private sector.”

Exciting Investment Opportunities, a Challenging Investment Destination

When USAID Moldova first reached out to INVEST for support in developing its private sector engagement strategy, their team had in mind a broad and ambitious scope of work. Unfortunately, the broadness of the scope made it expensive to implement in its entirety.

“The scope was exciting,” says INVEST Activity Manager Laura Conn, who supports the Moldova work. “It was reflective of all the new opportunities arising because of the country’s changing political situation. However, because it encompassed so much, it was difficult to break off discrete pieces of work for implementation, so we had two INVEST team members, Eric Adams and Robin Young, travel to Moldova and work with the Mission to refine the scope. Once there, they investigated the local ecosystem and worked with Mission staff to think through, based on the current programming and successful work the Mission had already done, the areas in which INVEST could really help catalyze investments.”

Defining the scope of work was an iterative and collaborative process. The Mission was open-minded about the possibilities for private sector engagement and different ways of working with INVEST. Moreover, because of USAID’s deep network and strong local reputation, INVEST staff was able to talk candidly with a lot of different stakeholders about those possibilities and their potential.

“There’s a real history and trust that exists between USAID and Moldova,” says Adams. “Because of that trust, we could meet with different business associations, banks, and other development partners and talk openly about the potential opportunities where tapping into the expertise, networks, and capital of the private sector could be a real catalyst for building on the work USAID had done in key sectors.”

During their trip, Adams and Young recognized that with access to the right types of debt and equity financing, businesses in these sectors had the potential for growth, and many entrepreneurs had an appetite for growing.

Unfortunately, the ripple effects of Moldova’s 2014 bank fraud crisis made accessing financing locally a challenge. In 2014, $1 billion disappeared from three of the country’s leading banks. The stolen funds, which represented a significant percentage of Moldova’s GDP, were transferred to shell companies in the United Kingdom and Hong Kong before being deposited into Latvian bank accounts with foreigner owners. This coordinated, insider fraud caused an economic crisis.

“It almost bankrupted the country,” says Adams. “In trying to help Moldova recover, the International Monetary Fund and other international development partners agreed to loan the country money.”

The influx of money came with monetary policy conditions, and the Moldovan Central Bank (MCB) had to put controls on the banking system’s reserve requirements to protect deposits and ensure that inflation didn’t increase. As a result, as recently as 2019, all Moldovan banks must maintain a minimum of 42.5 percent of their deposits in reserve at the MCB, which restricts the bank funds available for lending.

“With lending severely constricted, money becomes a bit ‘dear,’ and interest rates high,” Adams continues. “That creates an environment in which lending stagnates and banks tend to be highly risk-adverse when they do lend. Banks can impose strict collateral requirements and lengthy processing times. In terms of access to finance for small and growing businesses, the whole environment is very challenging.”

With businesses demonstrating a clear need for out-of-country capital, the INVEST team considered the perspective of potential equity investors interested in Moldova — what makes the country attractive and what makes it a risk.

“You always have to compare a destination to its neighboring countries because they are the competition in the region,” says Adams. “And looking at Moldova, a couple of things struck us right away.”

Beyond the long shadow cast by corruption in the banking system, the nation’s energy dependence on Russia makes it vulnerable. Also, many equity investors today are interested in investment destinations where products are not only produced but can also be sold and bought locally or regionally. Larger markets are appealing to investors because they have greater economic power to purchase these products. Moldova is a relatively small market.

“As an investment destination, it’s tough,” says Adams. “However, it’s also a country with some well-defined niche sectors, especially those that USAID has been supporting, which are experiencing growth. We felt that while Moldova is not necessarily a destination that investors run to, there are investable deals in Moldova, and if you could make linkages to investors and identify, package, and share these specific opportunities in a marketing pitch, you could channel investment into the country.”

The Mission agreed and decided that the next step was to have INVEST complete an investment landscape assessment.

“A landscape assessment helps you find out if you have both parts of the equation,” explains Adams. “Do we have the investee and the investor to be linked and are they ready to be linked? On one side of the equation, we had to identify companies needing financing. On the other side, we had to identify potential investors — banks, equity investors, venture capital firms, development finance institutions — and see whether they might be interested in investing in Moldovan enterprises.”

Understanding the Landscape, Identifying Potential Investments

In early 2020, INVEST awarded a subcontract to CrossBoundary, an investment firm focused on advising companies and investors across frontier and emerging markets. CrossBoundary partnered with Civitta, a leading management consultancy in Central and Eastern Europe, to complete the landscape assessment.

“One of the things that INVEST has done that is powerful is to encourage partnerships between global and local or regional firms,” says Tom Flahive, Partner at CrossBoundary. “A firm like ours has strategies and methodologies to provide investment facilitation globally, but we did not yet have deep enough local knowledge, awareness, and relationships in Eastern Europe, so it was clear to us from the start of this work that we needed a partner to complement us in those areas. Our firm had already been in Moldova looking at new business privately, so we got to know Civitta. We knew of their reputation both in Moldova and in the region. We thought highly of their local team and their regional team, so when this opportunity from USAID and INVEST came out, we reached out to them and suggested a partnership.”

“Our work has been very complementary, with CrossBoundary bringing a broader investment facilitation knowledge and a wide investor network, and Civitta adding a deep understanding of the local private sector,” adds Marilia Martins, Senior Associate at CrossBoundary.

For the landscape assessment, the partners interviewed 200 Moldovan companies to determine their financing needs and the strength of their operations and internal processes. They then profiled 63 that had expressed an interest in accessing financing. They also interviewed investors to determine their risk appetites and sectors of interest, and they spoke with transaction advisors to better understand the types of services that they are providing to help Moldovan companies become investment ready.

“We reached out to many regional and international investors who were not yet active in Moldova and found that the vast majority of them were keen to consider investments in the country if presented with the right opportunity,” says Martins.

When it came to investing in small companies, 65 percent of the 23 capital providers surveyed reported that they would consider such investments if provided with incentives and interventions that reduce the cost of entry, indicating that transaction advisory services or risk-mitigation tools funded by international development partners could help them overcome these challenges.

That’s good news because micro, small, and medium-sized enterprises account for 32 percent of Moldova’s GDP and 61 percent of its employment, yet they faced a financing gap of almost 14 percent of GDP.

The profiled companies had an aggregate investment demand of $198 million. Although companies of all stages reported barriers in accessing debt financing, many company leaders were still skeptical of equity financing as they dislike the idea of ceding ownership.

“Most companies want a combination of debt and equity,” explains Adams. “Equity doesn’t just bring money: it brings networks, connections, and deep know-how. Regardless, there’s still a fear, particularly with family-owned businesses, of giving up too much control, so company owners often prefer debt because they want to hold on to as much of their equity as they can.”

Overall, CrossBoundary and Civitta’s work revealed that USAID could play a significant role in facilitation of meaningful investments. By providing specialized services to bridge the gap between capital seekers and capital providers, USAID can help these companies secure the financing they need to grow. Likewise, these businesses need transaction advisory services because their lack of experience with fundraising can make them insecure when dealing with investors. At the same time, investors don’t see a large enough market in Moldova to justify the cost of the due diligence process, so USAID can reduce that barrier and incentivize private investment by covering these costs.

These findings were promising. In early 2020, the Mission decided that INVEST should move ahead with identifying companies that were looking for financing and assist them in preparing loan applications for banks for pitch decks for equity investors. With a target of securing $20 million in debt and equity financing for Moldovan businesses, INVEST and USAID Moldova asked CrossBoundary and Civitta to construct a Moldova Investment Facilitation Platform.

“An investment platform is a term that often confuses people,” says Adams. “We aren’t actually creating a structure. Instead, it’s a strategy for quickly taking advantage of investment opportunities. The team comes in and identifies companies seeking financing, helps them become investment ready and market themselves by creating pitch decks, etc., and then links them with the appropriate bank or investor. After that, the team’s work is largely finished unless the company needs advising during the closing of a deal.”

With the aim of facilitating mutually beneficial investments that align with the Mission’s objectives, the platform’s intention is to provide targeted, customized assistance to businesses and act as a neutral intermediary that brings local opportunities to capital providers, improves their understanding of the local market, and decreases their due diligence cost — all of which increases the likelihood of their making an investment.

Unfortunately, in late March of 2020, just as the landscape assessment was wrapping up and plans for the investment facilitation platform were getting underway, cases of COVID-19 began to spread rapidly, and within weeks, the world found itself facing a full-blown pandemic.

The Effects of COVID-19 on Moldovan Businesses

By July 2020, the World Bank reported that 20 percent of Moldovan businesses were at risk of succumbing to the economic shock of COVID-19 and that annual sales had declined 57 percent compared to last year, with small businesses suffering the most.

“We decided to do a rapid COVID-19 assessment before setting up the platform,” says Adams. “We decided we should talk to the same companies we had talked to before and other companies. Did companies still have interest in debt and equity financing? Had their plans changed completely? Had they moved from ‘let’s expand’ to ‘let’s survive?’”

Between September and November of 2020, INVEST engaged CrossBoundary and Civitta to perform a rapid assessment to determine the impact of the pandemic on local businesses and provide recommendations for transactions that the new investment platform could support.

“Once COVID-19 happened, Civitta’s engagement was absolutely critical to the success of this work,” says INVEST’s Conn. “With travel restrictions and case counts climbing, it’s essential to have someone on the ground, even for teleconferences and phone interviews. The time difference makes it really challenging to conduct this work from afar. If you are based, for instance, in New York and trying to conduct interviews in Moldova, there are only a few overlapping business hours during which you can reach people in Moldova.”

Together, CrossBoundary and Civitta surveyed 103 companies. Combined, these companies employ about 4,800 people, with a median of 10 employees per company.

Since March 2020, 26 percent of companies surveyed had laid off employees. Only 13 of the surveyed companies reported a high risk of shutting down in the next six months, but these closures would result in the loss of 865 jobs. However, 51 percent of companies surveyed reported that the impact of COVID-19 was manageable, and 31 percent said they’d experienced a positive impact on business as a result of the pandemic.

“A number of the sectors, and especially the ICT sector, were set up to handle this better than many major sectors in other countries,” says CrossBoundary’s Flahive.

Ninety-two of the 103 surveyed companies still expressed a desire to attract external funding, with an aggregated financing demand of $147.2 million, and more companies were now open to equity investments than before the pandemic.

“Some of the takeaways from our assessment were really positive,” says Adams. “The companies surveyed sought a lot of capital, which shows that there’s still a strong appetite to grow and expand. IT was the top area for investment in both assessments, which makes sense since that industry is arguably becoming more important in this current environment. We also saw a more active investment potential in the health sector, which also makes sense in the current environment. The wine, tourism, and creative industries were having a harder time.”

CrossBoundary and Civitta prioritized 25 companies for additional in-depth interviews. These firms represented $114 million in investment demand, approximately 78 percent of the demand reported by the 103 companies surveyed. Considering factors such as a company’s development impact, financial health, and ability to manage the effects of the pandemic, the partners created a scorecard to prioritize companies for potential support under the Moldova Investment Facilitation Platform.

“The pandemic has brought logistical challenges to transaction facilitation,” says CrossBoundary’s Flahive. “So much of deal sourcing happens from an organic networking approach. You meet to talk about a potential opportunity, but then often that conversation will spur three other conversations and through those other conversations you find the company that you’re going to work with. With COVID, we had to be more diligent with getting potential companies and investors on the phone. While it makes everything harder, it’s not a negating factor. We can still source and support transactions. We just have to be more patient. Things move more slowly during COVID, but they do move.”

“On the investor side, commercially-minded investors, such as venture capital and private equity firms, still have dry powder and are ready to invest,” adds Martins. “They are also interested in looking at companies that have weathered the COVID pandemic and see that as a signal of strength when it comes to the company’s fundamentals and management team.”

So far, six companies have been selected for potential support under the platform, and another 15 are under consideration.

“After doing this rapid review, we kept our target of raising $20 million,” says Adams. “Our implementing partners are still comfortable with it.”

“Globally, we overall have not seen investment demand or investment flows stop during COVID,” explains Flahive. “They paused and slowed, but they have continued. Moldova is no different. We are still seeing companies that are actively interested in scaling. And while some investors are challenged by being unable to do the in-person due diligence trip, which can be a gating item in their process, they are still interested and eager to continue pursuing opportunities.”

While most of the transactions identified for support are in the ICT and Fintech sectors, a light manufacturing company and a health care company are also included in the six selected firms, and the additional firms under consideration represent the beverage and agribusiness/food sectors.

“Although no wineries have been selected yet for support, we are in conversations with about 10 of them,” says Martin. “Because of COVID, they shifted the investment areas they’re interested in. In the beginning of the year, there was a focus on wine tourism, and they were interested in looking at expanding tourist-focused facilities. Now, there’s a greater focus on production: expanding their wine production capabilities, finding strategic partners to increase their market expansion, upgrading existing production facilities, and accelerating their exports.”

INVEST and its partners will continue to source transactions for support throughout the life of the platform. They will onboard new shortlisted companies through 2021. After that, they’ll only provide support to already onboarded firms because transactions generally take three to 12 months to close, and the activity ends in June 2022. Over the lifetime of the platform, CrossBoundary and Civatti hope to close at least four deals.

How Does Transaction Advisory Support and the Investment Platform Contribute to Development Results?

The need for investment facilitation and blended finance stems from the funding gap for achieving sustainable development goals around the world.

“When compared to the amount of development dollars out there, the amount of capital needed to achieve the global Sustainable Development Goals is a very large number. When compared to the amount of private capital out there, it’s a relatively small number,” says Flahive. “Often, in investment facilitation, we’re targeting a 10 to 20x multiplier on the donor dollar to the private capital unlocked, and we believe that that private capital is the best way to ensure that capital is flowing to the most sustainable enterprises — companies that are on a path to raising more private capital so that they can sustain themselves and scale — as opposed to companies that can only live from grant to grant.”

Still, given that traditional development projects often work with and target the world’s most vulnerable populations, supporting Moldovan companies looking to secure investment might seem a far cry from traditional development objectives.

“That’s something I can certainly appreciate,” says Conn. “For a long time, I worked in agriculture projects focused on vulnerable populations only, and that’s rewarding and important work. But when seeking to pull entire populations out of poverty, private investment is critical because it creates sustainable avenues for growth. In Moldova, we’re trying to identify private sector investment opportunities and link them to private sector expertise and capital that would not have been obtainable otherwise. Building up these local businesses — making them more marketable and capable of securing financing on their own — is vital to building sustainable change and helping the nation meet its development goals.”

All the transactions prioritized under the Moldova Investment Facilitation Platform support USAID Moldova’s development agenda.

“The primary metric of success for the platform is $20 million in transactions closed, but we select the supported transactions based on a fit check that not only looks at a transaction’s size but also at its impact and alignment with USAID Moldova’s development goals,” explains Flahive. “When it comes to economic growth, employment, and growth of key priority sectors, Moldova needs to work hand-in-hand with the private sector. It’s also important to understand what closing these transactions could mean for the broader market. I think one of the most exciting areas is where you can see a specific transaction unlock an entire market. Often, after an international private equity or venture capital firm does their first deal in a new market like Moldova, they have now gotten to know the ecosystem, overcome the barriers to entry, and reduced the transaction cost for future deals, so they’ll set up shop and do more transactions. Then, their competitors will follow.”

By channeling large sums of capital into Moldova via the funding of transaction advisory services and investment facilitation, USAID can help the country achieve their economic development goals in a sustainable manner.

“What USAID is supporting in Moldova is the growth of sectors as a whole,” Adams explains. “By developing an entire sector, such as the IT sector, we can strengthen the economy and create jobs. If we catalyze the flow of capital in and out of a sector, it benefits the entire sector, creates and enhances jobs, and helps Moldova reach their development objectives. The companies we are working with don’t look like the typical ‘mom and pop’ shops that many people associate with development projects, and I understand that can be jarring for people. I started my career working with village banking, giving loans of $50 to people so that they could invest in their micro businesses. That’s great work that needs to be done. But over the course of my career, I’ve also seen that size does matter, especially when you’re trying to have an impact on the development of an entire country. That’s what we’re doing here. If we can mobilize and create access to resources, markets, and expertise for companies, then we can contribute to the larger development agenda in critical sectors. We can’t simply work with SMEs and hope that we’ll generate economic growth from that work alone. We have to consider and support a range of investments that will help countries achieve their development objectives and address economic growth issues more broadly.”