Opening Doors to Private Equity in the Western Balkans

USAID CATALYZE Partners with Private Equity Fund to Ready SMEs for Private Investors

Increasingly, global private investors are eyeing the Western Balkans as the potential for diversifying their portfolios. While private equity financing can raise working capital for a company through restructuring ownership and/or management, few small- and medium-sized business owners in the region are aware of, understand, or desire such a private equity model. In fact, many SME owners resist giving up power and ownership to outsiders.

Given the ongoing supply chain disruptions and rapid inflation worldwide, the demand for capital among SMEs is higher than ever.

The USAID CATALYZE Engines of Growth Activity is working with WM Equity Partners (WMEP) to help raise awareness among small- and medium-sized enterprises (SMEs) on how private equity can serve as a valid option to develop their business further or as an opportunity to take on a financing or strategic partner in lieu of closing or selling the company.

Private equity funds aim to bring about operational efficiencies to a company and can be critical in delivering higher returns. Founded in 2009, WM Equity Partners has worked with more than 100 different clients in Serbia and is now focused on raising capital for companies across the Western Balkans. With USAID CATALYZE, WMEP supports SMEs in the initial phase of attracting investors, helping to prepare the company’s documentation, implementing training, and explaining the equity financing perspective. In 2022, WM Equity Partner successfully closed its first private equity transaction, and several more are on the horizon.

WM Equity Director Vladimir Pavlović at CATALYZE EoG Learning Event in Belgrade, where financial experts, partners, and business advisory service providers discussed private equity.

“Many (owners) try to transfer the company to their heirs, but it is tough everywhere,” said WM Equity Director Vladimir Pavlović, who has worked in the financial sector of Serbia for the past two decades. “The catalyst in that transition is the presence of a professional investor.”

If an owner is interested in financing, WMEP helps the company determine its financial value. Pavlović said this step can often be a big stumbling block.

“If you get far into the transaction and the owner has not clarified how much the company is worth, the chance of a transaction is small,” he said.

WMEP helps the owners understand their roles after taking on a business partner, such as what decisions can be made by the majority owner and what decisions cannot be made without a minority owner. Pavlović notes that reaching a consensus on the decision-making process is key, and the company’s first act should include a clause if a consensus cannot be reached.

In Serbia, Pavlović says most companies have only one owner and that sharing in the decision-making process can be challenging. One of the most challenging steps in moving to the private equity model is the owner’s initial decision to bring a partner into the company. While many think it is purely a financial decision, Pavlović believes it is 10% a financial decision and 90% an emotional one.

He notes that if there is no amount of money for which an owner would sell a company and give up any power, finance and accounting are a pure cost to the owner. As a result, the company’s financial history and projections are often unavailable and lack transparency.

“It is this essential information that professional investors insist on having. That’s why those evaluation processes take longer when we join the company, " explains Pavlović.

USAID CATALYZE is helping WMEP open doors in the region and making private equity more readily trusted as an investment mechanism.

“When you say that you are part of a program implemented by USAID, on the one hand, you will attract the attention of companies because it gives you legitimacy; on the other hand, you will attract the attention of investors because USAID’s brand is very well recognized in Serbia and the Balkans,” said Pavlović.

WMEP and USAID CATALYZE plan to work with 50 companies across the region.

For SMEs thinking about private equity, Pavlović’s message is clear: there is no time to waste.

“Preparing and taking a good look at where the company is today and evaluating the company’s value is challenging. It is important to see that sometimes it takes several years for a company to prepare to share its financial reports with potential investors. So, yes, start at the right moment and make your decision wisely. It can define the future of your company.”