Molly Corso in Tbilisi
May 31, 2012


Costly bank loans and limited funding sources have stifled the growth of small business across the South Caucasus. But a new fund could change that, according to Esben Emborg, the principal partner of the Small Enterprise Assistance Funds (SEAF) in Tbilisi.

The Caucasus Growth Fund, created by major international financial institutions and the US-based SEAF, is banking on a mixture of equity and debt financing – as well as new funding tools – to boost business growth and development in Armenia, Azerbaijan and Georgia.

In an interview with bne, Emborg notes the secret to the fund's success could be in untapped regional partnerships and prioritising good management over any single market sector. He stresses while that the fund's key sectors are "nothing surprising" – agriculture, hydroelectric power, retail, distribution, warehouses and cold storage – a focus on good management and on new types of "synergies" between businesses could open more possibilities for investment and development. "It is not so much the sector that makes the company worth investing, it is more the management. That is obviously a finding that is important to us," Emborg says, adding that in Georgia, for example, any well-managed business "can succeed at almost everything" because of low competition and the open market.

Take for instance trade. While Georgia has made efforts to model itself as a trade centre for the region, the distribution system between the three countries is unwieldy. Trade between the three is further hampered by the ongoing conflict between Armenia and Azerbaijan over the contested territory of Nagorno-Karabakh.

Emborg, formally the general manager for Caucasus Region for Cadbury Schweppes and Nestle, notes that the lack of a single distribution network for all three markets has been a stumbling block for consumer goods moving from warehouses in Europe to households throughout the region. Addressing gaps in the regional distribution system or other market areas would allow the fund to help business and commerce develop across Armenia, Azerbaijan and Georgia. "We are also looking at regional synergies between the three countries - I think it makes sense," he says.

Financial muscle

With a working budget of $42m – invested by the Black Sea Trade & Development Bank, the European Bank for Reconstruction and Development, the World Bank's International Financial Corporation, FMO Entrepreneurial Development Bank, and SEAF – the Caucasus Growth Fund will have the muscle to buy into and/or lend to a wide portfolio of businesses across several sectors. The fund will be managed by SEAF.

The fund will be the first to offer a mix of equity, debt, mezzanine financing and participatory lending to companies. While large financial institutions have tried to offer small and medium-sized enterprises equity financing in the past, the format did not catch on. The new fund, notes Emborg, should help entrepreneurs receive the financing and know-how they need without restricting their cash flow. While the fund is focused on businesses in Armenia, Azerbaijan and Georgia, the companies do not have to be owned by entrepreneurs from those countries. "It does open a lot of doors and I think it opens up doors to people who had seen the potential of the Georgian, or the Caucasus markets," Emborg says. "Sure, I hope [the fund will also help with financing]. We will be looking at new investments and we also have [funds] we can use on start-ups."

But the varied business climate in all three countries could be a potential obstacle for a fund banking on building a portfolio across the region. While Georgia has earned praise for its reforms, both Armenia and Azerbaijan remain bogged down with corruption and cumbersome legislation. The World Bank's "Doing Business" annual survey of bureaucratic hurdles that obstruct business ranked Georgia as the 16th easiest place to do business of the 183 studied in 2011. Armenia and Azerbaijan ranked 55th and 66th, respectively. "The three countries are very much different in terms of how they operate, the openness, the business climate. So we are not making any illusions that we will have an easy time in Armenia or Azerbaijan," says Emborg. "Georgia is [also] still in development, obviously, but much, much further on than the other countries."

"The speed that any of these countries will develop is all about how much the government in each of these countries is willing to let go and let people do their business without interference," he adds.

Emborg underscores that the fund has already identified potential clients, and there are a half a dozen projects "in progressed stage" across all three countries.

An additional hurdle for the fund could be the business sectors' development: the target group for the fund – enterprises with a turnover of less than $15m and fewer than 250 employees – have struggled to take hold in all three countries. "It will be a challenge, obviously, to find businesses in that middle section that has the sufficient capacity to grow in terms of management and all other things. The big businesses in Georgia and in Armenia and in Azerbaijan have a tendency to 'hoover' up the best people - they offer the best pay and it is the place you want to work, so they are much more attractive for young, smart people," Emborg said.

For all that, he's optimistic. "We still believe that we can find businesses that are worth investing in and can grow."



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