Currently there are only 19 investment funds in Serbia and 5 companies that manage them. The structure of investments at the beginning of 2018 was such that out of a total of 210 million euros of investments, short-term cash deposits occupy the largest share (around 70%), while the rest are mostly bonds and some stocks. So, in addition to the modesty of the figures themselves, what draws particular attention is the one-dimensionality of investment. Simply put, funds do not offer many options to the potential investor.
On the other hand, if one considers the relatively inert role of the Securities and Exchange Commission, as the main regulator, as well as the negligible turnover on the Belgrade Stock Exchange and the unattractiveness of investing in small shares and other transferable securities, which are in the open market, clearly is that the capital market in Serbia is extremely underdeveloped and that numerous systemic cracks need to be repaired before embarking on alternative forms of investment.
However, it should be noted that, in addition to being very interesting and replacing an outdated and extremely restrictive system based on the Law on Investment Funds, they may be more than relevant for certain actors in the Serbian economy.
Here, first of all, one should keep in mind the startup community and small businesses that, while operating well and recording adequate growth, need the capital to scale up and achieve the desired breakthrough in the market. It is clear that the IT industry could profit especially if the concept intended to be introduced by the new regulation comes to life.
It is well known that the share of micro, small and medium-sized enterprises in the Serbian economy is very modest (only about 32%). However, what is further discouraging is the fact that the capital market is quite harsh on these players, given that they can hardly reach the extra funds they need to make the leap. Practically every third person can get a loan from a bank and achieve pensive growth.
Of course, startups can’t even think of a loan, but they can hope that the idea they are developing will be good enough to attract individual investors, financial angels and other categories that again offer little capital under difficult and often unfair conditions and without added value.
However, the new regulation, through the Law on Alternative Investment Funds, finally makes Serbia at least a legally predictable and recognizable environment for, among other things, private equity and venture capital funds.
From April 2020, there will also be an opportunity for us to establish venture capital and private equity funds, which are seen by micro, small and medium-sized businesses as a potential source of financing.
There is an interesting fact that private equity funds’ investments in companies in Central and Eastern European countries in 2017 reached 3.5 billion euros. These investments are concentrated predominantly in Poland, significant in Hungary, Latvia and Romania, while Serbia is last on the list.
On the other hand, investments of so-called funds venture capital in companies in Central and Eastern European countries amounted to 108 million euros in 2017. All this speaks to the current trend of investing in this part of Europe and, if a foreign investor has the prospect of investing in Serbia, it will now have at least a recognizable regulatory framework, almost identical to the one in force in the EU.
So this market is very colorful and dynamic and this may be the first of many steps that will enable Serbia to be put on the alternative investment map.
Of course, other conditions are needed to create such an environment, but this is one of the necessary steps. Through private equity and venture capital funds, private investors can pool their free funds and entrust them to a carefully selected and regulatory-eligible team of people who will manage those funds.
IT companies and companies from other sectors that may be the target of such an investment at the beginning of their business cycle if they meet the conditions prescribed by the policies and rules of the specific fund.
Such an investment will not only bring them capital, but will also provide them with the invaluable know-how of experienced managers, strategically stronger positions, contacts and maybe even a network of clients. Although the types of funds required by the Alternative Investment Funds Act are numerous, as already mentioned, PE and VC funds are somewhere the most suitable tool for this type of investment. They are, in addition to the always attractive and popular hedge funds in the popular culture, also some of the “most sound” types of private equity alternative investment funds.
It should be noted that the Law on Alternative Investment Funds, in addition to being eligible to create a good investment habitat for micro, small and medium-sized enterprises, and in particular for start-ups and IT firms, is also necessary for the process of harmonization with EU regulations. It also offers various and very rich options for organizing fund management companies and, importantly, opening up the possibility for funds to invest in different types of assets, not just traditional assets such as securities and deposits.
It should be noted that the Law on Alternative Investment Funds, in addition to being eligible to create a good investment habitat for micro, small and medium-sized enterprises, and in particular for start-ups and IT firms, is also necessary for the process of harmonization with EU regulations. It also offers various and very rich options for organizing fund management companies and, importantly, opening up the possibility for funds to invest in different types of assets, not just traditional assets such as securities and deposits.
In addition, the law enhances the role of the Securities and Exchange Commission and clearly sets out the framework in which it will oversee the market, establish stronger supervision and a greater degree of protection in the case of risky investments, strengthen the role of depositors (banks), limit financial leverage, establish clear transparency criteria, prescribes strict licensing requirements, strict rules for risk management, etc.
With all this in mind, it is clear that, since October, Serbia has a high-quality, European and modern legislative framework that can be regarded as a good and, above all, a reliable “foundation” for establishing a culture of investment through funds.
