Love in the time of crisis

Weaknesses or Opportunities? Global economic tremors bring dramatic consequences for individual industries in each country. Still, on the other hand, opportunities that can bring significant positive changes for both respective companies and the overall business ecosystem are also emerging. Disrupted supply chains, rising raw material prices, unstable energy costs, recession, and an unstable financial market are singled out from the sea of problems as the biggest obstacles to business. What makes the current economic slowdown different from the economic downturn caused by the global financial crisis 2008 is the need for more clarity about what is happening. No Lehman Brothers collapse, no real estate market crash and no sharp drop in economic activity signalling a definitive impact. Instead, the global economy sets fluctuating conditions that few have seen before. As if the war in Ukraine, energy shocks, and supply chain issues weren't enough, inflation hit, which hasn't been this high and persistent in the last 40 years, followed by rising interest rates.

However, the consequences of the tremors did not dramatically shake Serbian companies individually. Still, they certainly added salt to the wounds of the existing problems in the Serbian business ecosystem. With various state support initiatives and other factors, Serbian entrepreneurs continued to work and even secured GDP (Gross National Income) growth from 2019 to 2022, approximately 5%. One of the sectors that contributed to this growth and managed to ensure the stability of the Serbian economy with its resilience is the manufacturing sector, which serves as the backbone of the Serbian economy. According to available data, this sector has been employing the most significant number of people for many years, approximately half a million in 2021, with the most crucial number of business entities registered as manufacturing. This sector's structure is such that many domestic small and medium-sized enterprises drive this industry. Evidence for this lies in the data that show that these enterprises employ 55% of the total employment in this sector and have reached a 40% share of the total value added in the manufacturing industry in 2021. It is also noteworthy that the SME segment of this sector has a very similar strategy - "produce here, sell there" - with this segment accounting for 40% of the total exports of industrial goods, amounting to €6.5 billion in absolute terms.

This is genuinely commendable, considering that in this sector, which encompasses manufacturing, no segment of the value chain has not been affected by the crisis, from volatile raw material prices and indirect costs to working capital issues and the increasing challenges of exports and finding customers abroad. Only the leaders of these companies know what it feels like to face real challenges head-on and how they have implemented quick and resourceful strategies, which are an integral part of modern business and should be studied in business education institutions as examples of best practices. However, the phrase "money makes everything easier" is what the public is familiar with, implying the financing of such operations. In Serbia, companies are primarily financed through bank loans and subsidies, as well as cheap loans from state development agencies, which, on the one hand, is perfectly fine. However, in today's environment where money has become scarce and expensive, this presents one of the significant issues that has evolved over the years. On the other hand, in our business ecosystem, there are no diversified funding sources, especially not those that would finance specific strategic directions of the SME segment.

Good financing practices for many companies in Central and Eastern European countries, where companies have faced similar challenges, involve alternative funding sources, namely venture capital funds—various funds and finance companies' models, which have evolved over time. Still, I would like to highlight "Private Equity" (PE) funds, which aim to finance companies that have reached a certain level of maturity. In short, the concept of these funds is to invest capital in private companies with the typical model where the fund purchases a stake in a private company with the belief that it will eventually realize an increase in the value of that stake. On the other hand, investors ("Limited partners - LPs") invest their money in the fund where the entire capital is managed by the management team of the company that established the fund ("General partners - GPs"). With their expertise, professional management, and extensive network of partners in a specific field, funds support the growth of companies and, consequently, the increase in the value of their stake. In the end, depending on the type of transaction, the outcome can be different, with some models involving the fund's stake being repurchased by the company's founders or sold to other, more significant funds.

However, the global market for PE financing also faced a crisis in the first six months of 2022, where this industry continued its high-value transactions from 2021 despite persistent inflation, the Ukraine invasion, and growing tensions between the United States and China. Then, in June, when U.S. bankers announced the first in a series of interest rate hikes, and their colleagues worldwide followed suit, banks withdrew from financing risky transactions, and business dynamics collapsed. It will take investors (LPs) some time to rebalance their portfolios due to market changes and the slowdown in cash returns from previous years. Short-term cash shortages will make it difficult to make large-scale investments, especially after several years of record investments in PE funds. The same could be said for the fund managers (GPs), who will face challenges in making placements as their investment volume depends on the current situation of business entities in the market.

In Serbia, there is no clear picture of this type of financing market, but in times of crisis, the advantages of Serbian companies and the opportunities that are emerging are conducive to the strong growth of our companies through this type of financing. Analyzing the mentioned SME segment in the processing sector, I would highlight several key advantages compared to companies in the same industry in Central and Eastern Europe:

• Our SME segment has expertise and experience in producing "niche" or unique products with a developed B2B model with large companies from the EU.
• The productivity of our companies is at an optimal level due to lower labour costs.
• Profitability is at the level of the Central and Eastern European average, with great potential for technological development of production lines and cost optimization.

An excellent example from our region that successfully generated three times higher exports through this approach and utilized these advantages is a company that has been a leader in animal feed production for many years. In 2015, this company received an investment from the PE fund Abris, which completed a complete restructuring. In 2022, the company was sold to a large distributor of agricultural products, RWA Raiffeisen Ware Austria AG.

Perhaps opportunities, after all. The problems on both sides have created opportunities to overcome them by creating a synergistic effect. In my opinion, "love at first sight" is possible, of course, with a trusted "matchmaker" that can come from the micro-environment of individual companies or the macro-environment with a strong influence on the entire business ecosystem in Serbia.