Investment funds eye banks' non-performing loans

Private equity funds intend to help banks with their non-performing loans, by financing the companies that are having trouble repaying their credits, if lenders agree to this proposal.

"We believe we can do business together with banks. We will meet with the representatives of six of the biggest commercial banks in Romania, to propose a partnership: help with some capital those companies that are unable to repay their loans and risk going insolvent or bankrupt," said Robert Luke, chairman of South Eastern Europe's Private Equity Association (SEEPEA), which comprises the biggest funds operating on the local market.

IFC, the World Bank's private sector investment arm, has recently announced its willingness to help banks process bad debt, by getting involved through stakes up to 20% in private equity funds that will focus on this business, if lenders think they need such support.

"The problem is banks refuse to accept they are having trouble with loans and prefer to reschedule the credits hoping that companies will come up with the money," Luke says.

Private equity funds are those funds whose capital was privately raised. Unlike traditional financing solutions (loans from banks), they do not only assist a company with capital but also get involved in its management in order to boost the business and create added value, getting part of the share capital of the company in exchange.

Since many of the funds operating on the local market such as Advent, Enterprise Investors and GED raised their capital before the onset of the crisis, they still have cash available for new investments. The partnership that SEEPEA proposes to banks comes at a time when more and more companies are falling behind in their loan payments and choose to file for insolvency to keep creditors at bay for a while.

Companies do not only need money to pay off their debt but also professional management, and banks, which are at their first major crisis on the local market, do not have the expertise to help companies get back on track, Luke says. The same goes for local entrepreneurs whose businesses went through almost a decade of economic growth and increasingly flexible access to bank loans.