Development finance for Ukraine’s private sector is on the rise

While the big-donor dollars flowing to Ukraine have largely gone to public and military support, development finance institutions have also been investing to prop up the country’s beleaguered private sector. And as the war enters its second year, many of them intend to ramp up that support. In the months following Russia’s invasion in February 2022, bilateral and multilateral development finance institutions worked with their existing clients to adjust loan terms or address immediate needs. The U.S. International Development Finance Corporation even helped businesses relocate. Investments in eastern and southern Ukraine have often suffered the most, and some have taken losses as a result of damage to physical assets. With reconstruction costs in the hundreds of billions — likely already nearly double the $350 billion estimate from June, according to some sources — private capital will play a critical role. “For most private companies or banks that are active in Ukraine currently, it's really just a question of how they keep their businesses alive,” said Lisa Kaestner, International Finance Corporation’s country manager for Ukraine and Moldova. “It's really about working capital and it's essential repairs,” she said, adding that some companies are trying to fix physical infrastructure or seek financing to move their operations elsewhere. These donor-funded financial institutions typically invest in line with their expertise, be it trade finance, supporting small businesses, or making equity investments. An overall figure for exactly how much has been invested in Ukraine’s private sector since the start of the war doesn’t seem to exist, but Devex’s calculations put the number in the hundreds of millions. DFIs are looking to expand their private investments despite the unique risks of operating in a country at war, such as barriers to due diligence and monitoring. To do that, these institutions — which are limited in how much risk they can take because they often have to operate on commercial terms — will likely need more concessional resources to help de-risk the investments. Investments to date The largest donors in Ukraine are three multilateral DFIs — the European Bank for Reconstruction and Development, the World Bank, and the European Investment Bank — though bilateral DFIs are also stepping up. Devex spoke with several institutions, including IFC, EIB, and DFC. They reported that they are doing everything they can to ensure their wartime investments meet normal high standards, including through creative means such as virtual monitoring. It helps that many of the investments thus far have gone to existing or previously vetted clients, they said. DFIs operating in Ukraine are also formalizing channels of coordination with one another. While the goal is to ensure limited resources are used efficiently, they are sometimes investing in the same deals, including in Horizon Capital, a Ukraine-based private equity fund. IFC, DFC, and the German DFI — Deutsche Investitions- und Entwicklungsgesellschaft, or DEG — have committed to investing in the fund, which targets Ukrainian businesses in the technology and banking sector. Horizon is “best in class” so it’s not surprising it is attracting the support from multiple DFIs, Naz El-Khatib, DFC’s deputy chief of staff for policy, told Devex. “But our pipeline in Ukraine is growing,” he added. “I suspect over time, as we’re able to get these transactions over the finish line, both from the DFC’s perspective and I’m sure from the perspective of other institutions, that the roster of businesses receiving that financing will continue to grow.” Here’s a breakdown of where some of these institutions have invested to date: • IFC’s total portfolio in Ukraine is about $300 million in Ukraine — about half of that has been invested since the war started. Among those investments are $30 million in Horizon Capital and $69 million in an agricultural commodity trading company. IFC has also provided guarantees to Ukrainian banks to support trade finance and improve exports, including grain. IFC has made most of those investments “without any concessional support” and holds them fully on its own balance sheet — which means it is taking on the risk and using its own money. While IFC wants to ramp up, Kaestner said, “We as an institution make decisions on a commercial basis and can’t put all the risk on our balance sheet and do more than what we’re doing.” • EBRD, the largest institutional investor in Ukraine, deployed €1.7 billion in the country in 2022, well on its way to its €3 billion commitment for 2022-2023. It also raised some €1.4 billion of donor funds in 2022, including unfunded guarantees, and mobilized €200 million from partner banks. The bank took on 60% of the risk related to its investments in Ukraine in 2022. EBRD’s spending in Ukraine last year represented more than 10% of the bank’s total investments. About 39% of its total portfolio in the country is private sector investment. The bank’s funding primarily went to investments in vital infrastructure, energy, food security, trade, and support for the private sector. EBRD’s Trade Facilitation Program expanded to support more than €400 million in trade transactions for crucial goods for the Ukrainian economy since the start of the war. • DFC’s first investments after the start of the war were providing technical assistance grants to existing partners supporting Ukrainian refugees outside of Ukraine. It has also supported a $15 million, 10-year loan portfolio guarantee for Bank Lviv, a Ukrainian bank, that will support lending to micro-, small-, and medium-sized businesses. DFC has also invested in the modernization and expansion of Ukrainian Catholic University, another existing client. The agency also signed letters of intent with Horizon Capital, a private equity fund, and with the Dobrobut Hospital in Kyiv. “We’re going to play a part in reconstruction, but we want to find investments that help support Ukrainian businesses trying to stay open during the war, Ukrainian entrepreneurs trying to meet payroll, trying to make sure that they can pay their taxes to contribute to the war effort. And the types of organizations that are providing services day in and day out,” El-Khatib of DFC told Devex. • The DEG has a portfolio of $70 million in Ukraine’s private sector, including the Horizon Capital private equity fund. It is focusing its investments on IT and private equity funds as well as the country’s private agricultural sector. What’s next Expect more private investment in the year ahead. That was the message the DFIs delivered to Devex. There is likely to be more trade finance. But some institutions will likely consider long-term investments as well, especially if donors provide guarantees or other funding to de-risk the transactions. A key target for many of DFIs is support for small and medium enterprises distributed through financial institutions. In December, IFC launched the Economic Resilience Action Program, a $2 billion package of investments to support the immediate needs of Ukraine’s private sector and help prepare for reconstruction. IFC will put up $1 billion but is working to secure guarantees from donor governments to make up the rest of the funding to de-risk the investments, Kaestner said. That $2 billion in investment is expected to mobilize another $1 billion to $2 billion in private investment, she added. “What we’re trying to do by leveraging blended finance would be to extend a bit the length of financing we’re able to provide and the level of risk we’re able to take,” Kaestner said. While IFC didn’t provide details on when those guarantees are expected to come in, Kaestner said it will use those blended finance resources as they become available and can quickly invest in an active pipeline of potential investments. It is already using some of that funding to develop a program to provide financing to small- and medium-sized enterprises through local banks, she said. DFC will focus on supporting small businesses, according to El-Khatib. On recent trips to Ukraine, he’s heard from Ukrainians that they want DFC to invest in energy, stabilization, healthcare, education, and agriculture. There’s also a lot of interest in DFC’s political risk insurance, and those transactions make up a significant amount of its portfolio in the country, he said. Last month, DFC announced plans to mobilize $250 million this year for banks in Ukraine to support small- and medium-sized businesses. That is part of a broader commitment to mobilize more than $1 billion in the coming years. DFC declined to say how much of the $1 billion will be its own investments. “Obviously there’s always tradeoffs with risk but we’re in a position where, given our mission, it makes all the sense in the world to keep pushing forward here,” El-Khatib said. The majority of EIB’s €1.7 billion investments to Ukraine since the start of the war have gone to the public sector. But as the conflict continues, the major lender will expand its private sector support to the country, Markus Berndt, acting director of EIB Global, told Devex. As it expands, EIB will focus on financing intermediaries, including banks, that invest in small businesses. It is working on a new program to support small- and medium-sized enterprises through first-loss guarantees to banks to allow them to take more risks and support those businesses. The bank is also exploring some potential investments in equity funds. With Ukraine officially a European Union candidate country, EIB can now also tap other pools of capital, including its subsidiary, the European Investment Fund, to invest in the country. The fund aims to support SMEs and will be useful as it turns to more private sector investment, Berndt said. Update, Feb. 28, 2023: This article has been updated to clarify the timeline of DFC’s $1 billion investment commitment and that IFC’s new funding program will support the private sector.