The EFSE is a public-private partnership in the truest sense of the term enabling the realisation of goals that neither of the two parties, public and private investors, alone would be able to achieve!
The EFSE is replenished with funds from various donor agencies and European governments, international financial institutions, as well as by private investors.
The EFSE sets the standard as a prime example of the intelligent use of public budget funds for development purposes. By using funds from public investors as a risk-cushion, the EFSE’s innovative investment structure attracts private capital, in particular from private investors that would otherwise neither invest in the fund’s target region nor for the benefit of the target group. Thus, the EFSE leverages the impact of scarce budget funds and at the same time opens a gateway for private capital investments to the countries in Southeast Europe and the European Eastern Neighbourhood region.
To date, the EFSE has acquired committed funds of over EUR 1 billion, approximately 66 % of which is private capital. This leveraging potential is critical for the region whose capital markets are still in a development stage where economic growth depends more than ever on ready access to long-term financing.
EFSE's multi-layered structure
Investor and donor funds used for development finance initiatives in the target regions are generally scarce in view of actual needs. The advantage of the EFSE’s funding strategy is to use these donor funds to leverage additional funds at large scale for development purposes. This is achieved by issuing different share tranches as well as notes bearing different risks:
- Public investors and donors invest in the junior C tranche (first loss piece)
- Development finance institutions and international financial institutions invest in the mezzanine B tranche,
- Private investors purchase the senior A tranche or notes.
Whilst mezzanine and senior investors invest at the regional level, junior tranches can either be earmarked to a specific country or the region as a whole. Country-specific junior tranches are exclusively used for investments in one particular country. Regionally earmarked junior tranches allow for a flexible use of funds and can therefore best accommodate changing development finance needs in the target regions.
In order to undertake investments, different sources of funds representing different risk tranches are pooled. They then constitute one single source of financing for the EFSE. Consequently, the EFSE uses these pooled funds flexibly within each country based on its overall investment policy. This approach creates efficiency gains and also effectively addresses the risks associated with each investment.
Mobilising private capital is only possible due to the subordination mechanism in place for each country in which the EFSE invests. In the unlikely event of losses – for example, due to a defaulting partner lending institution – the C tranche is affected first. Only when that tranche is fully depleted is the mezzanine B tranche affected, followed by holders of senior A tranches and, finally, notes.
Income is first distributed to noteholders, while holders of A, B and C tranches follow. Holders of A, B and C tranches receive income based on the success of the investments made by the Fund, noteholders receive a fixed interest rate.
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Contact point for complaints
For any complaints about the European Fund for Southeast Europe, please use the following email address: complaints@efse.lu.
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