Attachment J-12 Background Analysis and Reports.pdf

USAID INVEST: SERBIA

SERBIAN MEDIA INVESTMENT ASSESSMENT -

DRAFT FOR REVIEW

This report is made possible by the support of the American People through the United States Agency for International Development (USAID).

The contents of this report are the sole responsibility of INVEST, implemented by DAI, and do not necessarily reflect the views of USAID or the United States Government.

Options for mobilizing capital for Serbian media firms August 2019

CONTENTS

ACRONYMS 1

EXECUTIVE SUMMARY 2

THE MEDIA INVESTMENT ENVIRONMENT 2

PRIORITIZING DIGITAL MEDIA INVESTMENTS 2

THE MEDIA INVESTMENT PLATFORM - DEMAND BASED FUNDING SCENARIOS 3

THE MEDIA INVESTMENT PLATFORM STRUCTURE 3

THE MARKET: ASSESSMENT OF THE INVESTMENT ENVIRONMENT IN THE SERBIAN MEDIA SECTOR 5 THE SERBIAN ECONOMIC ENVIRONMENT - SIGNS OF STABILITY AND FOUNDATIONS FOR GROWTH 5

THE SERBIAN MEDIA INVESTMENT ENVIRONMENT – MARKET DISTORTIONS 5

INVESTING IN DIGITAL MEDIA - THE OPPORTUNITY AND RATIONALE 6

CONCLUSION AND RECOMMENDATION ON THE USAID/SERBIA CONCEPT IN THE MEDIA INVESTMENT ENVIRONMENT7

PIPELINE: THE INVESTMENT POTENTIAL OF SERBIAN MEDIA OUTLETS 8

SMS PARTNERS 9

INITIAL PIPELINE OF INVESTMENT OPPORTUNITIES 15

CO-INVESTING PIPELINE - E-COMMERCE EXAMPLE 16

BUSINESS CASE AND FUNDING SCENARIOS FOR THE MEDIA INVESTMENT PLATFORM 18

BASE SCENARIO 18

SCENARIO TWO – BASE BUDGET + 20% 19

SCENARIO THREE – BASE BUDGET + 50% 19

PREPARING INVESTOR-READY COMPANIES 20

STRUCTURE AND OPERATIONALIZING THE MEDIA INVESTMENT PLATFORM 25

MEDIA INVESTMENT PLATFORM STRUCTURE 25

OPTION 1: STRUCTURE A TRADITIONAL MEDIA INVESTMENT PLATFORM 26

SUSTAINABILITY OF THE MEDIA INVESTMENT PLATFORM 29

KEY RISK FACTORS AND MITIGANTS 30

BUDGET AND SCENARIO ESTIMATES 32

ACRONYMS

BMAP Balkans Media Assistance Program CEO Chief Executive Officer COSME Competitiveness of Enterprises and Small and Medium-sized Enterprises CO Contracts Officer CSR Corporate Social Responsibility EBRD European Bank of Reconstruction and Development EIF European Investment Fund EU European Union GDP Gross Domestic Product ICT Information, Communication and Technology IREX International Research Exchange LoI Letter of Intent MIF Media Investment Facility MIP Media Investment Platform MMF Multi Media Fund MSMEs Micro, Small and Medium Enterprises NAESA National Association for Ethical Standards in Advertising OECD Organization for Economic Cooperation and Development PEA Political Economy Analysis PIP Performance Improvement Plan REM Regulatory Authority for Electronic Media RFP Request for Proposals SMEs Small – Medium Enterprises SPA Share Price Agreement SPV Special Purpose Vehicle SMS Strengthening Media Systems TA Technical Assistance USAID United States Agency for International Development USD US dollars VC Venture Capital or Venture Capitalist WPF World Press Freedom

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EXECUTIVE SUMMARY

USAID/Serbia’s Media Project supports citizens’ increased access to independent news and information through market-driven media sector development and reforms. One of the Media Project's objectives is to provide capital to professional media companies – thus improving the demand as well as the provision of economically resilient and independent media. USAID/Serbia contracted the USAID INVEST project to conduct a landscape assessment and present options for mobilizing capital for Serbian media companies. The INVEST team assessment was conducted in July 2019 and included pre-mobilization desk research and field work in Serbia to examine the media sector investment environment, available investment approaches and vehicles, potential investment partners, an investment pipeline and an investment structure. Following are the primary takeaways from the assessment.

THE MEDIA INVESTMENT ENVIRONMENT

Serbia dropped 14 places in the World Press Freedom (WPF) Index (from 76 in 2018 to 90 in 2019).1 Public funding to the sector represents up to 40% of the market and small and medium enterprise media companies (SMEs) have been sidelined. Venture capitalists and bankers note that these companies are not attractive investment targets due to unstable cash flows, capacity concerns and, in some cases, a donor-driven rather than business-driven culture.

Conclusion: The enabling environment for independent media companies features a heavily distorted market that is currently unattractive to commercial investors.

PRIORITIZING DIGITAL MEDIA INVESTMENTS

USAID/Serbia is targeting the digital media value chain for investments. Market trends back this prioritization, including that mobile is the world’s fastest growing internet usage device and the fastest growing advertising spend category. In 2017, Serbia had the second highest digital advertising spending percentage growth in Europe.2 Evidence of demand for independent media includes, for example, one independent media company has seen an 80% increase in web page views in 2019, which they attribute to their independent coverage of civil protests.

Conclusion: There is evidence of a demand for independent digital media content that, with proper support, may be professionalized and monetized to create value for companies and investors.

POTENTIAL INVESTMENT PARTNERS AND PIPELINE

The assessment identified potential investment opportunities and sources of capital:

● SMS Partners The team identified eight partners that could receive investments but require investor readiness support.

1 https://rsf.org/en/serbia 2 USAID/Serbia SMS Political Economy Analysis. September 2018.

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https://rsf.org/en/serbia

● Co-investment The team developed one large scale co-investment scenario to link independent media content providers to an e-commerce platform.

● Venture Capital Funds The team confirmed there are venture capital funds that are open to co-investing if the right companies are found and mutual interests are clear.

Conclusion: The team estimates that a pipeline of 5-10 companies could be prepared in 6-18 months to take on investments of approximately US $3.45 million, comprising US $2.3 million from the private sector and US $1.15 million in catalytic capital, with a 2:1 leverage ratio.

THE MEDIA INVESTMENT PLATFORM - DEMAND BASED FUNDING SCENARIOS

The Media Investment Platform (MIP) will provide: 1) Technical assistance for investment readiness;

2) Transaction advisory services to market/close deals; 3) Grant funds for investment/development capital to professional media companies. The base case scenario is a 3-year, $3 million project that deploys $1.15 million in grant capital. Scenarios 2 and 3 give room for increased investments and commitments to other venture or social impact funds.

The MIP grant funds are allocated as direct grants and microgrants to SMEs (60%), co-investments with a private investor (30%), and partnership commitments with development partners (10%).

THE MEDIA INVESTMENT PLATFORM STRUCTURE

The MIP will have a governance structure, financial instruments by which to deploy and catalyze additional capital, and clear policies to guide, manage and report on financial and social returns on investments. Over time (tentatively in year 3), USAID/Serbia may consider establishing a sustainable Media Investment Platform (“S-MIP”). This facility would require funding from at least one other donor besides USAID and would provide various forms of equity, debt, and guarantees to SMEs. To fund the MIP project, USAID/Serbia may consider USAID/Serbia award to identify and directly engage an organization to manage and implement the MIP

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Conclusion: In the current media investment environment, the assessment team recommends a Media Investment Platform (MIP) to support the economic sustainability of Serbian media sector businesses through increased access to investment, particularly for SME professional media companies. The MIP complements and expands the Mission's current activities in the sector and the approach is aligned with the overall USAID Journey to Self-Reliance policy framework and the Private Sector Engagement Policy, which embrace market-based approaches to achieve development and humanitarian outcomes at scale.

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THE MARKET: ASSESSMENT OF THE INVESTMENT ENVIRONMENT IN THE SERBIAN

MEDIA SECTOR

THE SERBIAN ECONOMIC ENVIRONMENT - SIGNS OF STABILITY AND FOUNDATIONS FOR GROWTH

According to recent economic indicators, Serbia’s economy is stable and growth in 2018 was 4.3%, the fastest pace in 10 years.3 Macroeconomic stability has been maintained through economic growth, declining public debt, as well as low and stable inflation. Fiscal discipline has taken root, with the government budget recording a surplus for two consecutive years and public debt falling by about 15% of GDP since early 2017. At the same time, unemployment has declined, and employment has risen steadily, with informal employment making up a smaller share. GDP growth is expected to slow down to still robust rates of +3.2% in 2019 and +3% in 2020. Headline inflation should remain in check, i.e. below or around 3%.4

In the financial sector, micro, small and medium enterprises (MSMEs) face challenges in accessing suitable financing; these challenges are particularly severe for micro-enterprises and start-ups. MSMEs in Serbia constitute over 99% of all businesses and employ over 65% of the labor force. SMEs face challenges when seeking bank financing as bank lending standards are overly strict, requiring good credit history, collateral, and large turnovers. Other sources of financing that may be more appropriate for SMEs are not well- developed. These include factoring, leasing, and private equity/venture capital financing. 5

In its Annual Report, the European Commission stated that Serbia had made good progress and was moderately prepared to develop a functional market economy, having laid firm foundations for growth and preserved macroeconomic stability.6 The European integration process, which started in 2012, is a beacon for various sectors in Serbia, including media.

These positive and stable macroeconomic trends are encouraging for private sector investors. However, in the media sector, Serbia has caught the attention of the international community for its declining media freedoms, which were described by the International Research and Exchange Board (IREX) in its 2018 media sustainability index as the most polarized in 20 years.7 As recently as March 2019, the International and European Federation of Journalists condemned attacks on media freedom in Serbia.8 https://www.imf.org/en/Publications/CR/Issues/2019/07/22/Republic-of-Serbia-Staff-Report-for-the-2019-Article-IV-Consultation-and-Second-Rev iew-under-48511 4 https://www.eulerhermes.com/en_global/economic-research/country-reports/Serbia.html 5 Serbia’s New Growth Agenda. World bank Group. 2019.

http://pubdocs.worldbank.org/en/892631557249265437/Serbia-New-Growth-Agenda-4pager-ENG.pdf 6 European Commission 2018.

7 https://www.irex.org/sites/default/files/pdf/media-sustainability-index-europe-eurasia-2018-full.pdf https://www.ifj.org/media-centre/news/detail/article/serbia-ifjefj-urge-restrain-from-violence-against-journalists-after-call-for-protests-at-media-h ou.html

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https://www.imf.org/en/Publications/CR/Issues/2019/07/22/Republic-of-Serbia-Staff-Report-for-the-2019-Article-IV-Consultation-and-Second-Review-under-48511 https://www.imf.org/en/Publications/CR/Issues/2019/07/22/Republic-of-Serbia-Staff-Report-for-the-2019-Article-IV-Consultation-and-Second-Review-under-48511 https://www.eulerhermes.com/en_global/economic-research/country-reports/Serbia.html http://pubdocs.worldbank.org/en/892631557249265437/Serbia-New-Growth-Agenda-4pager-ENG.pdf https://www.irex.org/sites/default/files/pdf/media-sustainability-index-europe-eurasia-2018-full.pdf https://www.ifj.org/media-centre/news/detail/article/serbia-ifjefj-urge-restrain-from-violence-against-journalists-after-call-for-protests-at-media-hou.html https://www.ifj.org/media-centre/news/detail/article/serbia-ifjefj-urge-restrain-from-violence-against-journalists-after-call-for-protests-at-media-hou.html

THE SERBIAN MEDIA INVESTMENT ENVIRONMENT – MARKET DISTORTIONS

As a starting point, investors look for economic, political and regulatory stability and predictability so that businesses can function in an environment where natural market forces are not distorted or blocked. This is not the case in the Serbian media sector.

In 2018, there were a series of buyouts and mergers in Serbia’s media environment that resulted in a market where two corporations have significant shares in infrastructure, telecommunications, content production and distribution, as well as interests in the media buying and advertising sectors. The market is further distorted by public funding to the sector, which represents up to~40% of the market.

The Media Ownership Monitor estimates that owners and managers of TV outlets who publicly endorsed the current government serve 40.2% of the Serbian audience. The estimated endorsements are more pronounced for radio (42.6%) and print media (50.73%).9

The results are made evident in the World Press Freedom (WPF) Index rankings where Serbia dropped 14 places from 76 in 2018 to 90 in 2019.

In its field assessment, the project team confirmed that the media sector and, in particular, small- and medium-sized independent media companies currently are not attractive to investors or financiers due to unstable cash flows, market distortions, and capacity concerns (technical, commercial, management).

The team also concluded that support to small- and medium-sized media companies through investment readiness, transaction advisory services, and catalytic capital could play a pivotal role in attracting private debt and equity investors to this sector.

INVESTING IN DIGITAL MEDIA - THE OPPORTUNITY AND RATIONALE

In this challenging media sector investment climate, an investment platform targeting the digital media value chain because of the potential for high social and economic impact is recommended. Some of the key opportunities noted in the USAID/Serbia SMS Political Economy Analysis and other sources which support this include:

● Business indicators show a significant increase in media revenues. In 2017, total revenues of entities registered as media companies were €414 million, a 3.8% annual increase over 2016 (€399 million), which was a 9% annual increase over 2015 (€366 million).

● In 2017, Serbia had the second highest digital advertising spending percentage growth in Europe.

● Media Ownership Monitor reports that of 3+ million Serbians who use the internet daily, 77% use it to access internet news portals and other publications.

● From 2008 to 2016, the internet advertising market share increased from 1% to 13% while the share for TV, print, out-of-home and radio remained constant or declined.10

9 USAID/Serbia SMS Political Economy Analysis. September 2018.

10 Prava mera medija, 2018: 6

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● From January – June 2019, SMS partner saw an 80% increase in web page views. The Executive Director attributes this to their coverage of public protests, indicating a strong demand for independent news coverage.

The trends in Serbia are, in fact, mirroring global trends where the media sector has been impacted perhaps more than any other sector by the internet and a global shift to new technologies for producing and distributing media content. As noted in the SMS Political Economy Assessment (PEA), “this trend is confirmed by the recent Reuters Oxford Digital News report, which indicates that 82% of respondents in 37 countries use digital media and online sources to obtain news compared with 71% for TV, 36% for print, and 33% for radio.“

In its assessment of the media investment environment, the team also considered these notable findings from the SMS PEA:

● We are witnessing a mass customization of experience across all content, advertising, and brands. Most consumers will be using their smartphones to access media content by 2019. This trend makes mobile the world’s fastest growing Internet usage device and the fastest growing advertising spend category.

● Social media is driving massive traffic to magazine and newspaper websites, underscoring the opportunity for publishers to optimize their social strategy.

● Video usage and revenues are growing exponentially around the world and internet advertising spending is poised to surpass television ad spend.

This transition presents challenges and opportunities in production, consumer behavior and consumption, competition, interaction, distribution, monetization, attention, advertising revenue, subscription revenue, and product development. And these are areas where USAID interventions and investments in small- and medium-sized media companies can have a positive and lasting impact.

These findings and others offer evidence of an environment where independent digital media content is attractive and, with proper support, may be professionalized and monetized to create value for companies and investors.

CONCLUSION AND RECOMMENDATION ON THE USAID/SERBIA CONCEPT IN THE MEDIA INVESTMENT ENVIRONMENT

In the current media investment environment, the assessment team found evidence that concurs with the planned USAID program to fund the Media Investment Platform (MIP) to support the economic sustainability of Serbian media sector businesses through increased access to investment, particularly for small and medium sized professional media. The MIP complements and expands the Mission's current activities in the sector and the approach is aligned with the overall USAID policy framework for the Journey to Self-Reliance and the Private Sector Engagement Policy which embrace market-based approaches to achieve development and humanitarian outcomes at scale.

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PIPELINE: THE INVESTMENT POTENTIAL OF SERBIAN MEDIA

OUTLETS

The Serbian media market has more than 2,000 registered media businesses, but only half (1,263) have submitted the required business documentation and the quality and consistency of many companies is low. Over the past two years, USAID/Serbia and its implementing partners have been identifying and supporting select SME companies that have limited access to business development and investment finance yet reach a comparatively large audience and have the potential to grow. This assessment sought to build on this work, evaluating the investment potential of these companies, while exploring other media related companies and investors.

SMS PARTNERS

Commitment to quality, independent media. All of SMS supported media companies were established by committed journalists with a mission to provide quality and independent media. One of these, for example, was started by eight journalist colleagues 25 years ago. While all eight remain as owners, most do not participate in the business. In a similar story, another company has a group of owners in their 70's, many of whom are no longer engaged in day-to-day activities. One local media was started by four friends ten years ago, while another has been developing its business model out of the radio-web portal combination and increased its reach. Most companies are managed by people with journalism degrees. All are quick to point out that salaries are low, but that staff are very committed to their job.

Relationship with public officials. Companies assessed reported consistent pressure (roughly every other year), usually from government tax inspectors, and noted that this pressure also extended to companies with which they do business. They have become adept at managing pressure, but indicate it affects operations as people are distracted from their regular duties. They also emphasized that they take deliberate and calculated business decisions due to the operating environment, which has also affected their appetite for growth and for pursuing debt and equity financing.

Use of equity or debt to finance operations. None of the partners had considered equity investment to fund growth. While some had taken loans in the past, there were instances where the loans had been rescheduled due to inability to pay. One company has since been offered a business loan linked to the EU funded Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) program, which facilitates access to loans and equity finance for SMEs where market gaps have been identified. COSME runs 2014-2020. A listing of the Serbian financial intermediaries and investment focus is available at their web site.11 This is not considered a direct competitor to the MIP as the financial intermediaries that we met with do not see the SME media companies as bankable yet.

Business plans and actions. The SMS has sparked some actions among the companies it supports.

https://europa.eu/youreurope/business/finance-funding/getting-funding/access-finance/search/en/financial-intermediaries?shs_term_node_tid_dep th=2320

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● Developing business plans and conducting a human resource analysis to automate some processes and allow senior managers more time for business development and strategic growth.

● Establishing new online platforms with a paywall for a wider range of clients, upgrading existing digital products and digital marketing strategy and business development. Development of a scalable paywall would allow new and existing clients to access content through different pricing packages.

● An online subscription campaign, which has brought in five figure income in new subscriptions across a number of small medium and larger participating outlets.

● Successful combination of multimedia platforms for content production including special information and education shows for targeted clients in commercial and public sectors.

These media companies require significant technical assistance to ready them for investment consideration, especially in sales, product creation, latest digital trends adoption, etc. The know-how will need to come from organizational experts in monetization strategy, corporate governance and management, financial projections, accounting, debt and equity options, and strategic planning, among others. Any interested firms will need to complete fundamental shifts in their current mode of operation, which emphasizes the social rather than financial aspects of their business.

The team met with one startup that provides a tracking algorithm license, which measures customer loyalty by tracking user behavior as they surf the company websites. The benefit to USAID/Serbia would be the social and monetization impact of using the algorithm with SMEs like those working with SMS.

CO-INVESTING PIPELINE – E-COMMERCE EXAMPLE

Investment support thesis:

● Private investor will be attracted to acquire the 100% equity stake in the e-commerce platform subject to negotiating an attractive entry price (estimated range at 3-4x sales);

● Huge growth potential compared to peer countries, as only 31% of internet users in Serbia actively shop on-line compared to an average of 60% in EU;

● High expansion potential into neighboring markets (of Croatia, Bosnia & Herzegovina, Montenegro and Northern Macedonia);

● Strong customer awareness associated with award winning quality of service.

Impact thesis:

● Creation of the highly visible and marketable media outlet, which would feature high quality news feeds produced by independent news services;

● Leveraging the news network and monetizing its content production;

● Achieving demonstration effect and clear digital media market impact;

● Allowing for clear engagement of citizens (marketplace features);

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● Aligning USAID/Serbia's interest with private capital engagement interest, enabling private capital to invest where it otherwise wouldn’t in the absence of USAID/Serbia program initiatives.

BUSINESS CASE AND FUNDING SCENARIOS FOR THE MEDIA INVESTMENT PLATFORM

BASE SCENARIO

The base case is a 3-year, $3 million project that provides technical assistance for investment readiness ($1,350,000), transaction advisory services to facilitate investments ($462,000) and deploys grant capital ($1,150,000). It is based on the initial pipeline assessment and does not include commitments to other venture funds or social impact funds. This is considered to be the most realistic scenario.

In this scenario, the MIP grant funds are allocated as direct grants and microgrants to SMEs (60%), co-investments with a private investor (30%), and partnership commitments with other development partners (10%).

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The base scenario includes:

1. Technical assistance to help companies become investment ready with industry expertise, namely in much needed implementations of accounting and finance functions, business development, distribution channel management, IT improvement; monetization, etc., and

2. Transaction advisory assistance to find a proper equity investor to buy into the investment story of selected pipeline candidates or to develop a story on the back of an existing asset and facilitate and support transaction due diligence, structuring and closing.

3. The 3rd investment category, participation with USAID instruments in external investment funds, is not considered in this scenario.

4. The media investment platform has $1,150,000 to be distributed among roughly 5-10 pipeline companies that have the capacity to manage investments ranging from $50,000 - $200,000, and one specific investment scenario example which has a capacity to effectively and with the right impact consume an investment of up to $500,000. The fund would offer grants and microgrants, co-investments and partnership commitments and would seek to leverage at least triple ($3,450,000) the funds committed.

SCENARIO TWO – BASE BUDGET + 20%

Scenario 2 is a 3-year, $4.1 million project that provides technical assistance for investment readiness ($1,620,000), transaction advisory services to facilitate investments ($544,800) and deploys grant capital ($1,380,000) and commitments to other funds ($250,000). In this scenario, the MIP grant funds are allocated as direct grants and microgrants to SMEs (60%), co-investments with a private investor (30%), and partnership commitments with other development partners (10%).

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Scenario 2 differs from the Base case in that it increases the technical assistance and the media platform budget by 20% of the base allocation as more pipeline funding needs get realized through both assistance programs. The fund would offer grants and microgrants, co-investments and partnership commitments and would seek to leverage at least triple ($4,140,000) the funds committed.

In addition, this scenario provides $250,000 in external investment funds that would take the form of a commitment against deliverable (where the deliverable is the fund closing). This could be used with existing venture capital funds looking to invest in the digital media sector in the country. At the same time, these external investment funds would agree to leverage USAID/Serbia’s assets to make a meaningful impact on the media market.

SCENARIO THREE – BASE BUDGET + 50%

Scenario 3 is a 3-year, $4.8 million project that provides technical assistance for investment readiness ($2,025,000), transaction advisory services to facilitate investments ($669,000) and deploys grant capital ($1,725,000) and commitments to other funds ($350,000). In this scenario, the MIP grant funds are allocated as direct grants and microgrants to SMEs (60%), co-investments with a private investor (30%), and partnership commitments with other development partners (10%).

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This scenario uses the same logic as in scenario 2, increasing both assistance programs, respectively and the media investment platform budget by 50% of the base. As these amounts are still relatively moderate for the entire sector, they may quickly find the proper justification in higher pipeline funding needs. The fund would offer grants and microgrants, co-investments and partnership commitments and would seek to leverage at least triple ($5,175,000) the funds committed.

Furthermore, this scenario assumes funds in the amount of $350,000 USD to be invested in the form of a commitment against a deliverable (where the deliverable is the fund closing) for the up and coming first-time funds looking to invest into the digital media sector and willing to leverage USAID/Serbia’s assets to make a meaningful impact on the media market.

PREPARING INVESTOR-READY COMPANIES

The team estimates a 12-18 month period to prepare partner media companies for follow-up investment. The companies that are working with venture funds will be assessed for readiness, but expectations are that this will take less time and resources. The scope of technical assistance needs and investment facilitation is detailed in the next section.

Individual assistance categories

The investment platform will provide targeted, firm-level and investor assistance to reduce transaction costs and/or information asymmetries to catalyze developmentally beneficial investments.12 The support provided by such a platform improves the ability of local companies to grow their operating capacity and raise critical growth capital. For investors, the platform acts as a neutral intermediary and directly addresses barriers such as information asymmetries and high transaction costs by improving investors’ understanding of the market and decreasing the cost of due diligence. The platform is designed to provide appropriate support for the local context and constraints, including but not limited to the capital

12 Source: Center for Strategic and International Studies. “Investment Facilitation in Fragile and Transitional States”

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and technical assistance needed by target companies; risks and transaction costs faced by investors; and, characteristics of the local financial market.

The scope of technical assistance to companies – investment readiness

The pipeline companies identified will require technical assistance in the form of a strategic review of the enterprise, and concrete best-practice know-how from experienced professionals in sales and marketing, monetization strategy, corporate governance and management, financial management and projections, accounting and strategic planning, etc. This is a significant change from their current mode of operation, which often emphasizes the social impact of their work and is more suited to development partners.

The scope of this work will be determined through an Investor Readiness Performance Improvement Plan (PIP) that identifies short-term measurable targets for operational, financial, commercial, technical, HR and governance improvements that are the foundational business requirements for an outside investor. At the same time, the PIP must be part of a larger strategic business and financial plan that positions the company for growth (and investment).

Some of these tasks may have been undertaken with the 20+ partners in the SMS program, however, it is important to note that the MIP would function like a focused media accelerator with catalytic grant capital and would differentiate itself in providing intensive and highly focused readiness support with fewer companies and with a keen eye to finance, accounting, marketing, IT development, and other aspects that are critical to outside investors. The MIP may identify other companies and startups that are not part of the USAID SMS program. The MIP would source experts to support partner companies with the best practices for them to grow quickly and develop a sustainable and defendable (niche) market position.

USAID/Serbia would allocate a significant portion of its MIP funds towards development of a high-quality on-site technical assistance program (best practice can be found in i.e. EBRD’s funded SME Listing program under SRSS to support listing of the SMEs on the stock exchange). To do so directly from Serbia would require outsourcing of this program part to a selected 3rd party professional provider.

The selected partner will provide firms with experts providing on-site technical advisory services to the selected pipeline candidates and/or refer to additional services (e.g. legal) per the scope of the engagement letter. Each engagement will contain elements of concrete on-site operational support, which will get these companies investment ready.

The Scope of Transaction Advisory Assistance - Investment Facilitation USAID/Serbia can achieve high impact within the Serbian media sector by connecting prospective media SMEs, whether from the SMS program or outside of it, with providers of capital (lenders and equity investors). It can do this by working directly with the financial intermediaries that serve as a bridge between these two groups, namely the Transaction advisors (“TA”). Based on the discussions with key informants and the broader analysis for this assessment, the team confirmed the above assumption and

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identified transaction advisory services as an area where USAID/Serbia's funding assistance is critical and can yield positive outcomes.

Using a pay-for-results model with the transaction advisors would, to an extent, mirror some programs INVEST runs in other markets while being tailored to Serbia’s development context and the media sector. The program would incentivize a network of financial advisors who are well-positioned to help grow quality businesses, and that have a proven track record to:

● Identify digital media SMEs or media asset opportunities in need of growth capital;

● Offer services that allow these businesses to be competitive for financing;

● Raise capital from equity investors (or lenders, if applicable).

Supporting media firms identified under the SMS umbrella, or others that the SMS team may not have identified, with investment readiness and transaction advisory support to become investment ready, will allow USAID/Serbia to achieve its objective of mobilizing capital for the independent media sector to support its growth and sustainability. Transaction advisors would be contracted to perform the following tasks:

1. Identify SMEs in need of financing, whether debt, equity, or mezzanine,

2. Prepare SME investment packaging so that they are more appealing to investors and/or lenders,

3. Identify and facilitate contact between the SMEs and the providers of capital,

4. Accompany the SMEs throughout the process of obtaining capital including preparing pitch presentations, organizing road shows, writing due diligence questionnaires, organizing on-site visits, providing structuring advice, and others,

5. Close investment deals between SMEs and investors and/or lenders.

The Serbian media sector is highly challenging and there are a limited number of bankable or investable assets or initiatives. As such, a success-fee only payment mechanism (i.e. one payment at the close of the deal) will not attract any transaction advisors. Therefore, a combination of a contract/deliverable-based and a success-fee based remuneration, as INVEST has used on other transaction advisory activities, is recommended.

The MIP project will pay for the services that TAs provide to SMEs who need growth capital, through performance-based incentives. MIP will agree with Serbian TAs on a set of deliverables wherein TAs are compensated when they meet these targets. Payments will be made against deliverables, either issued under a Fixed Price deliverable contract(s) or through Indefinite Quantity Award(s) and corresponding task orders, that demonstrate progress toward raising capital for SMEs with the ultimate goal of closing investment transactions.

Sample deliverables:

● Letter of engagement with the digital media SME

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● Business plan preparation

● Pitch deck preparation

● Roadshow organization or Pitch deck distribution

● Contacting the potential equity partner universe

● Letter of Intent (LoI) structuring

● Share Purchase Agreement (SPA) structuring

In difficult investment environments with limited and relatively small investment opportunities like Serbian, the fees are allocated over a number of deliverable milestones and may range from 10-12% of the total transaction value.

The scope of participation in the form of a concessional/grant financing in the Venture or Special Impact funds

Since USAID cannot function as a sole LP in any fund or fund-like structured vehicle, it may decide to invest part of its MIP-budgeted funds into the several market-based and locally / regionally managed special investment funds).

STRUCTURE AND OPERATIONALIZING THE MEDIA INVESTMENT PLATFORM

MEDIA INVESTMENT PLATFORM STRUCTURE

In line with what has been presented, the media investment platform would consist of three core components:

● An investment platform with catalytic grant funds for accelerating growth, building financing experience, co-investing with equity investors and participating in investment funds.

● Technical assistance to companies for investment readiness.

● Transaction advisory services to package and market companies and close deals with investors.

The investment platform would have governance structures including an investment committee and a strategic investment policy guiding investment eligibility and allocations, financial instruments by which to deploy capital, and clear criteria and policies to guide, manage and report on financial and social returns on investments. The MIP project would provide technical assistance to S-M media companies to help them become investment ready, and would provide transaction advisors to package and market investments and close deals.

In operationalizing and funding the structure, the team considered three alternatives that would comply with USAID guidelines and respond to the media sector market in an effective, responsive and timely way. These include:

1. A traditional investment facility.

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2. A Media Investment Platform project funded and managed by USAID/Serbia using a standard Request for Proposals (RFP) contracting mechanism.

As a means of presenting the options, the team scored them according to the following criteria:

● Market responsiveness - of the structure to the clientele (companies and investors)

● Efficiency - Time and resources to set up the structure

● Cost/benefit - in relation to the market size (i.e., companies to invest in and potential investors) and in investment size

● Potential to attract other financial resources and tools (CSR, guarantees, other development partners contributions, etc.)

● Overall effectiveness in achievement of Mission objectives and investment objectives

The two alternatives are described below.

OPTION 1: STRUCTURE A TRADITIONAL MEDIA INVESTMENT PLATFORM

The first option is to structure the platform in a manner consistent with typical large investment facilities or funds (e.g. Global Financing Facility, Global Infrastructure Facility, European Investment Bank investment facilities). For this option, a fund manager would be selected through the USAID/Serbia RFP process and would be responsible for registering a Special Purpose Vehicle (SPV) and a management company. USAID cannot be the sole investor in a facility, so the most challenging part is to attract other donors and investors to contribute to the investment fund. The structure would look like the following:

Key features

1. Special Purpose Vehicle (SPV): A company or a trust and the issuer of debt and equity.

2. Management company (Servicer): The SPV is required to have a Servicer. A management company will be registered as an independent Servicing Company.

● The management company enters into a service agreement with the SPV and is responsible for the day-to-day administration and finance functions.

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● The management company works through technical assistance providers and transaction advisors to develop a continuous series of bankable projects for debt or equity financing using the SPV mechanism and provides oversight services.

3. Governance. A Board of Trustees governs the SPV policy and administrative operations.

Assessment of option 1

This option allows for equity, debt and guarantees to finance investments and is suited to a large investment fund where natural market forces are not distorted and there is a high volume of investments to be made annually that would attract other donors and investors to the fund. The set up requires a minimum of 1-2 years and the cost of running the facility is relatively high, which is why it is important to have significant debt and equity opportunities.

The facility would need to raise investment funds from other donors and the timing/success of this is uncertain. From our field work and discussions with key informants, the team also determined that the market size, i.e. the number of S-M media companies in a position to take on debt or equity financing and the amount of financing that could be managed is small. For these and other reasons, we find that the time and resources, cost-benefit, attractiveness for other resources and achievement of mission objectives result in this having a low score.

Option 2: A Media Investment Platform funded and managed by USAID/Serbia The second option is to structure the facility along the lines of a traditional RFP contractor selection process. The selected contractor would provide technical assistance and provide or sub-contract transaction advisory services. The contractor would manage the catalytic grant funds. The structure would look like following:

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Assessment of option 2

Under this option, the structure is managed “in-house” by a contractor through standard USAID RFP mechanisms. This structure meets the criteria for promoting an active approach to identifying and supporting potential financing recipients with investor readiness technical assistance as well as linking small- and medium-sized media companies with financing sources and co-investors through transaction advisory services. This option is market responsive, meets all of the scoring criteria and achieves the Mission’s objectives.

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SUSTAINABILITY OF THE MEDIA INVESTMENT PLATFORM

The above scenarios in essence represent the balanced mixture of:

● Know-how transfer (Technical Assistance program) – strengthening the investees by equipping them with the best practice industry knowledge and enabling them to find new avenues (products, services, business models) for growth by themselves;

● Private capital access transfer (Transactional Advisors program) - strengthening the investees by putting in place an effective program of attracting 3rd party equity providers, which would inject additional equity into the targeted pipeline, enabling them to finance the new avenues (products, services) for growth;

● De-risking private capital transfer or financing know-how transfer outputs or co-financing any meaningful impact initiative with other international financial institutions, NGOs, larger national corporations (Media Investment Platform).

As a new investment platform entering an untested and relatively small investment market, USAID/ Serbia should use the components above to engage, improve, pilot and invigorate the small- and medium-sized media investment market. Over time (perhaps early in year 3 of this project) and assuming that MIP investments gain traction and grow, USAID/Serbia may want to shift to a structure like a more traditional investment facility (Option 1).

Given the current conditions of the market, the Team recommends the approach to run the project as outlined as being the most optimal at this stage (Base scenario with Option 2 or 3 structure), and make a determination on setting up a Sustainable Media Investment Platform (S-MIP) should the quality of pipeline and transactions clearly justify this transition.

KEY RISK FACTORS AND MITIGANTS

The following section notes the risks in three categories: political risk, macroeconomic risk, and small-and medium-sized media company investment risks. At this time, the risks are assessed in broad terms.

At the time of the request for input and/or request for proposals stages, the risks should be further detailed. If and when the project is up and running, each investment would be thoroughly vetted in terms of the risk profile and methods to mitigate risks.

Political risks Probability: Medium Impact: High

As noted in the introductory section of this document and in the SMS Political Economy Report, the political influence and interference in the media sector is high and the government actions have been condemned by the international community and international journalist associations. The World Press Freedom Index country rank has declined by 14 positions in the last year alone. In addition, the market is distorted due to the financial inflows of public funds. The assessment team’s discussions with media

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sector professionals confirmed that independent media suffer pressure to support administration policies.

The risk associated with political interference and scaling up of attacks against independent media is ranked as medium given that 1) the international community is actively engaging in efforts to document and report on this risk publicly while also supporting (through development partners) independent media; and 2) the Serbian government is very keen to proceed with application to be included in the European Union, and under which media freedoms are a factor. If, however, were further increased in the country, the impact would be high on small – medium media companies.

Macroeconomic risk Probability: Low Impact: Medium

In recent years, Serbia has undergone significant political and economic transformation, which has increased stability and led to economic growth. The macroeconomic outlook for the country is positive as assessed by the IMF, World Bank and other international institutions. This stability has also positively affected the advertising and revenues in the media market, which grew by €48 million (13%) from 2015-2017. Nevertheless, Serbia is still a small and emerging market that is exposed to volatility, which could come from the economic conditions with its dominant trading partners and natural disasters. In general, any kind of economic downturn over the mid-term could quickly impact the overall media spend and hence the media market size, putting more pressure on the advertising budgets, concentrating even more funds with the largest media issuers and leaving much smaller independents exposed to the shrinking market. This would lead to potential closure of the financially weakest players, regardless of their level of professionalism.

The associate risk is deemed as having a low probability given the macroeconomic stability trend in recent years and the forecast of stability looking forward. The forecasts indicate Serbia’s economic prospects to be quite favorable (real GDP increasing at 4.0% growth rate in both y2020 and y202113) and rating agencies and market commentators are enthusiastic about the country’s macroeconomic outlook. Given the low level of the country's indebtedness (at only 54% of GDP in 2018) the team sees Serbia as safe-guarded against mid-term macro shocks that could negatively impact the proposed USAID/Serbia program. If there were macroeconomic instability the impact would be felt in the media sector relative to other sectors and the impact is deemed medium.

Media Investment Platform risks Probability: Medium Impact: Medium

The risks associated with the MIP are four-fold:

1. The risk of not attracting enough interest of private capital due to the inadequate size (revenues, profits, network effect components) of the SME program

13Sources: BIS, IMF, 2018

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participants. in spite of the USAID/Serbia de-risking financial instruments (recoverable grants, first loss buffer instruments, grants), transaction advisors might struggle in attracting enough private capital interest for the program participants, especially if the funds allocation and technical assistance program yields lack-lustre results in terms of the investee performance.

Mitigant: Carefully selected, independent and professional transaction advisors (“pay-for-performance model”) are capable to tap into wide networks of potential investors, including and especially focusing on national and regional private investors, who are the first to recognize the potential of media digital assets and are able to properly assess the market for their further growth. Furthermore, they will and should be able to prepare these SMEs as needed so that they are more appealing to investors and/or lenders.

2. The risk of outsourcing the funds allocation program to sub-par experienced contractors. Although a grant program is currently run by the SMS umbrella, wider scope grant-based and targeted fund allocation program (which has to be run in parallel with the investments done by the private investors) could represent a challenge for a non-professional fund manager, leading to a sub-optimal fund allocation.

Mitigant: USAID/Serbia has the expert capacity to source and procure the best possible private contractor, who would pursue diligent and professional approach to allocation of this valuable pool of de-risking capital to support the private 3rd party investments into the targeted sector. A governance structure should be in place to ensure that technical assistance, transaction advisory and grant making functions work together effectively and efficiently.

3. The risk of not realizing enough impact vs. the expectations: Actual realized impact returns might not fulfill the expectations unless all the components of the program will be carefully…