Frankfurt School Of Finance and Management

Academia
takes a commercial route

By Ross
Tieman

Published:
June 8 2008 21:00 | Last updated: June 8 2008 21:00

Commercialising
academic breakthroughs in science and technology is well-established,
but financial innovation has largely been the preserve of industry
practitioners.

Now Frankfurt
School of Finance and Management in
Germany is planning to break the mould by launching a novel financial
company spun out of academia.

“This
is evidence that spin-offs are not only viable in the biotech or
information technology sector,” says Udo Steffens, president of the
Frankfurt School.

“They
are also an innovative approach for business schools to achieve better
capitalisation of knowhow and knowledge and leverage further growth.”

The
business being formed into a standalone company is already an advisory
arm and fund management operation with more than €500m ($780m, £400m)
under management.

But
it is not another me-too competing with commercial firms for retail
investor cash and to employ equity or derivatives markets. Rather, it
is a niche player in the esoteric but growing world of microfinance to
speed economic development in eastern Europe. Its roots lie in the
opening of eastern European countries,

“The
telephone was always ringing with callers asking for training in this
field,” says Prof Steffens. As knowledge of the university’s expertise
spread, it soon found demand for advice too and developed a specialised
consultancy service.

Two
years ago that developed further with the launch of a Luxembourg fund,
the European Fund for Southeast Europe, designed in close co-operation
between academics at the Frankfurt School of Finance and Management and
a German state development bank, KfW.

The
aim was to channel money to financial institutions in south-east
Europe, including commercial banks, microfinance institutions and
investment companies. It supplies them with loans, guarantees, standby
letters of credit, bonds and other debt instruments. The ultimate
beneficiaries include more than 70,000 end-borrowers.

The
fund achieved a capitalisation of €500m by the end of last year, three
years ahead of schedule. It was designed by the experts in Frankfurt to
compartmentalise risk and the three tranches have different risk
profiles.

The
first-loss tranche comprises grants from donors, often European
government development agencies. The mezzanine tranche comes largely
from international financial institutions, such as the European Bank
for Reconstruction and Development. The senior tranche, amounting to
more than 30 per cent of funds committed, attracts money from private
sector investors, including Deutsche Bank and Sal. Oppenheim.

The
structure leverages aid donations to raise a lot more money to augment
the total funds available to invest in the region.

Research

The
people who manage the money have until now been employed by the
university. Sylvia Wisniwski, who heads the activity and who will run
the company, has a team of 20 people in Frankfurt and another 25 based
in the Balkans who seek investment opportunities.

Although
academics are closely involved, many of the staff are graduates of the
school who have moved into salaried jobs in this special fund
management business.

In
spite of approaches from would-be partners, the business school, a
not-for profit organisation, is turning its fund management arm into a
100 per cent-owned limited company.

Over
the past decade, “the motivation for us as an academic institution was
to grow revenue, which has been reinvested in research and teaching”,
says Prof Steffens.

Now
the management school wants to unleash the potential it sees in the
business it has created. Thus far, the business has one mandate. But
its expertise might well attract others and apply to funding climate
change investments, Prof Steffens believes. “We are very optimistic
that this will be a business that will grow very fast,” he says.

The
spin-off by Frankfurt School of Finance and Management, a €50m-a-year
operation, could inspire others to review their strategy. Both Tanaka
Business School at Imperial College in London and Harvard Business
School in the US have consultancy arms.

The
Frankfurt school sees the spin-off, which will take effect in August,
as simply the logical next step in a drive to consolidate and enlarge
its expertise in development finance.

Financial centre

Prof
Steffens is also busy recruiting a professor for the school’s new chair
in development finance. That will be followed by the launch of a Master
of Development Finance course. The two-year programme, leading to an
MSc, will deal with economics, finance and management, with a focus on
development issues.

Students
will spend three to four months working on a development finance
project in a developing country. Their placements will be arranged in
collaboration with the school’s International Advisory Unit. Some may
work in the spin-off or with its partner organisations, while many will
find themselves far from the beaten tourist tracks. The fund managed by
the company-to-be has operations in Bosnia and Herzegovina, Romania,
Serbia, Kosovo, Moldova, the Former Yugoslav Republic of Macedonia,
Albania and Bulgaria. It is poised to start operations in Ukraine.

Prof
Steffens and his school seem determined to remain leaders in
microfinance and development finance. The school has also established a
development finance research centre.

From
Frankfurt, this makes perfect sense. The city is the biggest regional
financial centre and, since the break-up of the former Soviet Union,
many German and Austrian financial institutions and commercial
companies have expanded into eastern Europe and the Balkans. The
school’s aim is to help plug the funding gap between commercial capital
and governments. But, in the process, it is acquiring and sharing
expertise with applications in other developing regions.

Copyright The Financial Times Limited 2008