FUNDS: Horizon Capital invests into improving corporate governance

By bne IntelliNews February 27, 2007

Ben Aris in Kyiv -

Horizon Capital began life as part of the US government's efforts to encourage Ukrainians along the path to a market economy. From this role as first aid for economies in transition, the fund management firm is now one of half a dozen fully fledged private equity funds that give investors exposure to Ukraine's balistic growth.

Natalie Jaresko, managing partner Horizon Capital

The original Western NIS Enterprise Fund was launched in 1995 with $150m under management to invest into the struggling Ukrainian economy. The idea was to establish a culture of funds and private investments while giving a leg-up to businesses emerging from the ruins of a Soviet economy.

However, the intention of the enterprise funds, which have been established across all of Eastern Europe, is for the managers to take their experience and track record, and launch private funds that will accelerate the growth of all of Eastern Europe's economies. Call it an investment into political transformation: the more prosperous a country's businessmen, the less likely they are to support a political revanche.

Horizon was just about to close its second fund at the end of February and was expecting to raise $132m of purely private money. Natalie Jaresko, the managing partner, says the firm were playing to a very receptive audience and had already disbursed $45m in six deals in the financial, manufacturing and media sectors, with the lion's share is going to the consumer sector.

Changing mentalities

Ukraine is hot again. Investors rushed into the market in the wake of the Orange Revolution in 2005, but their ardour quickly cooled after President Viktor Yushchenko failed to capitalise on his popular mandate and the country has lurched from crisis to crisis. However, by the start of this year investors seem to have decided that despite the ongoing political imbroglio, bad politics won't derail the Ukrainian economic locomotive.

"The politics matters less now as the business is leading business," says Jaresko. "Bottom line is that Ukraine now has arguably the only functioning democracy in the CIS. There are more parties now, but none of them are radical or proposing life threatening changes to the business environment."

At the same time, some Ukrainian owners are increasingly ready to sell, as not all the aging Soviet-era managers who won control of their firms during the privatisation process of the early 1990s are ready to fight in the increasingly competitive market.

"These guys were 50 when they took control of their companies and now they are approaching retirement. They are facing a choice: either sell and cash out or invest and try and compete. There are more and more of these companies becoming available," says Jaresko.

Still, taking a punt on Ukraine's growth is not without risk. One of the perennial headaches of private investors has been the shoddy state of the legal system and the malleability of the courts. But Jaresko says a simple dodge is to set up ownership structures that are outside of Ukraine and rely on some other country's legal system. Corporate governance is definitely improving – but you still have to be careful.

"We take both majority and minority stakes, but we always agree on a company structure that is outside Ukraine. However, finding the right partner is more important. The rules are only enforceable as you partner wants them to be," says Jaresko.

In the early days the bywords of any successful business were "cash and control." But as the economy begins to power ahead – Ukraine's GDP growth was up 9.3% in January year-on-year – the logic of investing for growth and expansion has become obvious. The trick has become, how to raise the investment capital to pay for new facilities, more staff and effective marketing.

"There is a changing mentality amongst the investors who are becoming more sophisticated about corporate governance. They want access to capital and are starting to realise that they have to give up something to get it – like more disclosure," says Jaresko.

And it is not just the foreign-owned private equity funds that are putting these demands on companies. Ukraine has been ablaze with foreign bank acquisitions over the last year, which is already transforming the way the finance sector works. Local banks are also asking for transparency from their customers. And even at the bottom of the pile, workers are demanding an end to the tax-avoidance schemes as they need a real declared income to get access to consumer loans and mortgages.

Open exits

Now the chances of keeping an investment to mature are growing the next problem is how to exit, but there is progress on this front too. Private equity investors into Ukraine have two basic options – the sale to a strategic investor and an IPO.

The raft of bank acquisitions are a taste of things to come as foreign companies eye the market of Ukraine's 50m-strong population, the second biggest country in the region after Russia with 142m and just ahead of Poland.

Despite the constantly changing government of the last two years, President Viktor Yushchenko's administration has managed to ram through all the laws and bilateral deals needed for Ukraine to join the WTO. Ukraine should accede to the global trade club in the second half of this year, which will drop protective trade barriers and "let the big boys in," as one investor puts it.

Ukraine's companies are acutely conscious that the clock is ticking and they need to grow and capture as much market share as they can now, before the already stiff competition becomes even tougher.

This opening up of the economy, coupled with the rising value of equities, has also been fuelling owners' interest in IPOs, which took off in 2004 and are now growing strongly. There were half a dozen floats last year and at least 30 Ukrainian companies are expected to come to market this year to float their stock.

Ukrainian companies are looking at the rapidly growing domestic equity market, but are also considering London's Alternative Investment market (AIM), while the Warsaw Stock Exchange has already seen one Ukrainian flotation last year.

"Warsaw is aggressively marketing itself to Ukrainian companies. It says it has more liquidity than AIM and the Polish investors are very interested in Ukrainian companies," says Jaresko.

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