Venture capital funds operating in Ukraine have been increasingly diversifying their portfolios by acquiring holdings in the nation's growth industries, sinking much-needed capital into developing sectors.
>Equity and venture capital funds invest in small start-up companies and risky turnaround ventures, whose fortunes they believe can be favorably reversed.
In addition to buying stock in target companies, venture capital firms also typically provide those companies with management and corporate governance expertise to help them grow to the point where they can be sold to other investors, or listed on a stock exchange through an initial public offering.
“Venture capital will continue to grow, providing funds to businesses that have only limited access to bank loans and other types of credit,” says Yevhen Baranov, investment manager for private-equity firm Ineko Capital Partners.
Baranov said that unlike shareholders, who normally expect to receive dividends, a venture capital firm generally reinvests a company’s profits back into the company, which “is very important for start-up companies.”
Venturing a guess
Experts say it’s difficult to estimate venture capital funds’ investment in Ukraine.
The Post reported in April 2003 that the amount of venture capital funds’ total capitalization here was between $500 million and $800 million, or more than 10 percent of the country’s total foreign direct investment.
But venture capital experts generally agree that it is nearly impossible to calculate these figures.
Oleksandr Chapko, public relations director for venture-capital firm SigmaBleyzer, said that there was no official information on the amount of private investment capital in Ukraine.
Chapko said that Russian investments in Ukraine have increased dramatically in the last three years, particularly in the energy and tourism sectors, and that most of the investment deals struck in those sectors were settled privately, making it very difficult to estimate the amount of private equity at work in the country.
Andry Blinov, chief economist with the International Center for Policy Studies, an independent think tank, confirmed that official information regarding the amount of private equity invested in Ukraine’s economy is unavailable.
ICP’s Baranov said that ICP currently has about $60 million under management, 20 percent more than last year.
“It can be assumed that the amount of total equity currently under management in Ukraine has grown by about the same percentage,” Baranov said.
Diversification and growth
SigmaBleyzer manages three Ukrainian Growth Funds, the first of which was incorporated in 1996, and currently manages about $100 million.
The company invests in Ukraine’s high-tech, telecommunications, software, food processing, machine-building, and broadcast and print media sectors.
Among the companies that have developed due to SigmaBleyzer’s involvement as an investor and management advisor, Chapko said, are the Sevastopol Shipyard, Volia Cable, the Poltava Confectionary Plant, Softline, Meta-Ukraine and Zaporizhya’s meat-processing plant.
He said that most of SigmaBleyzer’s divestments to date have been portfolio investments in which SigmaBleyer had a low level of managerial involvement.
“Our main goal in Ukraine is to attract international private capital to companies, and develop them into first-class transparent businesses… by introducing the highest international business standards, practices and experience,” he said.
After SigmaBleyzer introduces an efficient management system, corporate governance, and international accounting standards in a firm, he said, it seeks strategic investors with a high level of experience in their respective sector, to assure a target company’s further development.
Like SigmaBleyzer, AVentures – reorganized as AVentures Group last March – specialized in investing in the country’s telecommunications, media and technologies (TMT) sectors.
The company’s investments included the Unitrade chain of computer hardware and telephone shops.
Andry Kolodyuk, president of AVentures before the reorganization, said that only about four percent of all investments coming into Ukraine in the last several years have gone to the country’s high-tech sector, which remains in dire need of significant venture capital investment.
“Foreign investors don’t want to risk investing their money in our information technologies market,” Kolodyuk said. “One can understand them. Developed countries have a well-regulated legislative base, but in Ukraine, with the exception of a few ‘non-functional’ legislative acts, there isn’t an effective and coordinated legislative base…
“The [Ukrainian] TMT market does not have clear-cut rules of the game,” he said. “The change to a civilized regulation of the market is taking place very slowly.”
Other attractions
ICP’s Baranov said that ICP holds an interest in nine Ukrainian tourism industry projects, including three hotels and six resorts on the Black Sea. He said ICP is now structuring the separate projects into a single holding.
“We believe that tourism is one of the most promising sectors in the country,” Baranov said.
Ineko began life in 1994, as a brokerage firm specializing in Ukrainian securities trading and asset management. Since 1994, the group has completed a large number of investments, mainly in the power sector, and its exits inlcude stakes in the Kharkiv, Lviv, and GEM Hydro Energy and Repair Companies, Energoreestr, Energougol and Sevastopoloblenergo.
The group has also made investments in the automotive, transportation services, food processing, construction materials, real estate and financial services sectors.
In the real estate sector, the group has successfully exited from investments in Kyiv’s Slavutych Hotel and the Ukrtekhimprom office building.
Baranov said that ICP would continue to invest in the sector, but would not provide details.
ICP’s current holdings include Nizhyn Beer in Chernihiv oblast, a Kyiv public transport operator, a Lviv oil refinery, and Lakma, one of the nation’s paint and varnish producers.
Baranov said that Lakma was among ICP’s top three projects, along with its tourism and real estate investments.
“Production volumes at Lakma grew by 60 percent in 2003,” Baranov said. “The sector’s growing at an average of 10 percent, so that’s real growth.”
Baranov said that ICP feels confident that Lakma will grow by a further 40 percent this year.
He said that in the future, ICP will focus its investments in the fast-moving consumer goods sector and the booming construction materials sector, and is keeping its eye on financial services.
With a cumulative investment commitment of $85.5 million to 27 companies in Ukraine and Moldova, the Western NIS Enterprise Fund is one of the largest private equity investment funds operating in Ukraine.
Among WNISEF’s first big successes was Donetsk-based AVK confectionery, which was reorganized in 1999 from a loosely coordinated group of five separate confectionery plants into a parent holding company with three manufacturing subsidiaries as a precondition to receiving an $8.7 million equity investment from WNISEF.
The resulting consolidation of purchasing, finance and marketing activities enabled AVK to achieve substantial cost savings and post a 32 percent year-on-year increase in sales in 2002.
Among the company’s other holdings are Troyanda, an ice cream manufacturer and distributor, and Shvydko, a Ukrainian chain of quick-service restaurants.
Last October, WNISEF made a $3 million equity investment in the chain, which planned to use the proceeds from the investment to finance the opening of many new restaurants in Kyiv and implement an extensive marketing and brand-development campaign.
“WNISEF’s investment in Shvydko represents our first investment in Ukraine’s fast growing restaurant industry,” Natalie Jaresko, WNISEF president and CEO,” said in a statement.
“Quick-service, a key segment in the industry, is developing even more rapidly, with more than 20 local chains operating over 200 restaurants today. These trends have inspired us to invest in this promising market,” she said.
On March 11 of this year WNISEF completed the sale of its 100 percent stake in the Slobozhanska Budivelna Keramika, one of Ukraine’s foremost manufactueres of ceramic bricks for facades, to Raiffeisen Investment AG of Austria. WNISEF said the move was one of the largest equity exits in Ukraine, “with an exit multiple some two and a half times the equity money invested.”
“The transaction, valued at $13.5 million, is symbolic of the increasing sophistication and maturity of the Ukrainian market,” WNISEF said.“SBK has been a successful investment for WNISEF, and we are very pleased to be able to earn an attractive return in line with expectations,” Jaresko said, commenting on the transaction.
