Few Ukrainian-Americans have been as deeply involved in Ukraine’s development for as long as Natalie A. Jaresko, chief executive officer of Horizon Capital. In an interview, she talks about investing successfully in an economy dominated by billionaire oligarchs, what went wrong after the 2004 Orange Revolution, how her business survived the 2008 crisis and what lies ahead.
In an economy where the largest sectors are dominated by a few oligarchs, where can an honest investor go to make an honest hryvnia in Ukraine?
Investment fund manager Natalie A. Jaresko has answered the question this way: Find opportunities in smaller, competitive sectors of the economy that billionaire oligarchs tend to bypass.
For nearly 20 years, this Ukrainian-American from Chicago has been deeply involved in Ukraine. She served as the first chief of the economic section of the U.S. Embassy in Kyiv from 1992-1995, then with the Western NIS Enterprise Fund and now she is co-founder and chief executive officer of Horizon Capital, with more than $600 million under management.
In 2010, the Kyiv Post named Jaresko, 45, as one of the nation’s most influential expatriates for her business acumen and community involvement, including charitable contributions to the Chernihiv Oblast city of Baturyn.
She is also on the Pechersk School International Board of Governors in Kyiv, where her two daughters attend school. She is also a member of: the Open Ukraine Foundation Board, the East Europe Foundation Advisory Council, the Kyiv City Strategy 2025 Public Council and the Selection Committee of the Pinchuk Foundation’s World Wide Studies scholarship program.
Horizon scouts for investment opportunities in Ukraine, Moldova and Belarus. Their business strategy is to buy into promising but underperforming companies, turn them around and sell them after a few years or so for higher profits.
In an interview with the Kyiv Post, Jaresko talked about the promising sectors in Ukraine’s economy as well as potential pitfalls. Here are edited excerpts:
Kyiv Post: Looking at the tax problems of ArcelorMittal, the nation’s largest foreign investor, the recent uncompetitive sale of Ukrtelecom, the imposition of grain export quotas, the way that billions of dollars of Euro 2012 money is being spent with no-bid contracts, people have concluded that Ukraine is still ‘closed’ for business, except to insiders. Is this true at the small-to-medium business level where Horizon Capital invests?
Natalie Jaresko: Over the last 15 years, our access has actually been quite good. I like being in the small-and-medium business segment. It’s more open, more competitive. There is less interference from monied parties, less interference from regulatory bodies.
There are very many competitive segments of the economy. There are sufficient growth opportunities so that multiple players can win at the same time.
We invest in three segments: Financial services; consumer goods and services and business-to-business services.
KP: So you are holding to the same philosophy that you outlined in a 2006 interview, when you said that the biggest sectors – oil, gas, metal and chemical – are monopolies run by oligarchs?
NJ: Monopoly, oligopoly. Certainly there are large monied interests who have a great deal invested and a great deal to lose and a great ability to protect their interests. I have no problem competing on the basis of client tastes, quality of products and services, on who is more efficient in getting products on the shelves. I would rather compete in that arena than in the corridors of powers.
One of Horizon Capital’s big winners was Shostka Cheese Factory, which the fund manager sold in 2007 for a 470 percent return. (Ukrinform)
KP: Are the oligarchs simply not interested in small and medium businesses?
NJ: They have dabbled from time to time. There a few sectors that have large business interests engaged, but it’s not their primary business.
KP: How did you go into the 2008 economic crisis and how did you get out of it, considering that you invest in financial services and consumer goods, two hard-hit sectors?
NJ: The hardest hit is financial services because your net asset value is in local currency. With a devaluation of 40 percent, you’ve immediately lost 40 percent of the value of that business. For a bank, its asset is money.
We just happened to be managing the company in a way that gave us great opportunity and great flexibility. We, frankly speaking, had more serious issues with things that required us to change strategies altogether.
If you take our bank, more challenging than devaluation, was the fact that our whole concept previously was wholesale mortgage finance [involving the precursor entity to Platinum Bank]. Wholesale mortgage finance wasn’t possible after the crisis. No. 1, you couldn’t lend retail as it became illegal in hard currency.
No bank was going to be able to borrow long-term money and lend it in another currency and take risks. Mortgages ceased. We shifted to being a full retail bank and it’s now called Platinum Bank and we adjusted.
KP: What other lessons have you learned about surviving crises?
NJ: We’ve been through other crises before. We lived through the 1998 devaluation. We didn’t believe we should put a lot of debt on these companies and leverage them to the hilt. We were actually able to take on leverage, so we are coming out of it with new capacity and new lines coming out. I think that means a lot for us.
KP: Does that mean you saw it coming?
NJ: What you see coming is that currencies are very volatile. We lived through it once and we know that these markets are difficult. You need to manage your debt risk, your leverage. We relied on increased profitability and growth in the market for the longest time.
We have increases in market share and new products because the market is still so young and immature in so many categories and services.
KP: You exited Pro-Credit Bank in April 2009 with a profit? How is that possible?
NJ: The negotiations were going on for a long time, pre-crisis. It was a small stake. We sold to the holding company. If it wasn’t a crisis, we would have made a heckuva lot more money. I expected to do much better. But the crisis did affect our returns.
KP: You have three funds under management: The $132 million Emerging Europe Growth Fund-1 (EEGF-1), started in 2006; the $150 Western NIS Enterprise Fund and the Emerging Europe Growth Fund II (EEGF-2), with capital commitments of $370 million. How do these work?
NJ: EEGF-1 closed in 2006. Then you have a five-year investment period to make your investments. You can make those faster, which we did; we were basically finished by 2008. Then it’s a 10-year fund. I am supposed to be able to sell and return the capital by the end of the 10 years, which would be 2016.
Then we raised the second one [EEGF-2] in 2008, just before the crisis. That is truly luck, a blessing, whatever you want to call it. Because we had our second close in September 2008, just before the bottom dropped out here. So we were sitting on commitments of $390 million when the bottom dropped here.
We did have one default, one investor. So our fund today is only $370 million. We spent a good year in 2009 being very careful about making sure our existing investments were doing well and/or doing better than the market and then determining whether the negotiations we were already part of were appropriate and priced properly.
It was a long year, 2009, to get through. The result is in 2010 we made six new investments for $130 million.
KP: OK, let’s take Emerging Europe Growth Fund-1. If I invested $1,000 how much would I have or could I expect to have returned?
NJ: It’s more complicated than that. You don’t put it in at day one. You sign a document that says you will give me the $1,000 as I need it. At some point, I’ve ‘called’ most of your money, because I’ve invested the fund.
In these funds, when I sell a business, I have to immediately return your portion of the capital and profit to you. The value of that [portfolio] today is conservatively, in good shape, above cost. I think, but I don’t know. In EEGF-1, I still have seven businesses to sell.
Once we sell those seven businesses, you’re going to make the returns you expected. The expectations people have is three times to five times the money they put in.
KP: That’s a high return.
NJ: It’s also highly risky and there are no guarantees. But the bottom line is that — for that 2006 fund — I still believe we will meet investors’ expectations. We had a leasing company in Russia and MTV Ukraine. We sold those two because we believed they would require a lot more investment than we had.
Horizon Capital’s brief investment in MTV Ukraine taught fund managers the perils of entering an oligarch-dominated media market. (PHL)
KP: You went into MTV Ukraine and, at that time, it appeared you would go deeper into media. Then you pulled out. Is media not a good business in general?
NJ: Media is a complicated business. It is an oligopoly of sorts. In that case it was television. In television there are a few holding companies here. Having one channel in a consolidated TV market is just too difficult.
Advertisers like to buy on seven channels or 10 channels at the same time. You can do that with Inter and 1+1. For us, when the crisis occurred, advertising disappeared.
They started to really choose very carefully what minimal advertising they were going to do and it was on the largest channel where they had the best deals. I still believe in internationally licensed channels because I think they offer high quality.
But that business model of having one independent channel in a market where there are consolidated large groups, that’s not competitive.
KP: What’s left to invest?
NJ: We have about $200 million to invest in that [Emerging Europe Growth Fund – 2] and another three years or so do to it.
KP: What’s been your best and worst investments?
NJ: The biggest plus we’ve had of the businesses we’ve sold to date is Shostka, a cheese company in Sumy Oblast. It sold for 5.9 times cash-on-cash return and 470 percent [internal rate of return]. What did we do with that company to get that kind of return?
We changed their strategy entirely. They were exporting a commodity into one or two distributors’ hands in Russia. There was no brand. There was no distribution.
We instead took them into the Ukrainian market. We didn’t create something new. There was an enormous amount of consumer loyalty to that brand because, over the Soviet period, people believed it was a high-quality cheese.
So we turned it into a modern brand with a logo. At the same time, we developed a distribution system and put it into the grocery stores. When the French came into to buy it, [Fromageries Bel S.A.], they were buying a facility in the middle of nowhere, up in Sumy Oblast.
We took a good quality product with a good management team, improved it and put them into a more profitable area and made them into a premium product, not from a price standpoint but from a quality/value standpoint.
KP: And the worst example?
NJ: In the [Western NIS] Enterprise Fund, the first fund, we had a very serious corporate governance battle in a firm called Sonola, a sunflower-oil manufacturer. We ended up in arbitration in the United States.
We couldn’t get the courts here to enforce the arbitration award, so we took Ukraine to international court for not honoring its treaty obligations. It dragged on for years. It was a very difficult example of what things can go wrong.
We did recoup some of our money. It was a very early investment, 1996 and 1997, in much more unsophisticated times. It showed the weakness in the court system here. It showed the importance of having partners who are more willing to talk problems out rather than go to court.
KP: What else are you seeing with some of your businesses?
NJ: We do a lot of work on corporate governance and transparency.
KP: Who are your investors?
NJ: Sixty percent U.S.; 40 percent European. It’s a combination of corporate and public pension funds, university endowments…high net-worth individuals. University of Texas Investment Funds is our biggest investor.
KP: You got the Order of Princess Olha Award from ex-President Leonid Kuchma. You are believed to be close to the Yushchenkos [ex-President Viktor and ex-First Lady Kateryna] and now Ukraine has President Viktor Yanukovych. Is there a substantial difference in the investment climate, and how would you describe today’s environment?
NJ: Now we have a kind of middle ground. We have a world that is not particularly investment friendly. Globally, the appetite for risk is lower today than it was pre-crisis. You have improved macroeconomics, better than in 2009. It is definitely improving. Without another dip in the global situation, the macroeconomic situation here will continue to improve.
Some of the things [such as grain export quotas] that have happened in the last two years here are not friendly to investors from a regulatory standpoint. That’s worrisome. We’re in an IMF [International Monetary Fund] program. There even seems to be some deregulation and even a little bit of improvement on the business environment in some areas.
Another whole other level of fear is that, when you have what you call a ‘strong vertical’ [political power structure], that power can be abused. It makes some investors wary. Investor perception is slow to change and hard to improve.”
Right now, this government has to make a choice about whether it really wants to improve the investment environment. It has the macroeconomic base to do so if it wishes. But you can’t have the front page news that you’re reporting and have investors with a positive perception.
I think that’s what you see if you look at the level of foreign direct investment last year. It’s not what you hoped, given the macroeconomic situation.
KP: Hasn’t the administration already made its choice – that Ukraine is going to be an oligopoly?
NJ: You’d hope that, even if they’ve chosen in certain segments of the economy to maintain oligopolies, you’d hope that they’d make other segments of the economy more competitive and interesting.
KP: Ukraine can still progress as an oligopoly?
NJ: I absolutely believe that or I wouldn’t be investing here. There are so many segments of the economy that are competitive within themselves, competitive in the global economy. There are segments that are completely underdeveloped – services, tourism, information technology. They are not oligopolistic and they don’t even lend themselves to that. When and if the moratorium on land sales is eliminated, [that will be] an engine of growth.
KP: What’s the greatest source of optimism with the Yanukovych administration?
NJ: They like making money. They’re business people. If the markets shut down for Ukraine, it doesn’t help anything, if they can’t attract capital.
KP: What went wrong with the Yushchenko administration, with benefit of hindsight?
NJ: I don’t place blame on the Yushchenko administration for everything. Everyone’s expectations were extraordinarily high – mine and everybody else’s. There was going to be disappointment no matter what happened.
When the [2008 global] economic crisis hit, the combination of the unfulfilled expectations and the economic crisis hit hard. It hit the middle class almost harder than the bottom. The middle class bought into borrowing money for a car, taking out a mortgage for an apartment. Those were dollar-denominated loans and they were making hryvnia. They were working in businesses first hit by the crisis – investment banks, brokerage houses.
As hard as it was for the workers in metallurgy who lost their jobs, that segment didn’t have the same financial risks. They had tighter family units and were much more conservative in their spending.
I wish that the government, post-Orange Revolution, had reached out to young people. Georgia brought in a lot of young people with different ideas, perspectives and models. It didn’t happen here after the Orange Revolution, despite discussion about it. There was a lack of new blood.
I give very high ratings to maintaining a democracy, civil society and freedom of the press under the Yushchenko administration, which I would hate to see be lost because of the ‘strong vertical’ [of political power in the Yanukovych administration].
KP: We are coming up on the 20th year of independence. Are things turning about the way you expected?
NJ: No, I wish we were much further along. I am happy about many things. I continue to believe the future is bright.
There is a younger generation that has traveled, that has seen, that has experienced, that has a global world view, that has access to information technology, that is open to the world and sees themselves differently in the world. That is really crucial.
I wish there were no foreign troops on the soil of the country. I wish that the investment environment was much more liberal, much more open. I wish there were more foreign investors here creating more competition and forcing all of us to step up in our approach to business.
KP: So we’re talking about slow change?
NJ: This isn’t slow change. These 20 years weren’t slow change. It was dark when I got here in 1992. There were no fresh vegetables in the grocery stories for four months out of the year. There were no jobs for young people.
People had no access to money. There’s been a great deal of change. We have had free and fair elections multiple times in this country.
KP: I hope we have them again.
NJ: I believe we will. I don’t believe the people in this country will stand for anything less. We’ve made great progress. It’s just slower than you want.
Kyiv Post chief editor Brian Bonner can be reached at [email protected]
