American investment fund promotes development in Ukraine
by Roman Woronowycz
Kyiv Press Bureau
KYIV - For Ukraine, the U.S. government has developed a huge array of aid programs and re-education efforts to help the country in its drawn-out transition to a democratic and free-market country. It appropriates hundreds of millions of dollars annually to the U.S. Agency for International Development. It gives financial support in the form of defense cooperative threat reduction funds, Fulbright scholarships, student exchanges. The list is extensive. Many of the programs have come under one type of criticism or another for being wasteful, inefficient or ineffective.
That cannot be said of one of the government's more interesting projects, an investment fund called the Western NIS Enterprise Fund, which was capitalized with $150 million from U.S. government coffers and began operating in Ukraine in June 1995.
The investment fund is a private, not-for-profit corporation operating in Ukraine, as well as in Moldova and Belarus, that uses U.S. taxpayers' money in one of the riskiest investment climates in the world. It is a region whose business environment and practices have brought cries of anguish and frustration from some of the largest and mightiest multinationals that have attempted to invest here.
Nonetheless, the Western NIS Enterprise Fund has had a good amount of success in developing its portfolio, which consists of Ukrainian and Moldovan companies chosen for their future potential and willingness to adopt new business practices.
"The most important thing is our partner," explained Natalie Jaresko, executive vice-president of the fund. "We are the financial investor. We need to trust him. He needs to have the ability and the aptitude. And he must be someone who wants to work with us," she said.
Another key is that the investment create growth in real jobs and that it provide a return on capital in proportion to the investment's inherent risk.
Ms. Jaresko explained that much of what the fund invests is used to capitalize modern equipment and to develop efficient distribution networks - areas in which most enterprises in this region of the world are sorely lacking.
The Western NIS Enterprise Fund has identified what it believes are the region's business sectors with the most growth potential and has focused on the consumer and consumer goods manufacturing area as their target, which includes the agricultural processing industry, food processing, automotive parts manufacturing, construction materials and packaging.
Thus far it has committed $68 million of U.S. taxpayers' money into 20 corporations in Ukraine and Moldova. It is still looking for its first investment into Belarus, although it has extended several business loans to companies there. The projects in Ukraine and Moldova include an ice cream manufacturer, a meat processor, a sunflower oil producer and a bottle manufacturer. Generally, investments range from $1 million to $7.5 million per project. The fund has plans to move into the telecommunications and pharmaceutical fields. But that is for the future.
Ms. Jaresko emphasized that the final arbiter of whether her fund makes an investment is determined in the end by most of the same characteristics that draw any investor to an individual firm. "It has to do with the risk, the reward and the potential for exit," explained Ms. Jaresko.
The executive vice-president said that the fund's investment strategy calls for it to sell off its shares in individual projects within about three to five years of the initial investment, after the enterprises have gotten on their feet and have become lucrative to others.
An investment committee, comprising several members of the fund's distinguished 12-member board of directors, which consists of leading U.S. investment bankers and businessmen, including a former chairman of Cargill and a vice-chairman of Merril Lynch, must formally approve any investment decisions that the fund management decides upon.
So far Ms. Jaresko has not had to write off any investments in the course of the fund's four years in Ukraine, although some $14 million of commitments made to five companies were allowed to expire before the finances were actually extended because the companies were unable to meet the commitments required for the investment.
The Western NIS Enterprise Fund's conditions and requirements are strict, and the process leading to a partnership is arduous. It does not lessen with the purchase of corporate stock that makes the fund an owner, but only increases with strict supervision by the fund over its investment, including Western-type audits and guidance in standard business practices and operating procedures, with which a majority of businesses in this part of the world still are unfamiliar.
The fund tends to give less weight to businesses that approach them with requests to become partners. The technique that they have established is to identify the top 10 companies in a chosen sector with the most potential for growth, based on comparative advantage studies that look at such things as current management structure, distribution network and raw material base. In years past, when the economy was almost dormant and certain market sectors had practically shriveled up, the criteria could have been simply whether the firm was operating.
Fund managers bring in retired U.S. executives through the International Executive Services Corp. (IESC) to utilize their expertise to review the possibilities in the market sector. The experts not only establish a list of the firms with the most potential, but also establish the type and amount of capital investment a firm will require to begin moving toward profitability.
Recommendations by the experts are reviewed by the financial officers and cleaned up before being submitted to the investment committee, which must authorize that a memorandum of understanding be drawn up between the fund and the client.
After all that, the real work begins. Workers of the fund descend upon the firm to learn everything they can. "We interview friends, competitors, partners, everybody, to learn everything we can," explained Ms. Jaresko.
The due diligence involved also includes the legal side of the business. Government certifications, contracts and audits are reviewed with an eye to any improprieties, inconsistencies or questionable practices in the company's past dealings. Only if everything meets the fund's strict standards are papers for a joint stock company drawn up.
For most financial investments the review process, although already intrusive, would be the limit of their hands-on involvement in a company's day-to-day operations. With the Western NIS Enterprise Fund comes regular oversight, human resource and management training and the implementation of new management information systems.
The latter, part of what Ms. Jaresko called U.S.-type corporate governance, is a system of computer-generated management tools such as sales, accounts receivable and aging reports.
Fund representatives visit the firm's offices and plants every two weeks at a minimum. A regular year-round schedule of training seminars in sales, marketing and leadership development is implemented. U.S. experts from the IESC are utilized again to offer expert consultations on specific issues and problems.
Ms. Jaresko emphasized that the fund does not deposit money in the bank accounts of the firms into which it invests as part of their risk management strategy, rather it invests in the capital equipment that is needed. This is also a cost-saving measure because the fund's status as a foreign investor allows it to purchase equipment abroad without having to pay a value-added tax.
She said that for today the fund has a solid investment portfolio, although she admits that nothing can be certain, given the region in which the fund works and the type of investments it has made. "I don't see a loss potential in my portfolio, but I don't say that it can't happen. It's fully a part of the business," she explained.
Similar investment funds seeded with U.S. taxpayer money in Poland, the Czech Republic and Slovakia have brought a healthy return. The Polish fund in particular, which began with approximately $200 million in U.S. backing, made a profit of some $400 million before it exited the market this year, all of which was returned to U.S. government coffers.
However, the ultimate goal of the fund is not simply to show a profit, although that certainly is an objective for the fund managers and, of course, a desire of U.S. taxpayers. It is to engage Ukrainian businesspeople in a real-time training ground, to teach them modern Western business practices and techniques while developing their business sense and nurturing a good business ethic. Because the classroom is the entrepreneur's own business, he needs no further motivation or desire to learn. His business success depends on it.
"You can tell a small businessman how to write a business plan. You can give him something and he might spend it. But how do you truly instill a commercial mindframe? How do you instill the idea of a market economy? How do you grow a business, how do you make a business profitable? Unless they're commercially viable, it is all for naught," Ms. Jaresko explained.
In an area of the world where Western donor aid seems to evaporate into individual foreign bank accounts and the question of how to stimulate the stagnant economies of the former Soviet Union remains a matter of opinion, the Western NIS Enterprise Fund hands-on approach may just be a part of the definitive answer.
Copyright © The Ukrainian Weekly, September 12, 1999, No. 37, Vol. LXVII
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