Venture capital firm focuses on western Ukraine (06/17/01)

Venture capital firm focuses on western Ukraine

by Roman Woronowycz
Kyiv Press Bureau

KYIV - It could be that the ever-keen eye of the Western investor finally may have focused on western Ukraine, economically the most underdeveloped region of this struggling but potentially prosperous country of 50 million. Western Ukraine is renowned for its staunch patriotism and rich cultural development, but thus far has been considered a commercial investment backwater.

Western Ukrainian Venture Partners (WUVP), the privately owned management arm of an investment project initiated with funding from the Dutch government, has decided that the time is ripe for commercial investment in western Ukraine and has set up a fund to generate foreign investments for the region.

WUVP manages the Dnieper (Guernsey) PCC Ltd. (Dnieper Fund), a venture capital vehicle for agricultural and financial investments, which has identified the land west of the Dnipro River as its area of opportunity.

The management firm, subject to Dutch financial regulations, is looking to lure institutional and private investors into a wide array of commercial investment projects being developed in Ukraine, ranging from commercial animal husbandry, crop development and food processing to publishing and financial services.

"There are medium and small companies on side streets and back roads all over this region with outstanding possibilities," said Peter DeVreede, manager of Western Ukrainian Venture Partners, who has eight years experience working in Ukraine and earlier was a country manager for the international consulting firm KPMG in Kyiv. "One needs to look for good management, for an entrepreneurial instinct, where the major shareholders are the managers," added the venture manager.

Mr. DeVreede offers his potential clients wholly private and transparent Ukrainian companies that have been rebuilt in a Western mode with Western business requirements and traditions. WUVP acts as the manager of the investments and has financial controllers working and living on site to oversee the investment.

The management firm, which constantly scrutinizes Ukrainian markets for new opportunities, also identifies promising projects, prepares required due diligence reports and makes final recommendations to the Dnieper Fund investment committee, which must approve all new investments.

WUVP then monitors the performance of portfolio companies and submits periodic reports on its status, manages the company's liquidity position and, finally, its exit strategy.

The key to what the Dnieper Fund offers its clientele is flexibility. Its investment portfolio accents protected cells, an investment mechanism that allows an investor to identify where he wants to place his money, and gives maximum flexibility for differing classes of investors.

"A cell structure allows for specific demands of the individual," said Mr. DeVreede.

He explained that in more traditional funds the investor surrenders his money, which then is invested for him by the fund in an area where it sees the best opportunity. In a cell structure, however, an investor can request that his money be placed in a specific cell, for example one that will invest in the development of a particular type of food processing plant. The money then joins other investments that have been earmarked for that particular cell. This type of cell structure also allows for the co-mingling of finances from multinational institutional investors, which the fund is hoping to attract, with smaller investors.

Mr. DeVreede explained that WUVP is better suited for the Ukrainian market than the large Western investment funds, which unload $100 million to $200 million at time on specific projects. The large financial institutions find it practically impossible to invest such large amounts of money in Ukraine's transitional market environment because of the lack of complete privatization and thorough transparency in projects that are of the size they require.

Mr. DeVreede said his company is specifically designed to handle the middle- and small-sized Western institutional investor as well as private investors. He underscored that the projects WUVP recommends to the Dnieper Fund investment committee are wholly privatized and totally transparent. He added that in many cases the WUVP, in conjunction with local managers, develops projects from scratch.

This is especially true in the agricultural sphere, where old collective farms lie underutilized or simply crumbling and can be had dirt-cheap. By properly investing in modern equipment, the farms can be resurrected as modern agricultural companies at relatively small cost.

As an example, Mr. DeVreede offered several projects in the Rohatyn area of the Lviv Oblast, which has become its de facto base of operations.

"This is a region with high unemployment and a nearly collapsed agriculture system," said Mr. DeVreede. "They are happy to sell, but you need a local partner to make it work."

The Dnieper Fund has decided to dedicate approximately 30 percent of its portfolio into agricultural production and food processing. It has taken a stake in Rosan Capital, a local western Ukrainian firm, which has a major Canadian co-investor. One of its subsidiaries, Rosan Agriculture, has developed a project that the WUVP helps manage and which it sees as a core of its own investment strategy.

In 1999 Rosan Agriculture purchased a former collective farm in the Rohatyn area and invested in modern technologies to develop a state-of-the-art pig farm, with computerized feeding and computer chips in every pig that monitor its nutritional needs and development. Currently Rosan owns 6,000 heads, pigs that are sold to market, but is working to expand to 10,000, after which it will begin its own meat processing.

WUVP was so taken by Rosan Agriculture's success that in May 2000 its Dnieper Fund became a strategic investor in the firm.

WUVP also hopes that investors will be interested in projects to develop food processing plants as well as seed farms. In preparation for its food processing operations it has developed the rights to 3,500 hectares of land in western Ukraine.

However, Mr. DeVreede said the potential of the seed farms particularly excited him for two reasons. First, new seed strains are particularly needed in Ukraine because its own agricultural strains are poor. Second, European seed companies often have been unwilling to sell to Ukraine because the country has a history of reneging on property rights payments.

In another project, WUVP is looking for investors who would support an investment cell to develop dairy farming ventures and eventually a milk and cheese plant.

"Do you know why Ukraine produces so much dark chocolate and so little milk chocolate?" queried Mr. DeVreede. "Because it has a shortage of milk."

He said that WUVP hopes to make all the Dnieper Fund's agricultural projects organically based so as to maintain access to Western Europe's increasingly finicky market.

In order to achieve a diversified portfolio, WUVP would like to take its Dnieper Fund into the financial services field as well. Currently it has several projects in mind, the closest to fruition being the purchase of one of the top three performing insurance companies in Ukraine.

Mr. DeVreede would not name the company, but offered that it was a stable firm that needed investment for further growth. While not interesting to Western insurance companies who tend to look for large size, it was a nice fit for the Dnieper Fund's accent on small and medium investments.

There are also plans eventually to develop a publishing firm in western Ukraine and further down the road a bit, to invest in environment-friendly industries such as wooden toy production, which the venture fund manager acknowledged would be a niche market investment.

The idea for a venture capital fund for western Ukraine came from the Dutch government after a visit to the western oblasts of Ukraine by the Dutch prime minister in 1996. Government officials in discussions with western oblast leaders agreed to support the development of an investment fund. Unlike other Western funds such as the Western NIS Fund, which was fully capitalized by the U.S. government, WUVP received only start-up funding and organizational support from the Dutch government to develop the Dnieper Fund.

Because Ukraine still is perceived as a dangerous place to invest one's money, Mr. DeVreede explained that a goal of WUVP is to reduce the risks involved. He said part of the strength of the Dnieper Fund is the WUVP management team, whose members are from Western Europe but have extensive experience on the ground in Ukraine's business world and utilize strictly Western concepts and practices. The venture management team's priorities remain the maintenance of high levels of due diligence and oversight and the development of conditions to reduce the perceived risk in its investment projects, said Mr. DeVreede.

"I can't guarantee the weather, and I can't guarantee a 60 percent return, but the labor costs are low and the land costs are low," he explained. "We are getting it down to a normal economic risk."

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