Western NIS Enterprise Fund chief optimistic about Ukraine's investment climate (02/02/03)

Western NIS Enterprise Fund chief optimistic about Ukraine's investment climate

by Maria Kulczycky and Andrew Finko

CHICAGO - The Western NIS Enterprise Fund, a private equity investment fund capitalized by the U.S. government, has proven that, by following sound business principles, investments in Ukraine are not only prudent, but also can be quite successful, as confirmed by its president and chief executive officer, Natalie Jaresko.

Speaking at a seminar organized by the Chicago Business and Professional Group in late November 2002, Ms. Jaresko explained the goals, strategy and operations of the $150 million Western NIS Enterprise Fund. The seminar was held at the Ukrainian Institute of Modern Art in Chicago.

Since its inception, the Western NIS Enterprise Fund has made investments of $77 million in 24 companies in Ukraine and Moldova employing more than 12,000 people. The fund's success can be traced to its ability to identify undeveloped market niches that have the potential to competitively produce and sell goods for local and world markets. The fund has invested in businesses in food processing and distribution, construction materials manufacturing, packaging, light industry and financial services.

The fund succeeds by identifying the fastest growing sectors of a region's emerging market economies and identifying enterprises with outstanding growth potential and the ability to build competitive advantages. Then the fund works to build shareholder value, thus enabling it to recoup its investment and garner an appropriate return, Ms. Jaresko explained.

Reviewing the fund's many successful investments, the speaker observed that "Winners for us have been companies that meet an unsatisfied demand; are leaders in their market; have a uniquely talented management team; and an excellent customer base, distribution, brand and distinct features."

In addition to carefully screening potential firms, the fund also maintains a blocking ownership interest to, at a minimum, balance the interests of current managers and co-owners while providing direction to ensure success.

Businesses receiving the fund's equity investments also are required to adhere to strict corporate governance principles, maintain transparency in accounting, conduct annual international audits, pay required taxes, apply Western-style management and technology principles, and install world-class management information systems, according to Ms. Jaresko. As a result, two-thirds of the outstanding portfolio is experiencing double-digit percentage increases in U.S. dollar revenues year after year.

In addition to direct investment in production and services, the Western NIS Enterprise Fund stays committed to small business development. In order to sustain and expand the growth of the small business sector in Ukraine, WNISEF became a founder of Micro Finance Bank of Ukraine (MFB), a specialized micro-lending bank set up in partnership with prominent international financial institutions such as the International Finance Corp., European Bank for Reconstruction and Development, the DOEN Foundation, Internationale Micro Investitionen and the German-Ukrainian Fund. WNISEF invested $5.65 million in equity and debt. Since its inception, MFB has disbursed $44 million through 6,259 loans while maintaining a 0 percent default rate and a delinquency rate of 0.6 percent.

The creation of this micro-lending bank and its subsequent regional expansion into nine cities has enabled more capital to reach businesses throughout Ukraine. "Rapid development of our Micro Finance Bank and its outstanding performance is yet another proof of the growing small business and entrepreneurship culture in Ukraine," said Ms. Jaresko.

She pointed out several attractive sectors in the Ukrainian economy, including financial services (26 percent growth rate last year), retail distribution (11.5 percent), food processing (7.8 percent growth rate), and construction materials manufacturing (5.6 percent).

Among the fund's more successful investments is Slobozhanska Budivelna Keramika (SBK), a brick factory in Romny, Sumy Oblast. SBK is an excellent example of a remarkable turnaround: an inefficient, nearly bankrupt factory in 1997, it became the premium facade brick manufacturer in Ukraine in 2001. Growing demand for SBK bricks in and outside Ukraine resulted in the company's expansion and acquisition of a second production facility in Kharkiv. While local officials in Sumy oblast were initially skeptical of the endeavor, the company's continued profitability has generated considerable tax revenues for local government, as well as reaffirming the fund's judgement and providing inspiration to other Ukrainian businesses, Ms. Jaresko related.

As evident from the brick factory example, a key strategy in determining the social viability of an investment by the Western NIS Enterprise Fund is to ensure that the business pays all taxes. Plainly stated, taxes are the proof of success to the people who live in the communities where the business is located, since they are direct beneficiaries through improved roads, public service, and most importantly, regular paychecks for civil servants. Ukrainian companies pay corporate taxes of 30 percent of net profit and various local taxes. In SBK's example, since 1998 it has paid more than $4.4 million in national and local taxes, contributing significantly to the development of its community.

Ms. Jaresko pointed out that several market opportunities are being missed in Ukraine because of regulatory, financial and technical environmental hurdles:

"For instance, the clay in Ukraine is of such fine quality, that Italian firms import it to fabricate the expensive tiles used in home decorating. Bringing the fabrication know-how to the source would not only make the tiles less expensive, but would provide tremendous employment opportunities in Ukraine," she said.

In addition, Ukrainian steel mills produce very high quality product, but the lack of infrastructure investment threatens to destroy their future competitiveness.

"The Western NIS Enterprise Fund's mission is to build market leaders that attract capital to the region as a result of their competitive advantage within their industry and their ability to set standards for small and medium size businesses," Ms. Jaresko said. "But our investments have also produced direct benefits in terms of tax payments, social security contributions, salaries, and charity and community support. Indirectly, we've created value in local economies that translates to almost $5 in impact for every dollar invested."

Over the first 10 years of Ukraine's independence, the fund has demonstrated its effectiveness and shown Ukrainian business owners (and those people living in communities where investments are made) the market potential for Ukrainian businesses to compete in local and even world markets with well-established businesses. Ms. Jaresko underscored that she is optimistic about the future of the Ukrainian economy and investment climate, which is surely and steadily making progress.

The Chicago Business and Professional Group is an organization that has been reactivated by an initiating committee after a hiatus of several years. Last year it sponsored two programs with speakers and one social reception. A full program is planned for 2003. For membership information, please write to: CBPG Membership, P.O. Box 2249, Chicago, IL 60690; or e-mail questions to [email protected]. Annual membership dues are $35.

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