Horizon Capital is the leading private equity firm in Ukraine, managing four funds with assets of over $850 million. Its most recent $200 million Emerging Europe Growth Fund III (EEGF III) focuses on fast-growing, export-oriented companies that are high up the value chain, primarily in IT, light manufacturing and agriculture, as well as domestic champions in healthcare and pharmaceuticals, consumer goods and e-commerce. Canadian-born Founding Partner and CEO Lenna Koszarny, who has lived and worked in Ukraine for over 26 years, explains how things are changing under a new government that is young, outward looking and keen to implement sweeping reforms
You have been in Ukraine for a long time, which puts you in a privileged position to understand the changes that have taken place throughout the years. What is your view of the current situation?
I have lived in Ukraine for over 26 years and can say with confidence that Ukraine did very little in terms of structural reforms prior to 2014. Much has been done since then, and the political reset of 2019 provides greater ability for Ukraine’s new leadership to complete long-awaited critical structural reforms. Adopting legislation is key to implementing change with every new law or amendment requiring the support of Ukraine’s Parliament. Today, President Volodymyr Zelenskiy’s party has absolute majority in Ukraine’s legislature, thus giving the president the ability to both adopt necessary legislation to effect change, as well as holding executive authority to implement laws adopted, since Ukraine’s government is appointed by its parliament. The mood is one of “now or never” for Ukraine, as the country’s new leader has all the tools required to undertake structural reforms that his predecessors did not have. This means that key reforms that were too difficult or politically challenging to undertake – including land reform, large-scale privatization, paving the way for public-private partnerships and concession projects, tackling corruption decisively, and much more – are all possible now. The pace of reform is all happening right now and at a tremendous pace since the legislative and executive branches assumed office on August 29.
With your experience as a Canadian and having been in Ukraine for 26 years, what do you think are the shared cultural values that have made it easy for North Americans to do business in Ukraine despite any negative perceptions that might exist?
I am proud to be Canadian and proud that my ancestors were originally from Ukraine. In fact, Ukrainians have been contributing to Canada for over 125 of it’s over 150-year history. You certainly feel this in Canada where over 1.4 million Canadians are of Ukrainian heritage and in Western Canada where one in four Canadians trace their roots back to Ukraine. I also am proud that Horizon Capital has US roots and manages US-domiciled funds investing in this country. Both Americans and Canadians operate based on high values and principles, with business relationships based on trust, mutual respect and the alignment of interests. The same principles apply in Ukraine with the investment approach that we take – specifically, investing alongside visionary entrepreneurs who have built leading companies and are growing them regionally and globally. Any successful investment relationships begin with establishing trust with your partners and this is the same in Ukraine as it is in North America. During the last 26 years, the four funds that we manage have in total invested over $700 million in 150 companies employing 52,000 people primarily in Ukraine, as well as the near region. Some may be larger and some smaller, but in the end these are companies that move the economy forward in the sectors where they operate. The values and principles that I hold are the same in Ukraine as they are anywhere else. These are the same high values and principles that our firm and our team adhere to. We are very selective in choosing our business partners, ensuring we share high principles and standards, desire to be models of corporate governance and contribute to the global economy.
Who makes up your primary investor base?
American and European investors comprise most of our investor base. Our most recent fund, EEGF III, was launched with an anchor commitment from the Western NIS Enterprise Fund, a US fund, and attracted commitments from the European Bank for Reconstruction and Development (EBRD), Dutch entrepreneurial bank FMO, the International Finance Corporation (IFC), PROPARCO, DEG, and the Danish Investment Fund for Developing Countries (IFU). Moreover, over one-third of the fund was raised from institutional investors, foundations, family offices and other private investors. The new fund enjoys strong backing from existing investors of Horizon Capital’s prior funds, who contributed over 55% of total commitments. Our investors apply very high standards to our firm and our funds, and we in turn ensure that the portfolio companies that we invest in are best in class in their sectors. Out of 150 investments made, only one has ended up in the courts back in the 90s, with the fund ultimately receiving its full investment back with legal fees, evincing the importance of knowing your partner and the company, having a strong knowledge of the country, a deep network and paying attention to details. Today we focus on visionary entrepreneurs with a global mindset and typically those who are members of the new generation in Ukraine. The companies they have founded have bold visions and are growing by leaps and bounds. We are delighted to back these “champions of Ukraine” with our capital and expertise.
How do you convince investors who may have a bad perception of the country?
We encourage investors to look past the headlines and understand that investing where others may be reluctant to enter may allow for tapping into outsize investment opportunities with high return potential. Unfortunately, Ukraine is perceived as a country with a corruption problem. However, since 2014, there has been significant dialogue within Ukraine about corruption. During the past five years, Ukraine has admitted it has a problem, leading to the formation of core anti-corruption institutions to prevent, investigate and prosecute corruption. Today, we are seeing the culmination of the setup of these institutions, with the formal launch of the anti-corruption court, cases being brought forward for prosecution and perpetrators receiving prison sentences. This dialogue and these efforts are required for the country to move forward to a value-based society. I meet with many investors and in general, those who have not come to Ukraine often cite either conflict or corruption as concerns. I urge everyone to come to Ukraine to experience the country and form his or her own opinion directly. The intellect, tenacity, ingenuity and resilience of the Ukrainian people are truly impressive. Few countries have faced the challenges that Ukraine has overcome, all while defending its borders, regaining economic stability and resuming a growth trajectory.
What does your continued success say about the business climate in Ukraine at the moment?
Contrarian investors seek out value and opportunities irrespective of the business climate and often “go where others do not” as limited competition provides even great impetus for success. In general, the business climate has improved significantly in Ukraine in recent years. In addition to leading Horizon Capital, I also serve as a member of the Board of Directors of the American Chamber of Commerce in Ukraine (AmCham) and am proud to be the elected chair. Together with Citi Ukraine, AmCham issued a survey of the business climate in Ukraine in October 2019, with 62 percent of business respondents describing their mood as cautiously optimistic despite uncertainty that comes along with transformation. Interesting take-aways from this survey include:
What is truly striking is that this government is in rapid implementation mode: President Zelenskiy truly assumed the powers of the president only when parliament took office on August 29 and his party has absolute majority. One of the first acts of the new parliament was to appoint 35-year old Oleksiy Honcharuk as prime minister, who formed a 17-member cabinet with an average age of less than 40 years old. When they announced their five-year vision and the key metrics against which they will use to judge results, that was truly “music to investor ears”. In the past, we had an executive branch whose members acted as a compromise between different parliamentary factions. Now Ukraine has a prime minister who shares the President’s vision and has brought forward a team ready to take responsibility for the country’s progress, in particular with respect to economic and structural reforms. This is big news and often people do not understand the significance of alignment of the country’s leadership. During the first three months since the government took office, Ukraine saw over 250 legislative acts adopted. One of the first legislative acts was to strip away parliamentary immunity that deputies had always enjoyed. They will be held accountable for any criminal actions perpetrated, which is extremely important to ensure the highest standards are applied to those responsible for upholding laws in Ukraine. The High Anti-Corruption Court was launched in September – a key requirement for the International Monetary Fund and Ukraine’s bilateral partners. The rapid pace of implementation is very important as many of these issues have been discussed for decades. Take the land debate: for 16 years the country has maintained a moratorium on the sale of agricultural land with land reform discussed ad nauseum. Within the parliament’s first three months, a law was passed in the first reading that forms the basis for land reform and is expected to be adopted in early 2020 in final form. These are only a few examples of what has already started and once concluded, will be truly historical.
Has the new government opened the door to privatization?
In November, the new government cancelled the list of strategic assets banned for privatization, essentially stripping state-owned enterprises of the special status that previously prevented them being sold to private owners. Now, most assets will be privatized with larger privatizations offered via the State Property Fund and smaller assets sold to the highest bidder through the electronic platform ProZorro. Then there is the new concession law, which is a huge development as Ukraine needs to invest significant amounts into infrastructure and previously this was only possible by spending state budget funds. Now investors can build an asset with a guaranteed 30- to 35-year revenue stream prior to turning over management to the state, this is a novel and exciting opportunity. Two seaports are the first to be offered as concession projects, and both have over 40 interested investors from 11 countries.
So, there is still time to get in on the ground floor?
What we keep raising is that Ukraine offers a ground-floor opportunity that is truly unparalleled. In 2008, Ukraine had a nominal GDP of about $180 billion, which shrunk to around $120 billion, and then dropped to $90 billion in 2015. Ukraine’s nominal GDP has clawed its way up to about $135 billion today, so the country isn’t yet at its 2008 level. This is the largest country in Europe; it has signed a FTA with the EU and is trading with the EU market, in addition to increased trade with the Middle East and Asia. People can travel now even go on business without a visa for up to 90 days. I think this is a bit like Poland in the 1990s, except that every region of Poland got around $2 billion of infrastructure investment from the EU that Ukraine will not receive. At the same time, Ukraine is a ground-floor opportunity powered by “brains, hands and grains”. The country’s progress over these past years has been truly impressive and far exceeds what has been achieved previously since Ukraine’s independence. Ukraine ranks 64 in the World Bank’s Doing Business Rankings and 43 in the Global Innovation Index, outranking emerging markets such as Brazil and Argentina in these key measures. I believe Ukraine will attract more investor attention because it is ground floor and has strong sectors with sustainable cost advantages, including IT, food and agriculture and light manufacturing. The export-oriented companies in these sectors can leverage both the cost advantages that Ukraine offers today as well as a talented, hard-working and intelligent workforce.
Can you give us an overview where your investments came from and how companies were chosen?
We launched our latest fund, the Emerging Europe Growth Fund III (EEGF III), in June 2017 with final closing held in December 2018, when we reached our hard cap of $200 million. We’ve completed nine transactions, seven of which are export-oriented, which is really the focus of the fund: it includes industries such as IT, light manufacturing, food and agro, all of which are higher up the value chain. Ukraine has traditionally been a country offering commodities or selling the skills of its people at extremely low rates, but it is now critical that more profits remains in the country. Ukraine has greater potential than commodities alone – we can manufacture branded products and sell them worldwide and develop IT product platforms that become unicorns.
Our firm invests in companies that are pivoting to the EU and other markets with very strong platforms in Ukraine. These companies are competitive globally. We have tenure going back over 25 years, including deep networks and extensive relationships. We prefer to invest alongside visionary entrepreneurs who are growing their companies quickly, who are number one or two in their industry, and who are interested in growth capital and value a partner that will contribute to their business success. Of particular interest are opportunities in the exports sector, which are devaluation prone. A case in point is the spectacular track record of IT outsourcing (with 22% CAGR from 2010 to 2018), light manufacturing, and food and agriculture. These and other sectors are expected to further benefit tremendously from expanding trade. A good example in the IT sector is Intellias, a high-growth IT services provider, which we invested into in 2018. The company has five delivery centers in Ukraine, one in Poland, and 1,600 engineers in-house (which grew remarkably from 68 engineers in 2010). This Ukraine-based IT services provider is now a direct vendor to Fortune 500 corporations, serving leading car manufacturers worldwide with over 40 blue-chip clients. Among the domestic champions, we target industries undergoing fundamental transformation, such as e-commerce, which has a market that has grown six times over the past seven years in USD. With Internet penetration and online-shopping incidence still much lower compared to regional peers, growth at 30% is expected to sustain. It is these arguments that persuaded us to invest in Rozetka, the number one brand in Ukraine’s e-commerce by brand awareness and among the top three Ukrainian brands by value, widely considered the “Amazon” of Ukraine. It merged with EVO (“eBay of Ukraine”) in 2018, further cementing its leadership position by a wide margin. We have backed smart security systems company Ajax, which is one of Europe’s leading brands. The company’s products are sold in over 75 countries worldwide; it enjoys an impressive track record of revenue growth and profitability and is well positioned for continued expansion, and manufactures exclusively in Ukraine. Genesis, an IT product company, has 1,500 programmers that power online media, classified websites and other companies globally. We also invested in Dobrobut, the largest chain of private healthcare clinics, which offers high quality, essential services to patients in Ukraine. The company owns a wide network of clinics and hospitals, staffed by strong professionals and equipped with modern medical equipment, providing quality care to their patients. Healthcare is a sector in Ukraine with great growth potential that will attract significant private investment in the future – we are proud to back the number one chain of healthcare clinics in the country.
What are your feelings about the speed at which everything is happening and the direction that the country’s going?
The speed of change is a topic that comes up often in the business community. On the one hand, we have suffered through years of compromise and slow progress. This government stated from the outset that they will operate at an urgent pace and if mistakes are made, these may be fixed later. Of course, there is little support for an approach of second-guessing and double-checking; years can go by with no results. At the same time, if your business model becomes a casualty of a rapidly adopted law that will be fixed at some later, unspecified date, that is a terrible outcome. At AmCham, we encourage providing business with a seat at the table to provide advance notice of the legislative agenda and encourage a dialogue to truly understand how business thinks and what they value. It is business that creates jobs and makes substantial investments, thus it is important to engage the business community. In addition, we urge enough time between the first and second reading of laws within parliament to enable circling back and making sure that the business associations are part of this dialogue. The AmCham leadership, board and its committees move quickly and are ready to move as fast as the government is moving.
I do believe that the country’s leadership is right to put the “pedal to the metal” as time is money and countries compete for investment and talent; at the same time, the government needs to ensure they hear the business community and fix mistakes made as quickly as possible to minimize negative effects on business. There are a few litmus tests coming up, let’s see what happens.
You focus on export-oriented companies. What are some of case studies of how Horizon Capital continues to play an integral role in building this key export industry for Ukraine and what it’s going to represent for the country in years to come?
To build an edge, private equity firms increasingly specialize; hence the proliferation of healthcare, technology, energy, or other sector-focused funds. At Horizon Capital, we found our edge by backing high-growth, export-oriented companies and taking a hands-on approach in enhancing their export capabilities post-investment. Our focus on exporters with Ukraine roots gives the best of both worlds – attractive valuations and cost advantages on one side, with hard currency revenues mitigating currency and macro risks on the other. We are bullish on companies led by a “new generation” of visionary entrepreneurs, typically 25-40 years old, in sectors with sustainable cost advantages, including IT, light manufacturing, and food and agriculture. Recent protectionist skirmishes aside, global trade has been on an expansion trend for over half a century. Global exports have been growing at a much faster rate than the overall economy. As a percentage of GDP, global trade increased from circa 35% to nearly 60% over the last three decades. Being a successful exporter is often a strong proxy for sustainable competitive advantages. We focus primarily on export-oriented opportunities, which are best positioned to capitalize on the (1) cost-competitiveness of Ukrainian labor, (2) proximity to EU markets and (3) favorable trade framework post-FTA with the EU. In addition, domestically there are also several fast-growing sectors where you can outgrow any macro risks, essentially healthcare, pharma, e-commerce and consumer goods, which are growing at 30 percent-plus each year. If there is a currency devaluation or a macro shock, they can absorb it. On the export front, we believe the country has certain advantages.
These companies need access to capital. They need to improve their production. They need better equipment. They need greater networks. And that’s where we step in. We help them, and with our capital, expertise and networks they turn into regional and global champions and hopefully at the end of our cooperation, the company is ready to IPO or may be acquired by a global strategic investor.
What is the media overlooking that investors should be aware of?
Ukraine is portrayed as a bad actor, a corrupt country. What the media is overlooking is the change in Ukraine that has been driven by a new generation and by a civic society holding its leadership accountable. Nowhere in the world have there been free and fair elections resulting in a president winning over 73% of the vote and receiving such a decisive mandate for change from its citizens. Ukraine is moving forward at an unprecedented pace – this is the real story.
Where do you see Horizon Capital in the next three to five years?
There is no doubt that at the pace that we are investing and raising capital, we will be managing well over a billion dollars in the near term. We are well positioned to capitalize on the opportunities offered in Ukraine because of our track record with private investors and with international financial institutions. It is essential to build long-term trusting relationships with investors and have them see that through thick and thin you are earning them returns, even when unforeseen events occur. We are the leading private equity firm in Ukraine and will remain leaders in our sector.
Why should US investors go through Horizon Capital?
US investors who invest in Ukraine through our funds seek returns driven by investing in high-growth companies who are succeeding locally, regionally and globally. These are contrarian investors who understand that Ukraine offers a tremendous value opportunity with significant future upside available given it is considered a ground-floor opportunity with limited competition. We have a clear value proposition: back visionary entrepreneurs accessing global markets from Ukraine-based, cost-competitive platforms, resulting in high growth, high margins and high returns. Few countries that border four European Union countries and serve as a trade hub to Europe, Middle East and Asia can also offer a ground-floor opportunity for investors. If Ukraine gets it right, the country may very well emulate the post-reform economic rebound story of Colombia, which grew 13% annually for 10 years from 2004; the Philippines, which grew 9% annually from 2001-2014; Slovakia, which surged 17% annually from 2000-2014; and other success stories that have benefited from structural reforms, FDI and substantial exports growth.