Canadian-born Lenna Koszarny has been actively involved in the Ukrainian business community for over 25 years. As founding partner and CEO of Horizon Capital and a board member of the American Chamber of Commerce in Ukraine, she has a unique insight into the opportunities for growth within the country’s private sector
What lessons have you learned since founding Horizon Capital, and how would you appraise the resilience of the Ukrainian economy?
Founded in 2005, Horizon Capital has its roots in the Western NIS Enterprise Fund, launched in 1994. Horizon has over $800 million of assets under management, investing over $570 million in Ukraine and the surrounding region through four funds. The firm has backed over 140 companies that employ over 46,000 people, unlocking an estimated $1.8 billion in total capital. This long-term experience in the country has provided Horizon with a unique ability to gauge opportunities.
As a Canadian who has lived in Ukraine for over 25 years, I have witnessed the immense transformation that has occurred, in particular since 2014. Though they paid a high price, millions of Ukrainians stood up, declaring: “this is not the path that we have chosen. We demand basic human rights, to be free, fair and choose our trajectory towards the West.” They paid a very high price for this choice. At the same time, it has provided the impetus for transformation. Many of our business colleagues have gone into government or launched NGOs to lead change in Ukraine. We have seen the rise of civil society, which is very important in terms of checks and balances, and we have seen people take responsibility across the board for what is happening in the country – not leaving it to the politicians, but leaving high-paying positions and being the critical mass changing the system from within.
In terms of the business community, we have seen a huge shift to new markets, expanded supplier relationships and significant investments in capital and human resources to enable companies to compete globally. Those who have not pivoted West and upgraded their quality and product offering have been left behind. Exports to the European Union have risen dramatically, increasing nearly 30 percent year-on-year in the first half of 2018. There are multiple sectors and companies growing well in excess of these high numbers. Exports are a huge growth driver for the country. Of course, agriculture is a big part of it, but at the same time, we have seen dramatic growth in the IT sector, now number three in terms of export sectors for the country. To have outsourcing go from almost nothing to a $3.6 billion industry is amazing, and this is just the beginning.
I meet with many investors and in general, those who have not come to Ukraine and form their perception from the media often cite either conflict or corruption as concerns. I urge all of them to come to Ukraine to experience the country and form their opinion directly. The intellect, tenacity, ingenuity and resilience of the Ukrainian people is impressive. They have pulled themselves up by the bootstraps since 2013/14, and the austerity that Ukraine put in place to achieve economic stability is incredible. To go from a deficit of over 10.5 percent to 2.5 percent in one year from 2014 to 2015 must be a world record. Few countries have achieved such a feat, and Ukraine did it while at the same time defending its eastern border.
We view Ukraine as a ground-floor opportunity powered by “brains, hands and grains”. The country’s progress over these past four years has been truly impressive and far exceeds what has been achieved previously since Ukraine’s independence. Ukraine ranks #76 in the World Bank’s Doing Business Rankings and #43 in the Global Innovation Index, outranking emerging markets including India, Brazil and Argentina in these key measures. I believe Ukraine will attract more investor attention because it is ground floor and you have strong sectors with sustainable cost advantages, including IT, food and agriculture, and light manufacturing. The export-oriented companies in these sectors are able to leverage both the cost advantages that Ukraine offers today as well as a talented, hardworking and intelligent workforce. Ukraine has a 99.7 percent literacy rate and over 70% of Ukrainians have a second graduate degree.
You recently told Business Weekly that Horizon Capital plans to invest $100-$200 million more in Ukraine in the next five years. What drives this positive sentiment?
We plan to invest at least $100-200 million over the next two to three years, not even over five years. Ukraine offers a buyer’s market and we firmly believe now is the right time to invest. Valuations are attractive, typically 40-70 percent below peers after hitting rock bottom at 3.9x median EV/EBITDA in 2015, rising to 5.1x in 2017 with tremendous potential growth ahead given historical median multiples of 9.1x in 2010 and 13.2x in 2007. Investments in export-oriented companies founded and led by visionary entrepreneurs in sectors with strong, sustainable cost advantages are compelling opportunities, in particular, those in IT, light manufacturing and food and agro. These companies are competitive globally and benefit from newly-opened access to the EU and other Western markets. We have tenure going back over 25 years, including deep networks and extensive relationships. We have identified the companies that we want to back. We prefer to invest alongside leaders who are building their companies, who are number one or two in their industry, who are interested in growth capital and value a partner who will contribute to their business success. We welcome Ukrainian companies offering goods and services that are higher up the value chain. While Ukraine has traditionally been a country offering commodities or selling the skills of its people at extremely low rates, it is critical that more margin remains in-country. Ukraine is better than that, able to manufacture branded products and sell them worldwide, and develop IT product platforms that become unicorns. This is possible; this is the future.
What is the average time for investors to see a return on their investment in Ukraine?
Ukraine offers both short-term and long-term investment opportunities, depending on an investor’s priorities. Our funds are long-term with a typical investment cycle of three to five years and divestment in five to seven years. We do believe the timing to put funds to work is accelerated given today’s market as there are so many opportunities right now and a significant lack of capital. We also see opportunities in infrastructure that are decades long with the new concession law that has been put in place, the new public-private partnership law and with privatizations.
If I were running a global public company trading at EV/EBITDA multiples above 10 times or higher and could add sales/earnings acquired at a low to reasonable multiple, I would be interested in this. That is an opportunity that Ukraine offers. A platform in Ukraine, whether in IT, agriculture or manufacturing, offers that. Smart, contrarian investors looking at Ukraine today understand the compelling value opportunity that the country offers and are attracted by its talented people, solid growth trajectory and substantial anticipated returns on investments made.
Horizon Capital’s roots are American. What plans do you have to tap further into U.S. funding?
Our roots are American as Horizon Capital’s team spun out of Western NIS Enterprise Fund (WNISEF), a $150 million U.S. government fund focused on Ukraine, Moldova and Belarus, launched in 1994. We still enjoy a strong relationship with WNISEF, managing its remaining portfolio of investments and also as an investor backing two of Horizon’s private funds. The Board of WNISEF is high level, comprised of top executives appointed by the president of the United States, and a tremendous source of support. Horizon’s American roots also mean that all funds are domiciled in the U.S., and the funds and firm adhere to high standards of corporate governance and integrity. We have over 40 U.S. and European institutional investors – pension funds, endowments, family offices and private investors – which we attract because of the principles that we hold and the results that we have achieved. Half of our investment capital comes from the U.S., and what attracts these investors is that we have a team that knows what they are doing, that is based in the region and that has been here for decades with the ability to put capital to work and generate strong returns. To attract investors to this market, you need attractive double-digit returns. When we look at the investors who back our funds, they have over $300 billion in capital, and we are managing $800 million of it. This is a drop in the bucket and could be much more depending on positive developments in Ukraine. We believe there is a tremendous opportunity for Ukraine, not only to attract the multinationals or large-scale strategic investors, but also to attract global, pan-European and niche private equity, hedge funds and other quality financial investors. They contribute a great deal as they typically invest in private companies at an earlier stage, contributing to these companies becoming platforms for strategic investors to acquire in the future.
How would you assess transparency and governance in Ukraine, particularly from the perspective of a foreign investor?
A tremendous amount has been achieved in terms of structural reforms during the past four years, exceeding any efforts made during the 23 years prior to that. From a foreign investor’s perspective, this is extremely important, yet much more needs to be done. We want to see a continuation of Ukraine’s partnership with the IMF and continued progress in anti-corruption, deregulation, business-friendly reforms, including tax reform. By and large, the number-one requirement for investors is rule of law. Ukraine has made great progress tackling corruption, setting up the institutions to prevent, investigate and prosecute high-level corruption. These institutions are now in place, operating, well-led and gaining traction. We benchmark progress on corruption against Romania as this is the blueprint that Ukraine is following, thanks to support from the United States and other bilateral partners. In terms of number of prosecutions of high-level officials, we are ahead of where Romania was in year three. In my view, a well-functioning court system and the anti-corruption court that will try high-ranking officials and serve as an enormous deterrent is the last piece to put in place. Officials now know that there is a fast-track system to the anti-corruption court, monitored by international partners and Ukraine’s vigilant civil society, all of which is a significant deterrent to future corruption.
As a board member of the American Chamber of Commerce in Ukraine, how would you assess the ties between the Ukrainian and American business communities?
Business ties between Ukraine and the United States are on the rise, not only in traditional areas such as metals and grain but much more, including IT and other services. It is clear that the relationship between the U.S. and Ukraine must be based on mutual benefits realized through trade. All of Ukraine’s partners, including the U.S., clearly understand that for Ukraine to prosper and rise above its current circumstances, the country must be strong economically. U.S. companies are benefiting by trading with Ukraine and investing while also contributing to Ukraine growing stronger by the day. This win-win is essential: Ukraine needs investment; U.S. business needs markets. Ukraine needs technology; the U.S. has technology and innovation. This is a natural fit that is a clear win-win and will result in dollars being earned on both sides.
Ukraine is changing and doing the heavy lifting on its own, and that is not easy. Most of the reforms that the country has implemented are long overdue and would have resulted in thousands of citizens protesting in the streets in other countries. The fact that Ukraine is both defending its borders and implementing deeply unpopular but essential structural reforms is what observers usually forget. The path that Ukraine is on is so cardinally different from its past and must be applauded. A strong Ukraine means a strong Europe. I firmly believe the West has a responsibility to extend a hand to Ukraine, not to provide handouts, but to be solid trading partners, principled business partners and quality investors who expand the country’s export relationships and market access. Partner with Ukraine, trade with Ukraine – this is an easy ask. You make money while we make money. Let us do it together.