Four questions on Horizon’s Ukraine-focused fund

Horizon Capital closed its third Ukraine-focused growth fund on its hard-cap in December, one of the largest funds raised for the country in a decade.

The Kyiv-based firm began raising capital for Emerging Europe Growth Fund III in 2017, three years after the annexation of Crimea, and has raised $200 million, beating its $150 million target. The vehicle, which is smaller than its 2008-vintage $370 million predecessor, EEGF III received “strong backing from existing and new investors”, according to a statement.

Investors in Fund III include the International Finance Corporation, PROPARCO, FMO and European Bank for Reconstruction and Development. Horizon’s existing limited partners contributed over 55 percent of capital commitments, and US and European investors made up over a third of its LP base. Capital raised from EEGF III will back export-oriented companies in Ukraine and nearby countries. The fund has been deployed across six investments to date including IT company Genesis, Moldovan bank MAIB and IT services company Intellias.

Horizon founding partner and chief executive Lenna Koszarny discusses what changed in the latest fundraising process, LPs’ views on Ukraine’s investment landscape and the structural reforms driving the next generation of entrepreneurs.

EEGF III is almost $200 million smaller than its predecessor. Why did you decide to raise a smaller vehicle?

Nobody expects a fund focused on Ukraine to hit its hard-cap. Nobody expects anyone to be able to raise a dollar for Ukraine given what has happened since 2014.

We raised $370 million for EEGF II because valuations were much higher then, at about 10x EV/EBITDA. Now we can buy assets for 4-5x.

We have about 30 investors in the new fund, of which 55 percent are existing LPs. Even though the country has had its challenges, our performance in the first two funds was strong and that led to re-ups. Our LP base includes development finance institutions, institutional investors, foundations, family offices and other private investors.

What were your LPs’ main concerns about investing in the country?

We raised our two previous vehicles in 2006 and 2008 and this was pre-annexation of Crimea, before the conflict in east Ukraine, so that was top of mind.

‘What is Russia going to do next?’ That’s the number one question that we never got before. Most emerging markets are dealing with currency risk and macro-economic concerns. With this fundraise we have also had to address geopolitical concerns.

We’ve been on the ground for 25 years. We’ve invested through every president, prime minister, every single administration, and through [the] events of 2013. The perception is that there’s a war going on. But the reality is that you have 7 percent of the territory in the conflict area, and the remaining 93 percent is working, flourishing and pivoted towards the EU. That’s also a big difference, because prior to January 2016 we didn’t have a free trade agreement with the EU.

I can’t allay everyone’s fears. If you are a very conservative pension fund, Ukraine is not a country you will invest in. However, family offices, foundations, DFIs and other private investors are looking for value in global economy where assets are generally overvalued.

Our LPs who came into this fund, basically said: ‘Looking at it from a 10-year horizon, you’ve got great valuations now, you’ve got limited to no competition, and you’ve got an enormous number of opportunities.’

Prior to Fund III you were focused on consumer-driven business, why did you shift your investment strategy?

In the past, we focused mainly on fast-growing consumer goods, which was all about the growing domestic market and the rise of the middle class.

We pivoted to IT and export-oriented businesses in 2012 because we saw these companies growing at over 30 percent per year.  Companies have a cost advantage in Ukraine and generate between 70-100 percent in global revenues. That’s really how we deal with the typical currency risk in emerging markets. It has worked well and we saw great gains in EEGF II, and on the back of that continued the strategy into EEGF III.

What’s been the biggest change in Ukraine that has attracted PE investors?

For 20 years [after Ukraine achieved independence] there were no structural reforms. And if we look at what’s happened in the last five years, the country has been forced to choose. It’s the same choice that Poland, Romania and Hungary had to make. ‘Do we embark on structural reforms, pivot west, and is that our future?’

In the last five years Ukraine has been focused on implementing structural reforms, and a tremendous amount has been done to the point that the country has risen from 152nd position to 71st in the latest Ease of Doing Business ranking by the World Bank, ahead of India, Brazil and Argentina.

We have also seen the explosion of companies backed by a new generation. The same people who demanded the country pivot west are these people who are starting businesses. They are very entrepreneurial, mainly in the technology sector, but also in food processing and agriculture.

Lenna Koszarny is founding partner and chief executive of Horizon Capital.