Horizon hits halfway point in Fund IV fundraising in big win for Ukrainian PE

The Kyiv-headquartered firm is 'leaving no stone unturned' in supporting its portfolio companies, says founder and chief executive Lenna Koszarny.

Ukraine-headquartered Horizon Capital has raised half of its $250 million target for its fourth flagship fund, the highest first close since the firm’s inception in 2006.

Blue-chip US and European investors including the European Bank for Reconstruction and Development; the International Finance Corporation; Germany’s DEG; Dutch development finance institution FMO; the Swiss Investment Fund for Emerging Markets; the Western NIS Enterprise Fund; and the Zero Gap Fund, an impact investing tie-up between the Rockefeller Foundation and the John D and Catherine T MacArthur Foundation, have committed to the fund, according to a statement.

Horizon Capital Growth Fund IV, whose target is $100 million more than its 2017-vintage predecessor, was launched in October last year. The firm was forced to pause fundraising at the end of February to ensure the safety and security of Horizon’s staff and their families amid the Russian invasion; it restarted the process in May.

Target returns for the vehicle are in line with expectations for frontier markets, it is understood. Capital raised for Fund IV will be invested in 10 to 15 companies with an average ticket size of between $10 million and $30 million. Horizon expects to hold a final close by mid-next year.

London-headquartered law firm Stephenson Harwood is understood to be advising on Fund IV’s formation.

Private Equity International caught up with Lenna Koszarny, founder and chief executive officer of Horizon, about the firm’s continued fundraising in the midst of tumultuous conditions.

First of all, how is the Horizon team doing?

Lenna Koszarny, Horizon Capital
Koszarny: We are committed to this region and will remain so

Our team inspires me every single day [with] their resilience, commitment, dedication and strength – akin to the traits that the world has admired in Ukrainians since the onset of the full-fledged invasion.

From the beginning, our utmost priority has been the safety and security of our team, their families, the founders and management teams and extended Horizon Capital family… [We have] over 26,000 people on the ground in Ukraine, employed by portfolio companies in all funds managed.

Beyond safety and security, our team is leaving no stone unturned in supporting founders [and] portfolio companies, as well as leading numerous humanitarian initiatives to support communities and NGOs in Ukraine, with over $3 million raised by the firm via our humanitarian logistic group initiative. Our deal professionals remain in the region, with back-office personnel performing fund administration outside of Ukraine.

What are common questions from LPs about the fund’s strategy?

What we are asked most of all is regarding the impact of macro and geopolitical shocks on the portfolio and pipeline. The investment thesis for this fund continues our successful geopolitical and macro-agnostic investment strategy followed over the past decade, and most recently, for our vintage-2017, $200 million Fund III. Our focus is on tech and export-oriented companies over the past decade, leveraging cost-competitive local platforms succeeding globally.

The Fund IV strategy builds on the vision set in 2015 in raising Fund III, which was structured, raised and invested within the context of military conflict in Southeast Ukraine. The investment thesis and resulting stellar performance today of Fund III – with 100 percent of the portfolio by fair value only marginally or moderately impacted, despite the ultimate stress test – is driven by its design to mitigate geopolitical, currency and macro shocks, while carefully selecting the visionary founders and businesses backed.

Over 250 deals were reviewed prior to selecting 14 for [Fund III’s] portfolio. We expect to apply the same rigour and selectivity to a broad subset of attractive proprietary opportunities for Fund IV, and continue to invest growth capital alongside founders from our region for years ahead.

Do you expect Fund IV’s portfolio to be impacted by the war? How are you doing diligence on deals if travel is still challenging?

We expect to continue to mitigate conditions and risks specific to our market, as our track record has successfully demonstrated. We expect Fund IV portfolio companies to be resilient to such shocks given our focus on export-oriented, asset-light, human-capital-rich businesses.

In terms of travel, the global community has had to adapt to challenges posed by the covid-19 pandemic when lockdowns and related issues made travel impossible. This has been a blessing in disguise that has supported [the] adoption of remote work.

At the same time, there is no substitute for face-to-face communication, in particular in the investment business. Our deal professionals are on the ground in the region – travelling, meeting with founders, evaluating companies, performing and delivering results – despite challenges faced, driven by the firm’s mission, vision and commitment to the founders we back and making a high impact in our region.

One particular sector to highlight is Ukraine’s IT industry, which has been a bright spot throughout. IT export revenues increased 23 percent year-on-year during H1 2022, bringing in a record $3.74 billion for the first half of the year, with Ukraine on track to increase IT exports from $6 billion last year to over $8 billion in 2022.

How are Fund III investments faring?

Fund III has invested in 14 companies with two divestments to date and 0.21 DPI. Of 12 companies in the portfolio, 10 are in Ukraine and two in Moldova. This fund was structured, raised and invested following [the] annexation of Ukraine and occupation of the Donbas region. As such, the investment thesis and strategy were designed to mitigate risks in our core market.

Our focus has served us well: back fast-growing tech and export-oriented companies led by entrepreneurs with little to no debt; leveraging cost-competitive platforms to generate hard currency revenues globally, thus resilient to macro and currency shocks; and [providing] hands-on, high-impact value-add alongside capital invested to support founders and management teams in delivering strong results.

As of today, Fund III companies… [are] on track to deliver 30 percent to 77 percent year-on-year revenue growth in US dollars during 2022. Fund III also holds a purely domestic business in Ukraine – an innovative discount retailer pursuing CEE expansion, with revenues in US dollars up 69 percent year-on-year and a near tripling of EBITDA during the first half of 2022.

Are rising rates and geopolitical uncertainty impacting the valuations and exit routes of your existing portfolio investments?

Our outlook is similar to PE firms globally in anticipating… impact on valuations and the transaction environment resulting from policy tightening and changing macro expectations. At the same time, the stellar quality of assets in our portfolio – with most companies benefitting from a unique, established product platform and posting consistent high double-digit growth – and strength of their fundamentals, position these businesses favourably from both a valuation and exit perspective.

Another key factor is capital efficiency, with businesses in our portfolio typically cash-positive or having strong reserves, therefore allowing selection of optimal timing for M&A or fundraising.

In terms of geopolitical context, investor interest is picking up after the initial February shock, with inbound interest in our high-quality assets remaining.

Our focus remains on the future. Ukraine will persevere and, with the granting of EU candidate status in June 2022, is expected to accelerate its trajectory towards Europe, driving further reforms [as] required, and attracting significant inflows… We are long-term investors, committed to this region, and will remain so.