At the helm of Horizon Capital, the largest private equity firm in Ukraine, is a woman whose commitment to the country runs deep. Lenna Koszarny moved from Canada to the country of her ancestors as a young woman, developing a professional career that would blossom as Ukraine underwent a remarkable transformation process. One of her most recent professional highlights came in January 2019 when she announced in Davos, in the presence of Ukrainian President Petro Poroshenko and international business leaders, that Horizon had closed the largest Ukraine-focused private equity fund in a decade at $200 million, reaching its hard cap and the maximum allowed by investors. Here, she explains why, with the help of investors, Ukraine is now a country where high returns may be made leveraging the country’s talented workforce, cost-competitiveness and access to European markets

You were born in Canada, but have been actively involved in the Ukrainian business community for around 25 years, and eventually became the founding partner and CEO of Horizon Capital. What brought you to Ukraine in the first place?

My family is from Ukraine. Although I have a Canadian passport, I feel that my DNA is Ukrainian and have a very strong affinity with the country, its history and people. The first time I came to Ukraine was with my grandmother in 1993.  I was 23 and fell in love with the country immediately.  I realized that my mission and future lay with Ukraine, and moved here later that year. I wanted to be part of Ukraine’s story, of a country changing itself. I thought this may be a two- or three-year endeavor, first working at a technology fund, then launching a private consultancy firm, then joining a US government fund and later launching Horizon Capital with my partners and now I am leading the largest private equity firm in the country.

How much has changed since 1993?

I remember arriving at my place of work in Zhovti Vody, Ukraine in December 1993. Computers were a rarity; much was done in a manual way.  There were many people generating busywork and a large pool of labor with little access to technology and poor efficiency levels, which translated into low productivity. It was definitely a very different business environment than today’s Ukraine where technology is on the rise and fast. There was very little English, very little connection with the outside world and minimal investment by international companies and trade globally. Geopolitically, for over 20 years, Ukraine sat on the fence, balancing between East and West, preserving its Eastern-focused trade relationships and reaping the not-so-bountiful returns from a very much commodity-based economy. Structural reforms and integration with the West was far from happening.  Fast forward to today.  During the last five years, post-2013-14, the country has had to choose and has clearly made its choice: pro-democracy, pro-European Union, pro-reform. This transformation was instigated by the youth on the Maidan when millions of people stood up and said, ‘we will not allow people’s basic rights and dignities to be trampled on,’ and realized this is the last shot to pivot West. The last five years have been extremely challenging, yet very inspiring as well, especially to see the new generation who were traditionally focused on business and other pursuits joining the government at every single level, starting up NGOs and powering movements to reform the country. Ukrainians have demonstrated to the world that they take responsibility for their country and are doing all that it takes to maintain Ukraine’s sovereignty and pull the country up by its bootstraps.

What motivates you to invest in Ukraine’s future and the companies in the country today?

It is all about the people, as investing in growth equity means you are investing alongside a visionary entrepreneur that you trust and your interests are fully aligned in taking the business that they have built to a new level. We have over $850 million in assets under management, and we have invested over $650 million, backing over 140 companies with equity and debt from our funds. All these companies have exceptional management teams, employees and fellow shareholders that you are investing alongside.  Ukrainians are incredibly talented and knowledgeable, determined, resilient and principled. Very few people know that Ukraine is the 4^th most educated nation in the world and that over 70 percent of Ukrainians have a secondary degree. That’s the difference between the new and old Ukraine, whose members still remember the Soviet Union. We have to remember that period was over 27 years ago, and there are IT and business professionals who did not grow up in the Soviet Union and think just as Western business people do, in an entrepreneurial way.

What changes have you seen as a woman in the Ukrainian business scene?

When I first came here in 1993, you could not find a woman CEO, except in the odd case of a family company. Women were most prevalent in accounting departments or in administrative positions.  Now, it is night and day. You have women in technology; you have women leading startups and top women CEOs who earned their positions. Of course, this is a global issue. There are different organizations backing women, girls’ coding clubs throughout the country. Western NIS Enterprise Fund, a US government fund, is multiple initiatives for girls to launch start-ups, go into IT. This is part of the transformation that is going on in our country.

In January 2019, Horizon announced that it closed its third fund for Ukraine – the Emerging Europe Growth Fund III (EEGF III) – at its hard-cap of $200 million. This is the largest private equity fund that has been raised for Ukraine in a decade. What does that say about current investor interest in Ukraine?

Yes, when we began fundraising, we set a target of $150 million and many told us it was not possible. We first reached our target, then exceeded it and achieved our hard cap of $200 million, the maximum set by our investors. In fact, we had to turn away additional commitments.  This fund is a testament to a new generation of “business heroes” in Ukraine, visionary entrepreneurs leading high-growth export-oriented and domestic businesses. It is also a testament to our long-term, valued investor relationships, our strong team of talented professionals and export-focused investment strategy, and our solid track record of successful investing in this country. Our fundraising success should send a strong signal that Ukraine offers tremendous rewards for those willing to look past the headlines.  Since our first close last year, the new fund has already made six compelling investments. We look forward to this next chapter and many more investment success stories to come.

Who were the main investors in the new fund?
EEGF III was launched with an anchor commitment from Western NIS Enterprise Fund and attracted investments from the European Bank for Reconstruction and Development (EBRD), the German Investment Corporation (DEG), the Netherlands Development Finance Company (FMO), the International Finance Corporation (IFC), the French development agency PROPARCO, and the Investment Fund for Developing Countries (IFU) with over one-third of capital 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 percent of total commitments. US and Europe-based investors contributed roughly 35 percent each of total capital raised, with the remainder coming from other international investors.     

What is the one thing for you that makes or breaks a potential investment partnership in Ukraine?

First and foremost, it’s trust and reputation; that’s non-negotiable for us. Our partners must care about this, that they can build a reputation over 25 years and destroy it in five minutes. Clearly also, vision, determination and hard work; if you’re building a fast-growing business, you have to put the time in. They must demonstrate they are a leading company in their sector. In our current portfolio, we back visionary entrepreneurs who are transforming the business landscape in Ukraine and the region. Although they are typically between 25 and 40 years old, they don’t have to be in any specific age range – but they do need to be thinking globally: be progressive; be pivoting to the West or already exporting to Western markets. We seek to be the only investors alongside the founder(s). We are comfortable with significant minority stakes and do not need majority control or seek out distressed situations. We are providing growth equity to visionary entrepreneurs, backing them towards double-digit rapid growth.

What is your overall strategy for identifying investments and in which sectors do you plan to invest most heavily?

The sectors we back are IT, light manufacturing and food and agro. Those are very much export-oriented sectors, which ties in with Ukraine as an export story. People sometimes compare Ukraine with Poland, but Poland has benefited from being in the EU. If every region of Ukraine had had two billion dollars poured into it, then it would be a different story. I would compare Ukraine more to Colombia, where you have significant FDI and exports or Slovakia, which transformed from being the black sheep of Europe to an export driver through the auto industry. And then there is the Philippines, which is one of the top hubs for business processing. Exports have transformed this country, and that is only going to grow with the 2016 DCFTA (Deep and Comprehensive Free Trade Agreement) agreement with the EU catalyzing a pivot towards Europe. Many founders in Ukraine understand this, especially in the IT sector, where sales may be significantly or even 100 percent export based. This is very important for Ukraine because of the country’s steep currency devaluation.  Exports provide a natural currency hedge.  You may access investment that is euro or dollar-denominated like ours, and you don’t have the same risks from currency devaluation. We believe that export-oriented companies will contribute immensely to Ukraine’s future growth.  We also believe in fast-growing domestic e-commerce, pharma, health care and financial services companies.   

In the wake of the Deep and Comprehensive Free Trade Area (DCFTA) with the EU, Ukraine’s exports to the EU and Germany have increased dramatically. How much scope do you see to further increase trade with Germany specifically?

We’re extremely proud that Germany’s DEG has chosen to make an equity investment in our fund, the first such equity investment in a decade in Ukraine. When you have six to seven government or quasi-government institutions in your fund, it’s a seal of approval. With DEG and our institutional investors, we will be seeking to tap into their global knowledge and also provide them with co-investment opportunities into bigger deals. The manufacturing sector is definitely interesting for German companies; Ukraine has become one of the countries they look at for a manufacturing base, and the fact that manufacturing costs are about 2.3 times less than coastal China makes it highly attractive. While a container from Shenzhen will take 40 days to reach Europe, from Ukraine – about two days by truck. Time is money. IT is also interesting – the industry has risen from nothing, just over $100 million in 2003 to a $4.5 billion dollar sector. That’s amazing and makes a huge impact in retaining top talent in Ukraine. IT was third in the country’s export of services drivers, now rising to number two, with Ukrainian global solutions providers increasingly partnering with German companies.

How important could Ukraine be for German and other international companies as a testing ground for innovation?

We see Ukraine as an excellent country for research and development, top tech talent and offering a great value proposition. When you have that incredibly intelligent and talented a workforce, the result is high quality and amazing value from a human capital perspective.

What do you look for when investing in an enterprise?

We do not invest in commodity-focused industries, where margins are low and volumes high.  We look higher up the value chain. We are interested in companies that are leaders in their sector and that have a small to large footprint in EU markets.  For example, we have made an investment in Yarych, which is a top biscuit producer in Ukraine. They have already accessed European markets with both private label and their own branded biscuits. This is possible given considerable investments made in their technology and production platforms, and with our backing, they will be able to double that capacity further. That’s a perfect example of working up the value chain with branded products and higher margins. They have a cost advantage over Turkey and other countries that have dominated the biscuit sector while offering a high-quality product as well.   

What kind of returns do investors look for on their ventures in Ukraine today?

Investors who are looking at Ukraine seek net returns in excess of 20 percent. These are high numbers and represent an attractive return for risks taken. We know of leading strategic investors who have commented publicly that the risk-reward balance in Ukraine is perfect. Yes, there is frontier market risk in this country, but at the same time, if you get it right, the rewards are much more significant than in Western markets.

2019 is an election year. Should investors be worried about Ukraine continuing its pro-Western and pro-business direction?

Over a period of more than 25 years, we’ve invested through every President, Prime Minister, Cabinet of Ministers with their ups and downs.  We have invested over $100 million since 2013/2014 and will continue to invest going forward. From our standpoint, every leading presidential candidate is pro-European Union and pro-reform, and in the Parliament, most parties share that perspective.  We are not expecting any deviation from the trajectory Ukraine has been set on. That has also been cemented in Ukraine’s Constitution with the Parliament recently including Ukraine’s pro-European Union and NATO intentions within this foundation document.  And from next year, we will have five years of the same president and Parliamentary composition, meaning there will be a period of stability when it will be very clear what you can expect. Everyone knows it is an election year, but people are continuing to invest. The American Chamber of Commerce did a survey in which nearly 75 percent of its members declared they have seen growth this past year and have investment plans for 2019. Ukraine is on a path that will not change and it’s a path that links to the EU with the visa-free regime and the DCFTA. The more that Ukraine gets integrated into the European supply chain, the harder that is to break. The flip side of Russia closing the border to Ukraine is that the country has fought hard to access markets in Europe, and it turns out that these markets are higher-margin, more profitable and more stable.

Is there a final message you would like to send to readers of Die Welt?

I believe that for companies and leaders in the West, ignoring Ukraine is a wasted opportunity. It’s important that they go beyond the headlines, visit the country and judge for themselves. I’ve seen $10-20 billion revenue companies come and see the opportunities, and they’ve been absolutely shocked. They can’t believe what they’ve seen with their own eyes. For those who have the foresight to come to the country and see the transformation, they will realize how investing in Ukraine serves their own interests; how they can access the highly talented labor force and leverage cost competitive platforms. That is what will promote change in this country. We have achieved macroeconomic stability, the economy is growing at over 3 percent per year and leading companies are leveraging this incredible value opportunity. In a decade, it will be too late. It is the contrarian investors who are here now or who have Ukraine on their radar screen who will reap the benefits over the next two to three years.