UKRAINE'S VENTURE CAPITAL FOCUSES ON CONSUMER-ORIENTED SECTORS

INTERVIEW: With Neal Sigda, Partner, SigmaBleyzer By Volodymyr Mashchenko, Kyiv Post Staff Writer Kyiv Post, Kyiv, Ukraine
Thursday, Nov 07 2007

Neal Sigda is a partner with SigmaBleyzer, one of Southeast Europe's leading private equity fund managing companies.

Sigda is an American citizen with a bachelor's degree from Cornell University and a Master of International Management, with a specialization in finance from Thunderbird, the American Graduate School of International Management.

He joined SigmaBleyzer in 1999 as a financial analyst and has since become a partner in the fund, and currently heads up the Equities Research department.

Since joining SigmaBleyzer in 1999 as a financial analyst, Sigda has been responsible for selecting companies in which to invest, valuing target companies, consulting for large Ukrainian companies, helping restructure portfolio companies.

SigmaBleyzer is one of the largest and most experienced equity investors in the region and manages the Ukrainian Growth Funds (or UGF family of
funds) and SigmaBleyzer Fund IV. The first UGF fund was launched in 1996, two additional funds resulting in approximately one hundred million dollars under management.

The fourth fund was launched in 2006, bringing the committed capital under management to nearly half a billion dollars. SigmaBleyzer possesses unique expertise and hands-on experience which provides the company with a tremendous competitive advantage.

In his interview to the Post, Sigda said that despite the growth of Ukraine's private equity and venture capital market over the past couple of years, the overall investment climate in the country is improving at a much slower pace.

KP:  Why is the venture capital market still quite limited, with only a few players operating in Ukraine?

NS: Four primary reasons:

[1] First, after the Russian Crisis, many Western investors pulled their money out of the region. This led to there being few Private Equity players.

Since then, there has been more interest from small players and large regional players, but they have yet to arrive here en masse. Many never came back and many were scared off.

[2] The second part of the answer is due to foreign players not understanding the market well.

[3] Third, the weaker legal environment, compared to many other Eastern European countries, is a factor as well.

[4] The fourth would be that many Western investors, until recently, simply did not know about Ukraine. Its high rate of GDP growth over the past 7 years or so is finally starting to garner attention.

KP: Mr. Sigda, please comment on some tangible trends that have become evident within the last few years in the venture capital market.

NS: Private equity and venture capital have clearly been growing over the past couple of years in Ukraine. And it is starting to attract international attention. Larger regional funds, from Russia and Eastern Europe, have started exploring the potential of entering Ukraine.

In addition, other asset classes, such as Mezzanine - a form of unsecured debt at higher interest rates than banks provide, that can also typically be converted to equity - have shown greater interest as well.

KP: What is the main focus of the venture capital market, and how will the market capitalize on the growing Ukrainian economy?

NS: The main focus is probably consumer oriented companies such as retail, food processing, etc. This is due to the lower capex (capital expenditures) needs, high rate of growth, and general stability of consumer demand over the past few years - and predicted for the future.

In addition, disposable income continues to increase, with many sources predicting more than a doubling in disposable income by 2012. Investors would like to capitalize on this trend, while at the same time providing a service or product demanded by consumers. Other areas such as infrastructure projects, agriculture, and machinery are also attracting interest.

KP: How would you rate the Ukrainian investment climate?

NS: Unfortunately, the investment climate is improving slowly. Only when more changes or reforms occur will the market pickup as it has in other Eastern European countries. However, WTO accession is a big step in that direction - if nothing else, for the perception of investors.

It affects all business in Ukraine, because it drives up the cost of doing business here. For example, it is more expensive and takes longer to start up a new business in Ukraine compared to other countries. Getting licenses and permits can be a major risk even for established businesses.

KP: According to many experts, innovation technologies in Ukraine have a bright future. Can we expect the appearance of Ukrainian "Silicon Valleys"
in the next few years?

NS: Technology is an interesting sector in Ukraine. The cost side is still much less expensive than in the West, yet the culture and proximity to the West are major advantages, compared to India, for example. The level of English among the youth of the country is growing quickly and thus programmers and IT specialists are in demand.

But I don't think we will see a Ukrainian Silicon Valley anytime soon. For that to happen, the investment climate would need to significantly improve first. The success of Ireland is a good example of what can be done and an example that Ukraine could learn from.

KP: What is the monetary value of the venture capital market turnover?

NS: The amounts of investments are small. If we take private equity as a whole, I would estimate that investment from private equity is less than 0.1 percent of GDP in any given year. So there is significant room for growth.
SigmaBleyzer is, by far, the largest private equity player on the market.

Last year, we closed a $364 million fund, about 2.5 times the size of the next largest fund. However, most of our investments are into existing companies, known as buyouts, rather than venture capital.

KP: What is your prediction for the Ukrainian venture capital market?
What are future improvements dependent on?

NS: The forecast is rosy in that the numbers would seemingly have only one direction to go - up! And that is what I would forecast.

Because there the economy should do well over the next few years, I would expect most all sectors of the economy to be attractive for investment and particular decisions of each private equity player will depend more on the size of the deal and the strategy of their fund.

PHOTO: Neal Sigda, a partner with SigmaBleyzer, a leading private equity fund.

LINK: http://www.kyivpost.com/business/industglance/27754/