Top of Mind: Michael Bleyzer

Private equity is, by definition, supposed to be a high-risk activity. When it comes to geography, however, most investors shy away from the perils of investing in emerging markets, like those in Eastern Europe.

Michael Bleyzer, president and chief executive of SigmaBleyzer, finds the absence of private equity in Eastern Europe regrettable, but has not used it as a pretext to move his firm’s focus away from private equity investing in the Ukraine. Instead, he has expanded his efforts to include countries like Romania and Bulgaria, where he believes his firm someday will be looked upon as the first of many private capital sources.

VCJ: Most European private equity firms invest in places like the United Kingdom, France or Germany. Your firm, however, is focused on Eastern European countries like the Ukraine. Why?

Bleyzer: I believe that where we invest is attractive because it is an emerging market. These countries – the Slavic countries – provide opportunity like nowhere else, because there is an oversupply of deals and a significant lack of other types of financial institutions or capital. It also is obviously true that things like the rule of law isn’t always so well established in an emerging market, but we’ve shown that it is possible to understand how to operate and invest in that sort of environment.

But why the Ukraine, in particular? Is it because you were born there?

Well, we understand it very well. Part of that is from my personal background, but we could have focused on any Slavic country when creating SigmaBleyzer. Of all of them, though, the Ukraine was one of the most overlooked and under appreciated.

The country is physically at the intersection of ancient trade routes and at the center of Europe, if you measure from the Ural Mountains to the English Channel. This means that it historically has been a strong trade partner.

There also is the issue of size. Places like Moldova or even Latvia just aren’t large enough to support certain companies, while other emerging markets like Russia or China are so large that they have a hard time building the infrastructure needed for business to succeed. I think that the Ukraine falls nicely between those two groups.

If opportunities are so strong in emerging markets like Ukraine, why have so few European private equity firms, let alone American ones, invested there?

Most of those firms – particularly the larger ones – don’t have the time or patience to understand how to invest in emerging markets. All they seem to see is that some areas don’t have the same rule of law as the U.K., or a less developed financial market, and decide to invest elsewhere.

It takes a significant investment in your own firm’s infrastructure to operate a good, clean private equity business in an emerging market, which means hiring local staff and doing a lot of market research.

Your strategy needs to be long-term oriented, but not many firms want to look that far ahead because they don’t need to do it.

Should they do it?

Definitely. It may not look too attractive on a risk-adjusted basis, or at least that is what many of those firms would contend, but that is balanced out by the positive of having greater global diversification in your firm’s portfolio.

Please talk for a minute about your portfolio. One of your firm’s more notable deals was the privatization of the Sevastopol Shipyard, which is the largest naval repair facility in the Ukraine. Could you just provide a bit of color on the deal, since its primary client relationship was far different than what most private equity firms deal with.

The shipyard had one main client, which was the Russian Black Sea Navy. After the Soviet Union dissolved, the navy was divided into three groups, with Russia getting one, the Ukraine getting one and one formed into a joint navy operation. The problem, however, was that the Russian navy was not used to the financial aspects of a commercial relationship.

You mean, they didn’t pay for the work?

Yes, so we withheld service for almost a year until they even agreed to negotiate. Now the yard is running very well. We had to reduce the workforce from over 15,000 people to under 4,000 – which caused a lot of people to dislike the deal for a while – but it’s now considered to have been a good thing for the shipyard and the economy. Lots of other businesses were kept open because we were able to keep the shipyard open.

So how much did you pay for this 15,000-person facility?

I can’t really say.

Can you give a ballpark range? Was it more than $10 million?

I can’t say exactly, but it was less than that. It was in the single digits of millions of dollars.

Your firm tends toward the buyout end of the private equity market. Right now in 2004, do you believe there are decent earlier-stage opportunities in the region for venture capitalists?

I do. Some of them might be a bit premature because venture capital requires a better-defined financial sector than what many of the emerging markets have, but there are a lot of good opportunities if VCs are willing to invest.

During the Internet bubble, for example, we even set up an incubator for Internet-type ideas. It ran for two years and we had hundreds and hundreds of ideas and offers. We funded a couple of them, which means that we were willing to do venture capital deals there.

Did any of them make any money?


So Internet incubators in the Ukraine were on par with Internet incubators in the United States?

(Laughing) I guess so.

You said that you expect more VCs to come into the region once the financial infrastructure is better developed. In the meantime, are you seeing any significant activity outside of your firm and various government or World Bank-type entities?

In some of the early years after the Soviet Union fell, some firms came in, but many of them left because of all the instability. There were some more recent examples, though, but most of them were in Russia. The Carlyle Group was one; it opened an office in Moscow and has done a few deals, but I think they were mostly focused on oil and gas. Those are tough sectors because they are still dominated by a few large players.

Speaking of firms hesitant to go into emerging markets, you got a lot of attention in March 2003 when you wrote a Wall Street Journal piece titled “Taking Iraq Private.” [Editor’s Note: Robert McFarland, former national security advisor to President Reagan, served as co-author]. You basically argued that post-war Iraq would need private capital to succeed in rebuilding. Has that happened?

I have to say that I’m disappointed at the way that private capital leverage was not used. We advocated before the war started that the U.S. should place more of a significant role on opening the country to private capital, and to advertise opportunities for private capital to assist in the reconstruction.

But it obviously did not happen in the way we presented it, and the situation in Iraq has become so bad that opening the country to private capital now is more difficult. The ultimate goal, however, should stay the same. I believe that the ability to establish democracy in Iraq is directly correlated to building a market economy there, and that private capital would have a significant role to play.

Would you invest there today, which I assume would involve putting people on the ground?

No, not right now. Safety would be too much of a concern. It would almost be suicidal.


Michael Bleyzer

President & CEO, SigmaBleyzer

Ukraine, Romaina, Bulgaria, Houston, Texas