Could you briefly tell us what is the Romanian American Enterprise Fund, when was it created and what is its purpose?
The Romanian American Enterprise Fund is one of approximately 12 similar funds that were established by the US Congress through the SEED Act. (Support for East European Democracy). The first funds were created for Poland, Hungary and the Czech Republic. Romania and Albania were two of the last. Officially we were established in the summer of 1994 when we received a grant from the US Government of US $50 million in order to help the free market economy in Romania. We actually started working here in the fall of 1995. Because US $50 million for Romania is a drop in the bucket and because the US Government is not in the business of financing private enterprises, our role here is, in addition to assisting the free market economy to also be a magnet for private funds.
We have to demonstrate that one can do business in Romania, buy and sell investments so that the private investors, who are the ones that ought to come here, not the US Government or other Governments, gain enough confidence. In 1997, right after the elections we were able to raise a private fund called Romanian Investment Fund. It consists of US $65 million of private capital; approximately 50% American and 50% from Western Europe, and we manage its private equity component. In 1995 our board of directors decided to divide the US $50 million among four programs. US $25 million went to what we call Major Transaction Program. This program makes investments in small to medium size companies. Because privatization was slow, we began with small companies that had been established by Romanian entrepreneurs. Later investments were in the privatization of companies we purchased from the State Ownership Fund. In 1997 we sold half of our holdings to the Romanian Investment Fund and to a third party. The latter sold at a very high profit and others at a more modest profit, but we wanted to demonstrate that one could exit some Romanian investments successfully.
Now let us look at the major transaction program, which makes investments in excess of US $1 million: investments in direct equity between US$ 1-5 million. We look at this program as the one that, hopefully, will give us the returns to become self-sustaining. We operate like a venture capital fund, investing for maximum returns. There is no developmental aspect to it because if one wants to attract private investors one has to stress that the money will be invested for the highest return.
How does it work? Do you go to American investors in the United States and tell them that there is this possibility to invest your money in Romanian companies?
The first fund was capitalized by the US Government and the second fund was raised like any venture capital fund: we went to pension funds, money managers and said: "look, Romania has some opportunities and we would like to raise a fund and would like you to invest in Romania". That is how the US $65 million was raised.
What differentiates the Romanian American Enterprise Fund from other venture funds?
First of all we were the first ones here when other funds did not even exist. The U.S. Government capital started the engine. We have a large staff of Romanian experts - I would say probably the best analysts that Romania has in private equity. They went to business schools here and to the U.S. for training. We have an excellent team that can put together business plans and investment memoranda and I think this is what gives us an edge over our competitors.
Regarding the other US $25 million of U.S. Government money, we do a little bit of developmental work and we have a Small Business Investment Fund that averages investments of $200,000. Nobody does that in Romania. Big funds are not interested in US $200,000 investments because the returns are medium and of no interest to western investors - so here we are unique. We had a slow start but had made nine investments totaling about $2.5 million by the end of 1999.
We have two loan programs: one that started before we invested in Banca Romaneasca. We make loans between US $20,000 and US $150,000. The difference in our loans is that we are not exclusively looking for collateral. Romanian banks make short term loans with excessive collateral. We do ask for collateral but our focus is the cash flow. We analyze the business plan and if we conclude that the business can afford the interest and principal, the company gets funds even if the collateral is insufficient. Romanian banks are not effective banks. They take money from the population and send it to the National Bank because it is safer and they get high returns. The National Bank pays high interest but that does not help the economy. A small company here cannot obtain loans. It is only starting now but when we came here in 1995-1996 if you had a small business you were unable to get any financing.
Nevertheless most of the successful businesses are small businesses.
Of course. Small businesses are the ones that hopefully grow and create the jobs that this country needs.
Some time ago you bought a major stake in Banca Romaneasca?
It was only last year. It was our latest investment. | What has the Romanian American Enterprise Fund gained from that deal and what have you been able to give to Banca Romaneasca?
We acquiredBanca Romaneasca with its 16 branches in order to expand our small loan program. In this program we have U.S. Government money and funds from the IFC and since we also invest the bank's money, we want to employ our methodology of cash flow lending throughout the country. Banca Romaneasca is also a good investment. If we can help the bank with additional capital and information technology and eliminate other weaknesses, it will most likely become attractive for a large western bank. That is where the developmental aspect is combined with strictly for profit. We will eventually sell the bank. I think it will be a profitable investment because we want to implement other financial services. The bank owns 20% of an automobile insurance company. If we put a desk in every branch and also sell insurance - it is another financial service. We'd like to initiate credit cards and mortgages.
Only American funds participate in your projects or can anybody do so?
No. We also have Swiss funds, Austrian funds, in fact we welcome everyone. We also have Romanian partners. Although our money comes from the US Government we are a private organization so that anyone who has an interesting project in Romania can approach us. The interesting part is that if you can create some prosperity you have probably solved a lot of problems. Economic aid does ease instability.
What is your purchasing policy?
We look at management and the company's track record. We prefer not to invest in
greenfields - i.e., companies that start from scratch - but we do it occasionally. Obviously, in a country such as Romania where inflation is high and the currency depreciates, we are looking for companies which export and for companies that have a broad market share.
What is your philosophy?
We have seats on the boards of the companies, which we invest in and try to help them get the right distribution channels and technology and find strategic partners. Our mission is to make them attractive to foreign investors.
You left Romania and then you came back after the Revolution in 1989. Since when are you back?
I was here first in 1992 to help the country. One tries to help the country move along even though it might take two steps forward and one backwards. I have seen progress even though some western investors would challenge my point of view.
A number of Romanian businessmen seem to be quite negative about different aspects of the country.
Some complain for the right reasons. This country and the Romanian Government probably have not helped the small entrepreneur enough. The country is bankrupt and everybody needs money, so the normal help that you would have in the West does not exist here. Yet conditions have slowly improved over the last ten years, there are more foreign banks where big companies apply for loans. I am sure that soon all the large Romanian companies are going to be privatized, so we can say that things are moving. State Ownership Fund's new management is genuinely trying to privatize quickly.
Shouldn't the privatization process be finished by now?
That is where the Government missed an opportunity. In 1997 when foreign capital was flowing in here at a great speed it did not privatize fast enough. It changed the laws too often and foreign investors did not know where they stood. The Government changed the rules frequently so there was a lot of uncertainty, and that is why foreign investors stayed away. This combined with the decline of the economy due to the collapse of the Russian and Asian markets in 1998 did not help.
Foreign investors go where they can see the highest returns and Asia has received a lot of money lately, but the fault rests with the Romanian Government for not privatizing fast enough and for not stabilizing the legal system.
Do you see any good prospects for the year 2000?
There are uncertainties. Primarily because of the fall elections and investors will wait to see what the new Government will do. If the present coalition comes back, chances are very good. The new Prime Minister is perceived as a correct and intelligent man.
What would you like to transmit to our readers?
Last year we established a group within the Fund called "Capital & Trade Development Group" which is a free service that we offer not only to American investors but also to all investors. Anyone can come and talk to the Group. They have a large database of projects and can facilitate transactions. This group makes contacts between foreign investors and the Romanian seller. Additionally, I'd like to say that Romania is a country that has potential. Prices at the moment are low and returns can be very interesting |
ROMANIAN AMERICAN ENTERPRISE FUND 