Effective Investments Group, together with Dutch partners, has launched a project to build the first Ukrainian Feednova plant for production of high-protein feed additives and animal fats in Busk (Lviv region). The plant will provide up to 100 jobs and will be able to process over 220 tons of raw materials, yielding 90 tons of finished products per day. On 16 April, it became known that the Ukrainian investment company UMG Investments, which also has extensive expertise in implementing processing projects, was among the project investors. In an interview to NV, Igor Liski, Chairman of the Supervisory Board of Effective Investments Group, and Nadezhda Kaznacheeva, UMG’s Investment Director, spoke about the search for investors, transacting in the situation of quarantine, investment strategies, project implementation, sales markets and prospects of the processing industry new for Ukraine.
Search for partners
On 16 April, it was announced that UMG Investments would join Feednova investors. What shareholding does this concern? How much investment will the processing plant construction project receive from UMG Investments?
Nadezhda Kaznacheeva: This is confidential information not subject to disclosure. UMG Investments acquired a minority share in Feednova project. Accordingly, our investment in the construction and launch of the plant will be proportional to this share.
Why is Feednova project interesting for UMG Investments? How did the first contact on this subject occur between Effective Investments and UMG Investments?
Igor Liski: Probably, I should start by telling how we looked for investors at all. We were looking for a strategic rather than financial investor. Now there are two of them: Mada Participations B.V. (the Netherlands) and UMG Investments. We selected partners very carefully. The plant is being built from scratch. Therefore, we were looking for an investor that will strengthen the project, bring something more than money into it. For instance, the Dutch partners brought their expertise in the field of processing livestock products to the project. UMG Investments also communicated its understanding of processes, experience in creating a business from scratch. It was very important for us to understand that we shared a uniform vision of the project development. In Ukraine, not many enterprises are being built. We are actually creating an entire industry. Therefore, it is important that shareholders have the same understanding of long-term cooperation. We plan a development strategy for at least 5 years and are pleased to share the same thinking.
I have been nurturing this project for more than three years. Generally speaking, I am used to make decisions quickly and promptly start implementing them. However, construction of a processing plant is a complex and integrated project. We long searched for the site, selected equipment, obtained all expert approvals. Good projects require long and thorough preparation. We have been negotiating with UMG Investments for a year. They have a meticulous approach to all issues, rechecking our business model. Sometimes I would even think that everything was taking too long, that we would not reach the end. Still, we have closed the deal and are ready for long-term cooperation!
N.K.: Yes, the project started for us about one year ago. Once, my colleagues and I calculated how much time it takes on average to complete a transaction. It turned out to be about 9 months. In terms of time and in fact, it is very close to childbirth. This time, it took a bit longer, but we must remember that the coronavirus epidemic, which no one expected, intervened in the process.
Moreover, it was the first market transaction for us where we entered the project as a minority shareholder. In general, everything happened outside our comfort zone. In practice, everything went constructively, although the negotiations were long.
Igor, how did you find the Dutch Mada Participations B.V. as partner? What is its role in the project?
I.L.: For me, the Netherlands is a role model of how Ukraine from a mere agricultural country can become a country of advanced agrarian technologies. Firstly, we needed experience and expertise in the construction of such a facility, selection of equipment and setting of all technological processes. The Dutch, with their technology and vision, are perfect for this. We needed a partner that would calmly implement solutions developed over the years in Ukraine and adapt them to local specificities. To date, we are already discussing the possibility of creating three such plants instead of one.
Beside financial investment, what competencies and capabilities of UMG Investments will be useful for the project?
N.K.: We have an investment team that will attract money from international financial organizations and banks to this project. In this regard, we have extensive experience in conducting M&A transactions and IPOs, which will certainly be necessary for this project, especially as part of the future scaling process.
We also have a strong commercial expertise in organizing procurement and sales; we know how to launch new products on the market, including in Asia and Europe.
Is it difficult to find internal or external investors to build production from scratch in Ukraine?
I.L.: We are already seeing interest from strategic investors in the project. I will not tell their names now, but they are an American and a European company that already have a presence in neighboring countries. This interest will only grow as the project progresses. I think that we will return to this issue in autumn.
We had no middle ground in terms of equipment selection, environmental and other expert examinations. We went through all the mandatory procedures and public hearings. We have set ourselves high project implementation standards, as incompliance with any standards during construction often creates problems for Ukrainian projects and subsequently interferes with attracting a strategic investor.
N.K.: Western strategic investors are more likely to consider buying an existing business than building it from scratch. They understand that it is better to pay a premium for a finished enterprise than to pursue a long and complicated process of approvals and permits. Even understanding which agency should be contacted and when, which document should be made and how, having a team in place, it is still long and difficult. Moreover, the project should be financially and legally transparent in the first place. Investors are often faced with the fact that the company has a long history of privatization, land allocation, corporate conflicts, etc. Eventually, their lawyers write make up a long list of risks that one needs to either reduce the price by half, or simply refuse to buy. Yet, I am convinced that everything that we do, all the standards that we carefully maintain, will have a positive impact on the project’s capitalization and interest of investors.
Why is a partner, co-investor or a group of co-investors so important in the implementation of such projects?
I.L.: Unfortunately, we see that Ukrainians have low level of trust in partners; joint ventures are scarce. This impedes quick and sustainable implementation of large and complex projects. It is very important that project participants share uniform vision of things and processes; that partners have no Ukrainian ‘complexes’ about who is more important, who was earlier, who will ‘cut the ribbon’ or who will be the first to ‘dump’ others. If all this is eliminated, there arise new opportunities for cool projects that Ukraine is sorely lacking and which can only be implemented by combining knowledge, expertise and money.
N.K.: I can add that Ukraine lacks transparent projects with clear regulation and economy. Only such projects can be conveniently managed by two independent partners. If a company has off-the-book accounting, non-transparent ownership structure and bribery practices, it is difficult for partners to understand the financial performance and reporting forms. This causes problems. Therefore, it is difficult to negotiate and seek partners. We initially aim to follow the right path, which will become interesting for both investors, and international financial institutions.
UMG Investments has previously invested in processing plants, but with a focus on industry rather than agriculture. Are you intending to expand the geography and areas of investment?
N.K.: We have been developing Recycling Solutions for over 8 years now. Our goal is to build a #1 company in Eastern Europe for strategic management of by-products and waste. Today, it is processing of waste from the metallurgical, heat power and coal industries. This year, we will launch the first pilot plant processing of mine methane. So, indeed, a number of our projects relate to industrial areas. But if you look at Ukraine’s economy structure and GDP, their dynamics, you can see that the agricultural sector is one of those that grows and develops, including vertically. The export of agricultural products is growing, so production will also grow. Therefore, the demand for processing will also increase. At the same time, the enterprise under construction in Busk will create an important export product: high-protein meat and bone meal. This product can be both exported and in demand by large Ukrainian enterprises that import it today.
Our strategy involves development in the processing sector, as well as industries that are new for us, such as agriculture, light industry, IT, and logistics. Therefore, we were looking for a project in the agricultural sector, understanding that if it is related to processing, it will be what we need. So when Feednova appeared on the radar, we realized: this is the opportunity that we need to develop our expertise in processing.
What are UMG Investments’ goals as investor in this project? Do you intend to sell your share or, conversely, gain control of the enterprise when the project has been implemented?
N.K.: We are working on the Private Equity model. This is a simple model that has proven its viability worldwide. By the way, the latest statistics show that companies that operate under the management of PE funds are more cost-effective than, say, public entities.
We give money for business development and then exit the project by selling the share, recording the results of our investment. This is the main, but not the only goal. It is very important for us that our projects are innovative and environmentally friendly. We want to do something to tell children about. For me personally, this is very important.
So far, there are plans to scale up the business. We do not know yet when the strategic investor will be attracted and how the market will develop at that time. Indeed, much will depend on the path Ukraine will follow and on how successfully it will develop. Up to 30% of business valuation depends on valuation by investors of the country itself.
Project concept and implementation
How did it occur to Effective Investments to build a processing plant?
I.L.: Since 2014, I have had an internal urge for creation and construction. I believe that this is the highest level for a businessperson: to create something that did not exist. When we built the Beehive honey factory, we realized that agricultural products had great growth potential. We want to sell products with high added value, work with innovations. We studied many industries, but Feednova is a unique project. This is production of high protein products, the demand for which in the world, according to our forecasts, will grow by 4% annually. For Ukraine, it is also a solution to enormous problems. Ukraine is probably the last agrarian country without such industry in the world. There are only small local solutions, which producers create for themselves, and old veterinary and sanitary plants built back in Soviet times, which do not fulfill their function today.
How many more such processing plants do you intend to build in Ukraine? Are you considering the possibility of involving domestic investors?
I.L.: My philosophy is as follows: everything that I build, I build as if I always wanted to own it. We cannot say that we are building a plant for sale. The fact that we can be interesting to a large foreign investor confirms that the business is being created to the highest standards. We are ready to both own this company and sell it, but to the right investor and at high price.
As regards the number, according to our estimates, Ukraine needs at least two more such plants for full cycle processing of livestock waste, in order to talk about the presence of this industry in the country. When enter the home stretch in the construction of the first line of the plant in autumn, we will begin to obtain authorizations for construction of the second. For 5-6 years, we plan to build three full cycle plants with two lines each.
At the same time, we are already working with farmers. It is important to make them understand that we offer a civilized solution and create added value at the same time.
The plant producing high protein feed additives is aimed at export. What sale markets are you considering?
I.L.: This was the first thing we studied at the design stage of the project. Now Ukraine is importing such high-protein products in large quantities. This shows that even in Ukraine it is a popular product. We are building a plant with the state-of-the-art equipment, so we have no restrictions on the sales markets. We look at Europe, but Asia is the fastest growing market. We already have preliminary agreements for sale of products with traders, but in the end we want to reach out to the final consumer and get the maximum price. This is certainly not a right thing to say, but sales is the least concern for me in this case. When you achieve maximum quality, and consumption of the product that you make grows in the world, it is quite simple to sell goods on the market.
N.K.: The world’s population is growing and needs more and more food. The population of Asia is getting richer, and the richer the population, the more meat products it consumes. And China is not the only one. Vietnam, for instance, is also actively growing and developing. This means that the demand for meat and bone meal for feed production will remain high.
I.L.: I have stronger faith in Asian markets. If global demand grows on average by 4% per year, in Asia it is 7-8%.
N.K.: Truly so. On the other hand, there are key traders in Europe, and here we can apply a combined approach to sales. You can sell through traders and at the same time increase the share of direct sales in different regions of the world.
How was the site to build the first plant selected?
I.L.: We were looking for a site for a year and a half, sorting through more than 30 locations. The main factor in this respect is logistic, of course. Raw materials, just as finished products, go from East to West. Goods are primarily exported to Europe. The second factor is that Lviv region has the fastest growing meat and livestock processing industry. We came to this conclusion by evaluating the statistics for the last 6 years. Equally important is the quality of roads. Moreover, we previously visited hundreds of facilities and found out which of them is ready to supply us with required amounts of raw materials.
Interestingly, one of the factors that was at first insignificant for me, but later turned out important is the active position of local authorities. We were surprised how efficiently the local team worked: the governor, investment agency, regional council, mayor. Our approach is to resolve all issues only transparently, obtaining all possible and impossible documents confirming the correctness and legality of decisions, transactions, formalities and other things. We were supported at all levels. Now, when we are looking for sites for new enterprises, as a person already wise with experience, I try to find out what local authorities say on the matter, how interested it is, whether there will be support from them.
How fast should the plant reach its production targets? What are they?
N.K.: The plant will process 70 thousand tons of raw materials and produce 30 thousand tons of finished products annually.
I.L.: We plan to launch the plant in Busk in two stages. The first line is in the first quarter of 2021. The second – by the end of the next year. As for volumes, everything will depend not on equipment and setting, but on how quickly we will proceed on contracts with suppliers. In autumn, we will assign our specialists to Europe for training so that they know how to properly ensure the logistics and storage of raw materials and finished products. I am sure that the market is ready. We held a lot of negotiations and now everyone is just waiting for us to start producing.
I believe that when the enterprise reaches its maximum performance, it will be the largest in Eastern Europe, surpassing its counterparts in Poland, Belarus and Romania.
Support from the state
Did the project gain support at the state level? After all, they often talk about it now, promising an “investment nanny” and full assistance.
I.L.: We never looked for state support. The main thing is no obstacles. All we now want is that the government fulfill its part of the social contract. We have attracted technology to the country; we are creating production to high standards, building a new industry. At the same time, the state could monitor compliance with standards in the field of disposal and processing of livestock waste, so that there is zero tolerance for violations of environmental and sanitary standards in the country; so that no one ignores how waste is dumped into rivers or buried by farmers in hollows. Indeed, in some areas of Lviv region, people would simply block roads because of imminent man-made environmental disaster.
According to official statistics for just one year, Lviv region produces 72 thousand tons of livestock waste. Personally, I think that these figures are underestimated, as one has to pay for disposal. Some volumes are formally disclosed in documents. But the region has not a single enterprise that would be able to process these volumes correctly.
Impact of coronacrisis
How difficult was it to prepare and close the deal during the pandemic and quarantine? How did quarantine affect construction and plans for its completion? When are you planning to open the facility?
I.L.: As for construction itself, we had to spend two weeks to reshape the work, so that people keep a distance, where possible, work in masks. We were behind the schedule for three weeks, but in the current situation, I think this is a good result. The commissioning of the plant is scheduled for February-March 2021.
As regards the signing of the transaction, I am grateful to the partners for not using the quarantine as force majeure, so that we signed the deal in the midst of it. I remember how we met in masks, suits and gloves and went into the notary’s office in turns.
N.K.: The deal was completed, despite the quarantine, only thanks to the teams that worked on it and aimed at the result. Of course, we could have used this as force majeure. However, this was not our goal. All colleagues, with proper precautions, were involved in the process, holding negotiations, clarifying all details of our partnership to the last. I know that our colleagues from other funds suspended their activities until the end of the quarantine. We closely monitored the situation. Yet, we are a local investor with many years of experience. We understand that after any crisis, there is recovery. Therefore, in my opinion, this is the most appropriate time for investment.