Economic History, Financial Services, Investments, Latvia, The Baltic Course No. 22

International Internet Magazine. Baltic States news & analytics Sunday, 23.11.2014, 05:21

Investments with the American optimistic approach

By Olga Pavuk , BC, 31.07.2006.Print version
The article with the same title appeared in 1994 in the daily Business&Baltija (B&B) describing the investment fund New Century Holding’s (NCH) initial steps on the emerging market in Latvia in the start of 1990s. Today we can assess the American investors’ activity in Latvia showing the scheme of venture capital installment into almost all spheres of national economic development, taking NCH as an example, and “creaming off” a very risky — and therefore highly profitable — market.

It is somehow interesting to note that now it’s impossible to find any reliable information about NCH, not even through the net, except a small reference to the fund with the same title placed on a Bulgarian site working on Bulgarian property market since 1993. Therefore, all information used in the present article is based on author’s personal notes and accounts of the meetings with the NCH’s holding representatives in Latvia.


A few words about the NCH’s history

The NCH’s history goes way back to the early 1960s when among the Stanford University staff (the latter is well known for creating the Silicon Valley concept) one of the first US venture capital funds has been born. Alongside attracting funds for quickly developing global electronics’ industry, these funds have been actively involved in investments into the Latin American developing economies. This valuable experience has pawed the way for Americans into quick entrance on the new post-Soviet market territories.

 

The NCH has been specifically created for the purpose of investments into the former USSR republics and Eastern European states. General NCH’s operating assets in November 1996 were set at 750 mln dollars with the investment period limited by 2006. Most of the funds — about 550 mln dollars — were invested in Russia, although some resources were used in Ukraine, Kazakhstan, Bulgaria, Rumania and the Baltic States. According to Russian press, this American fund acquired (often through affiliated companies) formidable assets in Eastern companies; i.e. 40% shares in Northern-Western Shipping Company, 25% shares in St. Petersburg’s telephone network and 40% shares in Eastern Trans-Shipping company, to name a few.

 

As precisely to Latvia, the NCH’s two funds invested 310 mln dollars into its economic development.

 

Already in 1995 the NCH signed an agreement with the US government OPIC-fund (Overseas Private Investment Corporation) in which the latter provided investments’ security at the level of 75% to initial investment sums. In return, the OPIC received a specified share of the NCH’s profits. Thus, OPIC has taken the role of an insurance agent for the NCH’s investment funds; the fact that greatly reduced in general the latter’s incurred investment risks.

 

Generally speaking, as to November 1996 the NCH already created nine investment funds with various investment portfolios and activity directions, which have been united into a holding for the sake of simplified management. The NCH’s founders and investors represented big US banks and financial corporations, as well as some of the US universities, e.g. Harvard Endowment Fund, with the total actives exceeding 5 bln dollars. Operating liquidity and security of the NCH’s participants from the US were at the level of billions of dollars, therefore the participants’ direct overseas investments constituted a small fraction of their resources used in the NCH. None of the participants invested more that 3% of their operational assets; the single investment’s share never reached more than 10% of assets.

 

As to the NCH’s assets’ management, none of the investors took any part in it; all decisions have been taken by the fund’s administration team. For the taxation “optimization” schemes most of NCH’s daughter companies were registered in off-shore jurisdictions. Needless to say that NCH itself has been registered in an off-shore zone in Bermuda Islands. The NCH’s head office was situated in New York, where all the important decision making concerning funds’ proceeding have been taken.

 

Initially the NCH’s interests in the Baltics, including Lithuania and Latvia, have been represented by a Riga citizen — Grigorij Levin, well known from the Soviet time to all jazz-funs. And somewhere in 1994 the initial information about the American fund has crippled into the Latvian media. Thus in 1994 Mr. G. Levin told to the article’s author about the NCH’s very first steps: according to Levin, the fund “entered the Baltics together with the so-called Baltics’ song-revolution under the wings of an international religious organization. For the following three years the fund’s activity has never been the focus of attention in media. Today we know perfectly well that such companies are very cautious in relation to press, being at the same time quite professional in using mass-media to forward its investment aims.

 

But all that we know today... Way back to the start of 1990s we only started to approach the basic rules of the market economy development. And the experience gained can give us the chance of explaining step-by-step efforts of risk-investors trying to conquer our economy.


First profits came from banks

In the beginning of 1990s the NCH has been co-founder of several Latvian commercial banks, including Depozitu banka and Sakaru banka. Thus from the start the NCH could acquire quite solid annual profits. It has to be mentioned that at that time interests in the bank were at the level of 60%, and more. Good profits could be made from the bank’s deposits, interests on which have been fantastic: from 36% in Sakaru banka to 90% in Banka Baltija. The latter was a good source for profit; at least up to 1995, when the Banka Baltija collapsed, alongside some other companies which activities have been based on borrowing residents’ liquidity. Several banks, including those mentioned above, went bust and the NCH was forced to find another ways of investments.


On Russia’s security market

After Latvian financial crisis in 1995, the NCH moved to other commercial banks, including Riga Commercial bank, successfully proceeding to earn profits at quite fashionable at that time for foreign investors’ manner, i.e. investing in Russian securities papers. Most of the Latvian banks have been involved in these operations too, up to the middle of 1998 when the next financial crisis occurred, that time as a consequence of Russian default in payments. Several banks, including Riga Commercial which invested in Russian securities a major share of their assets were forced into bankruptcy. Something to remember: the NCH’s interests in Riga Commercial at that time were represented by Mr. Karlis Cerbulis, the person we’ll talk about later.


Major player on the investment certificates’ market

Another step in development, though quite logic for the NCH, was to take part in privatization processes — first in Russia, then in the Baltics. We could suggest that it was the main aim of the NCH’s fund, as well as that of several other funds entering the ex-USSR territory, to take part in state property privatization processes, assisted by quite profitable deals with vouchers and other privatization papers alike.

 

It was exactly in the year 1994 that in the B&B daily a reference to another Mr. Levin appeared, that time named Mr. N, i.e. Vladimir, happened to be the abovementioned Mr. G. Levin’s brother. From various source we could get information on Vladimir’s actions in acquiring investment certificates (ICs) in enormous amounts through a deposit system in one of the Riga’s banks. It could be asserted that NCH at that time with the help of various contact persons had become the major operator on the ICs market in Latvia. With the ICs face value in 1994 of 2 lats, they could be bought from people at the price of 50 santims up to 5-6 lats. At the moment there were more that 350 firms involved in acquiring ICs in Latvia. As soon as in 1995 the ICs value increased drastically, a critical situation occurred when faked ICs in the amount of 1 mln lats appeared in the market; that information was released first in Latvian media by the author.

 

After the fake ICs case their value had reduced to 1-2 lats and for several years to come it had stayed at the same level. The criminal investigation concerning fake ICs has never disclosed any criminal persons behind the case, and the light on all the particulars of the case had never been thrown upon. What was definitely sure that several intermediary firms have been involved, including prominent Russian Sberbank.


Entering stock exchange

Above mentioned Mr. K. Cerbulis, Latvian citizen with the American descent, published in 1988 a first travel guide in the Baltic States in English. Before that, in 1993 having the counsel position to the Depozitu banka’s president (it was precisely at that moment in his carrier that we first got acquainted), he was heading an expert group aimed at creating the security market concept in Latvia. According to this concept, it appeared that the only stock exchange that could work in Latvia was Rigas Fondu birza (RFb). This concept asserted as well that in the beginning the only securities that could only be traded at RFb were shares of the companies which had been privatized with the use of the ICs.

 

Precisely in that year (1993) Mr. K. Cerbulis had become the first Rigas Fondu birza’s president; first trading shares appeared at RFb in summer 1995. During several years the NCH had acquired shares in all more or less important Latvian companies listed at RFb through ICs’ public offers, for example in Valmieras stikla skiedras rupnica, Rigas transporta flote and Ventspils nafta, etc. This acquisition has allowed the NCH to take acquire valuable part in the so-called minority share holders’ position. As a reminding evidence of that period’s events the author has retained a thankful letter signed by Mr. Cerbulis to acknowledge the author’s publication defending the minority shareholders’ rights which had been deprived of their rights in companies’ management.

 

The final point in the privatization deals has been the acquisition by Levin’s brothers and their spouses of about 8% shares in Latvijas Unibanka, later on for a certain period transferred to the NCH. During that period, trading Unibanka shares had taken about 90% of RFb’s activity until in 1998 the bank had found a new owner —Swedish bank SEB. As soon as the Unibanka left the stock exchange, it ceased for a certain period to attract investors’ attention.

 

It could be specifically mentioned the most successful NCH’s deal, i.e. acquiring major stock shares in Sidrabe’s company; the NCH invested into the company about 1.5 mln dollars after which the company assets increased ten-fold. Sidrabe is one of the rare Latvian companies producing high-tech equipment (vacuum components) for export which volumes reached several millions of dollars.

 

At the same time, among NCH’s failures could be mentioned involvement in such deals as participation in privatization of the following companies: sweets’ production at Staburadze, Ventspils transporta ekspediticija, Latvijas kugneciba and Preses nams.

 

In 2001 the NCH and JSC Bastions ZS sold their shares (73.5%) in Latvian insurance company Balta to Danish insurance company Codan. In 2004 financial company NCH-Development Partners L.P. sold all its 2.024 million shares (84.7%) in Valmieras stikla skiedras rupnica.


Closing the circuit

In February 1996 the Rigas Fondu birza changed its president; Mr. Uldis Cerps has become the new RFb president (he presently is heading national Financial and Capital Commission, country’s main securities supervising body).

 

Mr. K. Cerbulis announced his decision to stay off of the elections for the next RFb’s presidential post and told journalists at a press conference about his intentions to reside in Latvia and represent in the country the group of American funds connected to the New Century Holding. It is to be noted that up to that moment he always denied any connections to the American fund.

 

Presently Mr. Cerbulis is a member of the governing boards in several Latvian companies, e.g. Domuss, Nokte, Nadas, etc. where he represents the NCH’s interests. Latvian business community is still awaiting privatization of several big industrial “objects”, as well as about one million hectare of land; there are still out of use more that 7 mln privatization certificates, including about 3.5 mln certificates (as to April 2006) that have been registered on the accounts of various firms and companies. The certificates’ value increased two-fold in 2005 and for the first time since their start-up the prices reached the PCs’ face value.


Property deals are still attractive

The house on K. Valdemara Street, 7: In the Latvian capital is the most spectacular NCH’s acquisition; a Russian citizen is its official owner presently.

There was another sphere which could not slip from the NCH’s attention, i.e. property market with its ever growing prices. The American fund got hold of the market at its early stages when in the start of 1990s the de-nationalization of residential dwellings had begun. During that period most of the owners of Latvian property market that lost everything during 1940s and settled abroad, retained their property and most often wanted to sell their unexpected assets to anyone offering a reasonable price. At the moment the new Latvian government has sold some of the state property, as well.

 

The NCH acquisition of property went through certain stages, as a rule, according to simple scheme disclosed by the Latvian Telegraf daily. Thus, in the middle of 1990s Mr. V. Levin first concluded land-leasing agreements and afterwards made privatization deals both for the houses and the adjacent land. In a couple of years the new owner, Mr. V. Levin sold the property to company specifically created to administer the property; that company was a legal owner while the property administration was carried by another company, Domuss. According to Latvian Company House’s statistics, Domuss is owned by NCH’s administrative “structures”, i.e. Development Capital Corporation (97.34% of shares) and Vista Capital Corporation LLC (2.66% of shares).

 

At a later time, at the end of 1990s Mr. V. Levin left the property acquiring scheme; the houses and the land have been registered directly on the name of the Domuss company. Such a change, most probably, have occurred due to the fact that up to May 1997 the Land Reform Law (art. 20) allowed only Latvian citizens the right of land acquisition to physical persons. Therefore, foreigners and aliens in Latvia could acquire land only through intermediaries; Mr. V. Levin was one of them in the middle of 1990s.

 

Through this scheme the NCH has acquired most attractive property objects in the Riga’s city center; the property administration and management has been performed by the NCH’s firm, i.e. Domuss. Up to 2005 the NCH has acquired more than 40 houses and 30 plots of land. This American company has been acquiring the houses in the most fashionable regions in “the old city” where during the time of the First Latvian Republic most wealthy citizens resided, or in the city’s downtown. The acquired houses were, as a rule, renovated later on according to European housing standards and then rented out on highest in the city price levels. Sometimes the NCH sells some of the houses, but again through very high price level.

 

Thus, one of the most spectacular NCH’s acquisitions is the building on Valdemara Street 7, where in the Soviet time the Highquarters of the Baltic Military Command (or something of that sort) was situated, according to rumors. The house’s acquisition history is quite typical to the period of property de-nationalization in the Latvian capital. Far back to the spring of 1940 the building owners managed to get a 400 thousand lats security on the house mortgage. In modern time, in the beginning of 1990s, according to the Law on Property Restitution, the building has been returned to their former owners, i.e. G.E. Graude and A.R. Lieb, the US citizens. The property at that time has been evaluated at the sum of 2452. 25 lats.

 

Already in 1994 the new American owners mortgaged the house in Sakaru banka at 1.2 mln lats with the subsequent rights to rent the building out as well as administer the house; as we remember, one of bank’s share holders has been at the time the NCH. Then, in 1996 Mr. V.  Levin acquired the house, at that time for 676,500 lats. Already in 2000, to our information, the Domuss company wanted to buy the house for a million lats. During several subsequent years Domuss “decorated” the building with the sell-out billboard. From 2003 the building was acquired by a new owner, Russian citizen, Mrs. Elena Orlova who paid according to the country’s Land Register 1.037 mln lats. The house is burdened by several mortgages the amount of which exceeds the acquisition sum. The building is being renovated presently and it is expected that soon a new modern hotel will be opened in the house. According to property experts, the building’s market value is presently around 5-7 mln lats.

 

The NCH intends to sell some other of its property assets, e.g. a set of shops in the “old city” in Riga and several commercial estates in Basteja Pasaza which was renovated in 1998 for the loaned sum of 5 mln lats. The initial property price in 1993 was 24,865 lats and the registered owner according to the Land Register was in 1996 already mentioned Mr. K. Cerbulis (the property value was then 1.46 mln lats). Also for sale is the newly erected trade complex, Gertrudes centrs; about 3.2 mln lats have been invested into construction, plus the NCH’s additional 2 mln lats investment into the multistoried underground garage; the construction was administered by ex-prime minister, Maris Gailis. The houses in the quiet city center — on Vilandes and Antonijas Streets — are sold out as separate ready-made apartments. Approximate value of the four houses for sale is 25 mln lats with the total floor of 22 thousand sq m.

 

It seems that the NCH does not feel like leaving the property market. According to Domuss’ Board chairman, Andris Kupcis the NCH fund has other priority investments: most urgent are residential building in Jaunmarupe and trade-advertisement complex Riga Plaza in Pardaugava. The NCH’s holding longstanding plans are connected to residential construction in Dreylini region where the holding owns already more than 59 hectares of land.

 

Recently the NCH’s Latvian branch in cooperation with the Dutch partners started the construction project of an industrial property with the aim of making glass covered in vacuum by various colored films and layers. The resulting glass is expected for use, first of all, in greenhouses; the project is valued at about 20 mln euro.

 

Starting from 1993, the NCH Advisors’ daughter company, JSC Abava in engaged in renting out warehouses. The latter has acquired from Soviet time a land plot of about 18.8 hectares on which in the old days had been the cooperative whole-sale warehouse, the third largest in Latvia.


Disgrace in a noble family

Despite the NCH’s very accurate mode in relations to media, scandals could not be avoided, anyway. Thus, for several years, up to 2002, Mr. Kalvis Bricis has been Domuss’s director; he moved then to the general director’s position in State Property Agency. Due to internal intrigues in the Agency he was first fired, then restored in his position and then again lost it under a plausible pretext of the Agency’s re-organization, which turned into JSC Valsts nekustamie ipasumi.


Venture investors unite their efforts

In 2003 Latvian risk capital association was organized gathering under its roof venture capital investors. Among the new members there were, besides the NCH Advisors Inc the following companies, e.g. Baltcap Management Latvia, EKO Investors, Hanseatic Capital Latvia, Small Enterprise Assistance Funds, etc. These companies render financial resources for such projects’ implementation which are risky and experimental in nature but quite promising in future returns. Venture capital’s working scheme is quite simple, e.g. a venture fund invests into the research company initial capital of about hundred thousand lats and becomes the company’s co-owner. If the company successfully allocates given resources, it can expect additional several thousand lats financing next year. “Sponsor” can get profit together with the company, then after 3-8 years it can leave the company and sell its shares to other co-owners, strategic investor or bigger venture fund.

 

It is expected that in such a way Latvian SMEs can acquire for their perspective projects during 2006-2008 about 21.8 mln lats. Latvian entrepreneurship guarantee’s agency signed a contract for these funds’ distribution with the three financial companies which were selected through special tenders: TechVentures Fondu Vadibas Kompanija, Zalas gaismas investicijas and EKO investors. Abovementioned funds Latvia has acquired from the EU program on “State support for venture capital arrangements for SMEs”.

 

In February 2006 Latvian Council of Ministers adopted privatization scheme for the state JSC Uznemejdarbibas valsts atbalsta fonds. This fund has been the first local venture investment company in Latvia providing security for SMEs initial capital registered in the country in return for co-ownership in the SMEs. Somehow the Council of Ministers has been generally quite reluctant towards state support for business activity and do not want in this way sustain competition with private companies.

 

As to the mentioned NCH fund, during last several years it has become a member of a respectful organization, i.e. Foreign Investors Council, which was established by solid investors with the aim of conducting active dialogue with Latvian government concerning facilitating business environment. Thus, it takes about 10 years for the “venture capital” to become an integral part of Latvian investment policy.






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