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Agribusiness Investments

Agribusiness Partners International, L.P. (API or Fund) was a $100 million limited partnership formed in 1995 to invest in agribusiness and food processing companies in the countries of the former Soviet Union. The Fund had a guaranty from the Overseas Private Investment Corporation, an agency of the United States government and was fully invested in companies located in Russia, Kazakhstan, Ukraine, Moldova and Georgia.

Overview
The Chairman Emeritus of the Burlington Capital Group, Mike Yanney, was invited by Soviet officials to develop several agribusiness-related projects in the Soviet Union during the late 1970’s and early 1980’s. The success of these projects cultivated key relationships with important people in the Soviet Union that still exist today. With the fall of communism, Mr. Yanney recognized the historic opportunity to develop an investment fund for the former Soviet Union. Mike Yanney and Bob Peyton, an executive with over 27 years of agribusiness experience, developed the fund idea and secured an investment guarantee from the Overseas Private Investment Corporation (OPIC), an agency of the United States government. The unique fund structure guaranteed investors that they would get back at least their total investment capital, even if either the transition in the former Soviet countries was unsuccessful or the fund performed poorly. This guarantee was instrumental in attracting investors to Russia and the Commonwealth of Independent States (CIS) in these early days of the economic and democratic transition. In December of 1995, Agribusiness Partners International (API), a $100 million private investment fund with a guarantee from OPIC was closed. A final fund closing was held in February 1997. Agribusiness Management Company, the fund manager for API, established an investment office in Moscow, Russia in 1995 which not only increased the overall presence in the region, but insured a hands-on approach to the management of the daily operations. Over the years the office was staffed by native Russian speakers from within the region. Members of the Omaha investment team traveled extensively to the former Soviet Union and worked closely with the “in region” team with each member bringing a successful investment record and strong financial, strategic and operational skills. The team developed strong personal contacts and extensive regional experience in sourcing, structuring, managing and exiting investments in the former Soviet Union. Agribusiness Partners International (API) invested in eight food and agribusiness sector companies with operations in Russia, Kazakhstan, Georgia, Moldova and Ukraine. The investments included classic agribusinesses such as poultry production; however, some investments, although related to agribusiness, reflected a more diversified approach such as glass container manufacturing and packaging production.

Portfolio Companies Overview
Chicken Kingdom
In 1997, API made its initial investment in a broiler production company – initially called Golden Rooster which later evolved into the name Chicken Kingdom, the brand under which all products were marketed. The investment rationale for Chicken Kingdom was a severe shortage of domestic production of poultry as broiler production had declined 75% from the peak during Soviet times. The fund also believed there were significant inefficiencies in the broiler production cycle in the Region and yet the region possessed the potential for low cost production with its inexpensive grain costs and abundant labor. Chicken Kingdom was started in the Lipetsk Region of Russia and then expanded into the Veronesh and Bryansk Regions. The initial investment updated the Lipetsk Processing plant, several state owned broiler farms in the region and completely updating all houses engaged in broiler production. The company also invested in its own broiler breeder farms and hatcheries to enable it to be self sufficient on broiler chicks. In 2004, the company completed the construction of a state of the art processing plant in the Bryansk Region located approximately four hours by car west of Moscow.

Initially, the company employed a team of foreign expatriates to get the company started and to transfer the knowledge of broiler production and best business practices from the west into Russia. By 1998, the entire management staff was virtually all Russian citizens with only the CEO a non-Russian expatriate. In 2004, the transition was made complete when one of API’s investment team became the CEO of the company making the company 100% Russian managed.

Chicken Kingdom was sold by the fund to a large Russian meat and poultry company in the summer of 2007. The company had grown from zero in revenues to $150 million annual revenues upon exit. The company employed approximately 3000 employees at the time of exit and had grown to be one of the top three broiler companies in Russia. At its peak production prior to exit, the company was producing approximate 1.2 million birds/week utilizing in excess of 300 broiler houses at 14 different locations.

Chicken Kingdom was one of API’s most successful investments as the initial capital of $22.5 million returned $130 million to the fund over the life of the project.

RASKO
In 1998 API invested $15.0 million in the Rasko glass container company located in Vladimir Region in the small village of Anopino, Russia. RASKO was an existing operating entity that had been privatized by management of the company headed by its CEO, Vitaly Mironov. RASKO was marginally profitable at that point and was producing 90 million bottles /year with existing Russian rotary production technology. With the API investment, RASKO proceeded to build a new factory in Anopino as well as upgrade the existing factory. In 2000, the company expanded to Veronesh and acquired a television tube manufacturer in that city and again proceeded with the upgrade to modern glass container production. RASKO grew to become one of the leaders in glass container production by 2007 when the fund exited this business. At that time, the company was producing 850 million bottles /year with revenues of $73 million on an annual basis.

Foodmaster International
One of the first businesses that API invested in was the Foodmaster Dairy Company. Foodmaster purchased outdated dairy processing assets in Kazakstan, Ukraine and Moldova. The company renovated those plants with modern equipment and produced state-of -the-art dairy products for the markets that it served in those former Soviet countries. The big success story for Foodmaster was its ability to establish one of the leading brand names for dairy products in Kazakstan with #1 market share in several of the markets it served. The initial investment was made in March 1997 with a total investment commitment of $12.3 million. The company grew from zero revenues to sales of $45 million when sold in 2004 to the French cheese maker Lactalis. Enterprise value of this business was $38 million excluding the Foodmaster’s Ice Cream business which was kept until it could reach significant size to attract strategic interest. Foodmanster is another example of a business that was started from scratch with old existing Soviet assets and was built into a company with leading market share in the markets that it served.

Polygraf
In 1997, API invested in one of the early leaders in the packaging and labeling industry, Polygraformlenie located in St Petersburg, Russia. Polygraf was one of the early suppliers of packaging materials to the multinational consumer products companies serving Russia. Leading companies such as Mars, Coca-Cola, Pepsi, Whiskas pet foods, and Red October Chocolates are just a few examples of their clients. Polygraf was an established business and was in the early stages of expansion with new offset printing technology and flexographic printing when API acquired the shares. Polygraf developed into the largest packaging and flexographic materials company in Russia with 2007 revenues approximately $75 million. API reached an agreement to sell its shares in Polygraf to management in 2004 with final settlement in 2007.

Saint Springs Water Company
In 1996 API invested $2.2 million in the Saint Springs Water Company, a producer of premium brand still and sparkling water sold in plastic containers and office coolers. Saint Springs was the first modern or western style producer of bottled water to enter the Russian market. The company grew quickly to reach approximately 20% of the total Russian bottled water market and was the leader in market share and brand identity. The company’s annual revenues had reached $31 million when in 2002 it was sold to Nestle of Switzerland and was the initial entry of Nestle into the Russian bottled water market.

Acodec Cheese
Acodec Cheese, a start up investment, was a small producer of hard cheeses and was relatively successful in the early years, but eventually ran into significant raw material supply problems later in the investment cycle. Acodec was sold to a Russian cheese distribution company at a slight loss in 2006.

KLP Soft Drinks
KLP soft drinks was a start up beverage production company utilizing a franchise of the Irn Bru brand from AG Barr in Scotland. KLP was financially devastated by the financial crisis of 1998 because of the devaluation of the Ruble. The company discontinued its operations in 1999.

Bagrationi Sparking Wine
Bagrationi Sparkling Wine was an investment in a Soviet style sparkling wine production company. The investment rationale was this was a low cost entry into the business with a large plant and an abundant inventory of wine materials. The production plant was renovated with a new bottling line and upgraded production facilities. However, the primary business was export sales to Russia which were ultimately prevented due to political differences between Russia and Georgia. Bragationi was sold to a Georgian investor in 2006.

API Performance
In 1998, the region experienced a severe economic crisis and currency devaluation. For example, the Russian ruble devalued by 4 to 1 or lost 75% of its value. Other economies in the region followed suit. This made it very difficult on businesses that relied on ruble sales in Russia but imported products or raw materials from abroad. In fact, many businesses and investment funds were not able to survive the crisis. The API fund weathered this difficult economic period and prospered because we had decided early on to not allow our portfolio companies to incur hard currency debt. This kept our investments immune from the initial impact of devaluation. The Fund also invested primarily in businesses that were Ruble based (local currency) which prevented significant cost/revenue imbalance post devaluation.

The investment team’s operational and regional experience translated into substantial financial and market growth. The current political stability, combined with steady economic progress, is expected to accelerate portfolio companies growth and enhance exit opportunities.