‘Enterprise Funds’ Get Off to a Rocky Start
At first, it seemed that something got lost in the translation.
When the Bush Administration and Congress set up “enterprise funds” in Hungary, Poland and Czechoslovakia, they envisioned an Eastern European equivalent of venture capital operations, selectively planting investments that would grow into thriving businesses.
But when the Hungarian-American Enterprise Fund opened its doors in Budapest last August, it was deluged with more than 4,500 applications for handouts--including 42 letters from a single village, each requesting two pigs.
In fact, out of the first 7,000 applications, only 35 even vaguely resembled the types of investments the fund was seeking: promising young firms that needed $500,000 to $2.5 million in capital.
And that was only the beginning of the difficulties that the funds have confronted as they have sought to introduce Western-style investment concepts to the formerly communist economies.
“The problem is not lack of opportunity for investment,” said Alexander Tomlinson, the former investment banker who serves as president and chief executive of the Hungarian fund. “It’s that everything takes longer than I thought, and I get frustrated over that.”
Tomlinson’s experience is not unique. Each of the enterprise funds has gotten off to a stumbling start:
* The Polish-American Enterprise Fund, working with Southshore Bank of Chicago, has established a $13-million program under which more than 300 small businesses have received loans of up to $20,000. It plans to raise that limit to $35,000.
Another of its projects involves investing larger sums in new businesses that range from a bank in Krakow to joint ventures that would build 1,000 units of housing to a private apple-growing cooperative.
* The Hungarian-American fund has committed money to 14 serious capitalistic ventures ranging from a printing plant to a classical music recording company and the privatization of Hungary’s largest computer software company.
It also hopes to expand a formerly state-owned paint and plastics firm into a chain of do-it-yourself stores--a market that Tomlinson expects will grow rapidly once Hungarians start taking title to homes that were allowed to deteriorate under government ownership.
* The Czechoslovakian-American fund, meanwhile, was begun only a few months ago and is still in the process of organizing its operation.
For all, that process has been bumpy.
When the Bush Administration set up the funds, planners apparently did not foresee some of the problems explaining the concept of venture capital to societies that had not experienced grass-roots capitalism in half a century.
“I really thought we would be able to move faster,” said the Polish fund’s Tomlinson.
Although the U.S. government provides the money for the three enterprise funds, the private boards that administer them decide how the funds will be spent.
In addition to making investments themselves, the funds bring together other resources--for instance, arranging for retired executives or recent MBAs to work with struggling businesses in Eastern Europe.
The Polish fund is by far the largest, authorized to spend $240 million over three years. The Hungarian and Czechoslovakian funds received $60 million each. Those amounts are only a minuscule portion of the investment that Eastern Europe hopes to draw from the public and private sectors in the coming years.
But the funds’ role is unique.
Their mission is “not necessarily to do the largest deals, but to set an example and to take risks that a private businessman couldn’t take,” said William Sievers, an attorney who has worked with the funds. “They say to the world, ‘Hey, we did it. Now it’s possible for you to do it.’ ”
Still, Robert L. Barry, the State Department’s top official for Eastern European assistance, said the government is satisfied that its investment in the enterprise funds is paying off.
“There are some very big spenders coming along behind the enterprise funds,” Barry said--among them the 39-nation European Bank for Reconstruction and Development, which expects to pour $7 billion into the region’s private sector. “The enterprise funds are out there sort of blazing the trails.”
Barry noted that Poles are fond of saying that building a private enterprise system from a state-run economy “is like trying to make fish out of fish soup.”
Managers of the Polish-American fund, for example, were startled to find that the powers of a notary in Poland went far beyond merely witnessing signatures. The Polish notary saw it as his job to scrutinize every aspect of a contract--and to block a deal if he did not like something in the paperwork, even if it had been approved by attorneys on both sides.
Some say the funds themselves are to be blamed for at least part of the delay.
“They have been very, very slow getting off the ground,” said Thaddeus Kopinski, the U.S. Chamber of Commerce’s director for Central and Eastern Europe. “The perception is they’re not there for us. They could have gotten their act together much sooner. It’s frustrating. People are saying, ‘Where’s this money?’ ”
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