Member of the Armenian Assembly of America. Owner of Setrakian Financial Group LLC.
Entrepreneur Discusses Private Equity Fund For Armenia During Vem Radio Interview
NEW YORK — In a recent interview with Vem Radio in Yerevan, Vasken Setrakian discussed his plan to develop the first private equity fund for Armenia. The following is a summary of that on-air discussion.
After several visits to Armenia, Setrakian realized the need for private investment in Armenia, which could only be done on a large scale through investment funds and investment partnerships.
He explained the importance of an institutional track record, which was lacking in Armenia at the time. He noted that many investors from the Diaspora went to Armenia, but that they tended to focus their attention on failures rather than successes.
“The benefit of a fund is that it blends the returns,” he stated. “This way, one is able to attract substantial funds to a small country such as Armenia.”
Estimating that Armenia will require in excess of $50 billion to become a viable country that can eventually enter the European Union, Setrakian stated that this kind of money couldn’t be attracted through donations and individual investors, but rather through institutional investment. “To attract institutional investors, there is a need for demonstrating a proven track record,” he emphasized.
Setrakian joined the prestigious Brown Brothers Harriman in 1980 and was involved in all aspects of the investment management business. He became head of the Long-Term Fixed Income Management Group, head of the Global Fixed Income Management Group, and managing director in 1991.
In 2000, he started the New York-based Setrakian Financial Group (SFG), with subsidiaries in asset management and securities.
Setrakian explained that with the support of the International Finance Corporation, the private-sector division of the World Bank, the marketing of the private equity fund for Armenia began last year. Citing an early reluctance from investors from the Diaspora, he briefly turned his attention to investments in the Arab world and recently decided to re-launch the marketing efforts for the fund.
After establishing an office in Armenia, SFG hired five young MBAs from Armenia—three women and two men—who will work with him to develop a “deal pipeline” for various projects.
“In the US, venture capital investors usually seek returns of up to 45 percent,” he stated. “Given the perceived risk in Armenia, people expect upwards of 50-60 percent.”
He noted that one Wall Street investor explained that they were turning away projects in Kazakhstan at 50 percent, which highlights the challenge facing Armenia. “People assume they should be able to get 50-60 percent, but realistically the target should be lower,” he added, noting that the fund prospectus calls for a 30 percent minimum target for the gross rate of return.
Setrakian also stated that while the fund is relatively small, Armenia is a place where you can hire very good people at a lower cost than in many other places. He added that while this fund is only $20 million, he hopes that successive funds will be much larger.
“We are thinking 50-100 years from now, not just 5-10,” he emphasized. “If Armenia is going to be a viable nation, it will require a lot of financial resources. The mission of the fund is to start the process for Armenia to develop a track record.”
Noting that investors, even from the Diaspora, expect high returns, Setrakian stated that the fund needs “strategic investors” who believe in Armenia and are willing to accept less of a return. He also discussed political risk and the lack of adequate business and legal infrastructure in Armenia.
“Some of it is real, and some of it is perceived,” he stated, adding that perceived risk is influenced by distance and cultural differences. As a result, SFG decided to begin marketing the fund last month in areas closer to Armenia, such as the Middle East.
Some place a higher limit on the emotional or patriotic factor, but those are very few, he noted of diasporan investors. “Kirk Kerkorian is not seeking to make a big return—he wants to help Armenia,” Setrakian stated, adding, “Most investors view the fund more as a business—which it should be in order to create a track record. When it comes to charity, the Diaspora is always eager to help. But in this case, because of perceived risk or a certain reluctance to view this as a strategic investment, many Armenians have stayed away.”
Setrakian added that the response often improves when the details of specific opportunities are provided, several of which he cited. These included underwriting for fixed income securities.
“With our contacts in the Middle East, Armenia could become a platform for bond issuance, employ a lot of talented young people, and create high value-added jobs,” he stated. Another possibility is a regional medical facility, since Armenians have a reputation for being very good physicians.
“This could become a Mecca of sorts for patients from the Middle East and the CIS,” he said.
He also cited the CANDLE synchotron project, which could make Armenia a player in the business of producing computer chips. “Armenia could be active in the pharmaceutical and the micro-robotic fields. We have the talent for it here,” he stressed. “There are opportunities—high tech opportunities, low tech opportunities—it’s just a matter of having some faith.”
He also mentioned that the fund couldn’t be promoted in the US because of restrictions in the securities laws, which has been an obstacle. “We cannot reach out to the Armenian-American community,” he stated. “I am sure there are many Armenian-Americans who would be interested in the fund, but I can’t make public announcements about it.”
Addressing the issue of emigration, Setrakian explained that the fund would create jobs not only in the high-tech sector but also across a broad spectrum of education levels and backgrounds.
“We need to make money, and we want to create jobs,” he stressed. “We are painfully aware that Armenia is losing a lot of its talent to emigration, but this is not just an Armenian problem. It happens in other countries as well, even in France.”
“Just building infrastructure is not enough. As a private equity/venture capital fund, we can do things that the public sector and individual investors cannot do,” he emphasized. “We will build a diversified portfolio with a little bit of high-tech and a little bit of low-tech, so that the poorest of the poor will stay in the country, as well as the educated elite.”
Although the fund has a mission to create jobs and help the Armenian economy, Setrakian reminded his audience that the first responsibility is to its investors. “We have to generate a decent return, which may sound like a contradiction,” he stated.
Citing a factory enterprise that has been developed in Armenia over the past year, he revealed that the investment of less than $500,000 has generated jobs for more than 100 families, with the expectation of employing over 500 people in three years. “So, the impact of a $20 million fund will be significant,” he stated, although refraining from any specific projections.
Setrakian also emphasized that more important than job creation is the need for higher-quality jobs. “If we have an Armenian MBA who can find a well-paying job, we have a much better chance of keeping that person in the country,” he said, noting that many professionals in Armenia have difficulty finding employment in their respective fields.
“During the Soviet era, Armenia was becoming known as the ‘Silicon Valley of the Soviet Union,’” he emphasized. “We can regain that position within the region as a high-tech country which is also successful in the financial and medical field. The more we can create jobs for the PhDs and the MBAs, the better the future of the country.”
Setrakian also added that the fund might be able to leverage additional funding for larger projects, attracting the interest of additional investors. “Before you know it, $20 million can become $50 million, so there is a multiplier effect,” he noted. “The next funds will be larger and will have a much larger impact on the country. The fund can also give hope to the people of Armenia—especially the youth.”
He indicated that the fund had many more applicants from MBAs than it could initially use, which was a sign of the rate of “underemployment” in the country. “Sometimes this can be even worse than unemployment,” he stated.
Using another example, Setrakian noted the number of people with business or law degrees working in restaurants or hotels in Armenia. “This is one of the reasons I am reluctant to embrace the strategy advocated by international institutions to promote the tourism sector and small-medium enterprises. Those are all great sectors for Armenia, but people with these advanced degrees need different opportunities, which the fund will help promote,” he argued.
“Every minute we are wasting, the less likely Armenia will remain an independent nation,” he said. “Armenia needs to be nurtured back to health, and we have a tremendous opportunity, as far as the Diaspora is concerned, to turn it into another Singapore. Although it is a tiny country, Armenia can become a major player in the world by becoming very successful economically. We should stop pointing fingers, we should stop looking at each other, and start working.”