What do you do with an unemployed Russian nuclear scientist? Put him to work designing a modem adapter for the traveling notebook computer user.
A special U.S.-chartered fund is doing just that: converting Soviet-era defense operations to peacetime purposes. Now, operators of the federally funded Defense Enterprise Fund are looking to spin off a $100 million fund for outside investors.
One of 10 enterprise funds established by Congress to ease the switch to capitalism from communism in Eastern Europe, DEF is the only one charged with converting former military operations into technology innovators in Russia, Kazakhstan, Ukraine and eventually Belarus.
The idea behind the fund was simple: keep former Soviet scientists and their resources from falling into unfriendly hands by creating jobs in profitable enterprises, explained John Nowell, president and chief executive officer of the Richmond, Va., fund.
During the past three years, the $70 million fund has taken significant minority stakes along with board seats in ventures ranging from telecommunications to personal computer hardware and software to oil pumps.
With the involvement of Western strategic partners, DEF has funded such deals as turning a former Soviet nuclear plant in Kazakhstan into a high-tech manufacturer.
The 10-year fund has committed $2.5 million to KK Interconnect Worldwide, whose products include a universal modem adapter that enables executives to plug their notebook computers into telephone lines around the world. The adapter now is being sold by The Sharper Image for $49.95.
Similarly, DEF has funded $5.8 million to LIFORM, a venture between Dosvid Engineering Co., a former Ukrainian producer of hand-held guided anti-tank missiles, and Paris bank Credit Lyonnais. The limited liability company will reclaim aluminum, brass and other metals from military hardware purchased in Ukraine.
Despite the social goal of the fund, it has been successful financially because its projects are market-driven, not technology-driven, Mr. Nowell explained. DEF officials project the first fund will have an annualized percentage return in the low 30s.
But the fund ultimately can take advantage of about only 3,000 of Russia's available pool of 100,000 under- and unemployed scientists and engineers.
Now, DEF officials are establishing Global Partner Ventures to both create an externally funded $100 million pool for future projects that would create more jobs for former Soviet scientists and to manage the existing DEF.
The group has 14 employees in Richmond; in its St. Petersburg and Moscow offices, it has a total of 32 employees, 80% of whom are native Russians. Native Russians -- many of whom have received education in the West -- engender greater trust in partnerships.
Pending final Department of Defense approval, they Global Venture Partners should be on its own by Jan. 1, Mr. Nowell said.
With the new fund, dubbed the NIS Transformation Fund, officials no longer will be tied to constraints of converting former defense installations. Instead, they can leverage other defense-related investments to full advantage, he explained.
For example, the new fund could add a local fixed-wire loop onto a fiber-optic cable that will run from St. Petersburg on the Western border to Khabarovsk near the Sea of Japan. The cable is being laid by another DEF-financed joint venture, MPS-Telecom, that uses the switching stations of the Russian railway system.
Global Venture Partners, which still awaits its full documentation, now will start the arduous process of soliciting investments.
A former Soviet specialist in the U.S. Army and later president of Pioneer Metals International, a unit of Boston-based The Pioneer Group Inc., Mr. Nowell hopes the fund will raise cash from two sources: institutional investors and technology companies with large research and development budgets. The latter also would be paying for a look at deal flow, trying to uncover sought-after technology, he explained.
Fee structures will be slightly higher than normal, with a sliding fee of 2.75% dropping to 2.25% over the life of the fund plus 20% of returns after a hurdle rate of 8% is achieved. The initial closing is expected in February, with a final closing expected later in the year.