Ukraine director of one of the largest global buy-out companies says first Ukraine deal likely this year.
Advent International is the only globally-active private equity firm dedicated to Ukraine and with a strong local presence. One of the largest global buy-out companies, it has 1 billion euros committed to investment in Ukraine and Central and Eastern Europe (CEE), and another 6.6 billion euros available for worldwide investment, including in Ukraine and CEE.
Advent invests worldwide primarily in five sectors: business and financial services, retail consumer and leisure, healthcare sector, industrial sector, and looks to invest 40-120 million euros per deal to take a controlling stake in top companies. Advent’s Ukraine director Tamas Nagy has been based in Kyiv since 2007, and tells Kyiv Post what 2010 will hold for merger and acquisition deals in Ukraine, and when Advent will close its first Ukrainian deal.
Q: With valuations rock bottom and growth returning, is Ukraine looking attractive for global private equity?
A: For private equity investors, gross domestic product growth is not as important as stability. Just think of France and Germany, which have slow growth rates but are of huge interest to investors. What investors need are things like predictability around currency, government policies and the legal framework. So, regarding Ukraine, the last few months demonstrate a fair degree of stabilization, regarding bank recapitalization, currency, and macro-economic drivers such as stabilization of employment. The legal framework is also improving, thanks to the new joint stock company law [which has made Ukraine corporate law more compatible with European law and increased protection for minority share holders].
Q: How has the crisis impacted on Advent International plans in Ukraine?
A: In the long-term view of twenty years, the crisis has been a blip. The crisis has not changed the fundamental attractiveness of Ukraine as a destination of investment. It is still one of the biggest countries in this region, based on population size, and very high pent-up demand across many sectors.
We have been very successful investing though the Latin American crisis, the Asian crisis, the Russian crisis, the Turkish currency crisis and now the worldwide recession. The only question worrying us now is whether we will see the return of the pre-crisis valuation / risk perception mismatch, [meaning companies were effectively overpriced]. It will be a lot more difficult for sellers to convince buyers of the great growth potential and country prospects in the short term, so probably valuations will remain conservative.
My experience tells me that, because Ukraine has been very fast on the way down, it can also be very fast on the way up. And there has already been wage growth this year in real terms. If you look at that in the broader European picture, that’s a fairly positive trend. The lending boom has ended, but for how long? We can already see how banks are starting to lend again, according to the usual pattern, starting with blue chip corporates, then other corporates, and then retail lending.
Q: Advent International has been present in Ukraine since 2007 but has still to close a deal. Why?
A: In 2007, when we set up here, deals were being done that brought fantastic value to owners. Many of these were done by investors such as hedge funds buying minority stakes, often under 10 per cent, with no boardroom representation, no voting rights, at very high valuations. It was mostly outsiders investing, not Ukrainians who could properly understand Ukrainian risk and price it appropriately. We did not participate in this, but spent the time building up local expertise. If you try to invest in a country where you have just set up and do not even speak the language, you will get burnt. If you consider the years 2008-2009, there were generally very few deals done even on a global scale as investors with money, like us, were waiting for some degree of stability to return. We believe that now is the time to invest.
Q: Advent International has deep emerging market experience in both Latin America and Central Europe. Which experience do you draw on most in Ukraine?
A: We draw on Advent International’s Latin American experience a lot in Ukraine. Especially regarding things like currency, high inflation or low disposable income, it is very important. If you look at high growth environments such as 2006-2007, our Latin American experience was very important in helping us maintain focus and not get carried away. It is very easy to buy a bank for four times the value of its net assets when everyone else is doing it, but because of Latin America we were able to stick to our principles and be a more prudent and conservative investor.
But it’s in fact a bad analogy to compare Ukraine directly with Latin America. Ukraine is a European country that is navigating a difficult path in terms of geopolitics, but it is a European country.
Q: What factors does Advent International find challenging in Ukraine?
A: Management talent is one of the most difficult issues for us in Ukraine. The management team is a main focus when we look at a company. We have come across some exceptional managerial talent, but by and large the depth of the talent pool for senior management is not as deep as one would wish, compared to say Poland and Romania. It’s a situation I know from Hungary and Poland in the late 1990s. It will take another five or 10 years for local management to develop and adopt international best practice. It’s basically a life-cycle issue of a country, and not an issue of the quality of talent of the people available in Ukraine.
You can’t underestimate the importance of management. We hardly ever invest in companies where management might have to be changed, beyond a few new people or new positions.
Q: Advent International has invested, in particular, in construction materials and beverage producers in Romania and Bulgaria. Is this also your focus of interest in Ukraine as well?
A: Everything connected with the consumer is interesting. We feel that, despite the collapse of the construction industry during the crisis, there is enormous pent-up demand for construction materials in Ukraine. Just look out of this office window – you can see seven cranes working, where a year ago there were only two. As soon as the employment situation stabilizes, and banks start lending again, the demand will make itself felt.
Similarly the FMCGs [fast-moving consumer goods] sector including beverages is of great interest to us.
Q: How would you add value to Ukrainian companies you invest in?
A: Our strategy is to buy controlling stakes in market leaders in sectors we are interested in. Often we do ‘buy and build’, i.e. we buy two or three companies from the sector and consolidate them. We then also work on expanding exports. This is where Advent International’s international expertise and networking comes into play, in opening up export opportunities.
When it comes to low-branded construction materials, such as ceramic tiles, there is no reason why Ukrainian producers should not export to Europe if they can compete in terms of price and quality, and we have the infrastructure in place to help them do this. Additionally, we work intensively with management. We have an exclusive ‘grey-hair’ partnership for instance with around eighty former top managers who advise on companies from their sectors and contribute their expertise.
Q: Will we see Advent International close its first Ukrainian deal in the first half of 2010?
A: Because things in Ukraine usually take a little longer, we could say third quarter.
