Awe-inspiring people
Ukrainians are literate, educated and hard-working people who want to live in freedom and dignity, where human rights and rule of law prevail. They want opportunities, jobs, health care and education. These are universal values. The resilience of the people is truly awe-inspiring.
Reforms are under way
For the first time in nearly 24 years of independence, there is a critical mass of reformers who are committed to changing the system and structural reforms are being undertaken. This began in May with the election of President Petro Poroshenko, followed in October by pro-European parties winning a majority in Parliament and a reform-minded Cabinet of Ministers formed in December 2014 under Prime Minister Arseniy Yatsenyuk, where the average age is less than 45, English is readily-spoken and communicating by mobiles and text are the norm.
Great opportunities
Export-focused companies are of great interest as Ukraine is the most cost-competitive manufacturing platform in Europe.
Combined with the benefits from the free trade agreement with the European Union, the tailwind for exports is strong. It is also a major initiative we drive in many of our portfolio companies, from Biofarma in plasma-based drugs, to Ergopack in household goods, to Jaffa in juices or Purcari in wines. Being competitive in export markets makes these companies even more competitive at home.
Fast-growing sectors continue to expand despite the economic slump. IT outsourcing, software, ecommerce, logistics and pharma show solid growth. Combined with historically low valuations, there is a strong case to be bullish about these sectors.
Deleveraging is another opportunity. Many operationally strong companies are suffocated by expensive, foreign-denominated debt. On the other side, you have severely undercapitalized banks. The demand for equity is high and there is appetite for capital infusion at attractive terms. Discounts on debt of up to 50 percent are not uncommon and these are win-win arrangements, lifting the financial pressure off the company and helping the bank offload a problematic loan.
We also see leading companies going on offensives, taking advantage of the lower costs of market share gain. The advertising market is down nearly 50 percent in dollar terms, so the costs of investing in bold marketing campaigns is a fraction of what it was. The same applies to retail listing fees or investing in a new sales footprint. Take Kerameya, our bricks producer, which is taking advantage of slumping imports and weaker local competitors.
Money to invest
We have more than $50 million in capital for investments. We are picky about what opportunities we back. It is a buyers’ market, which results in attractive valuations with significant upside potential.
We see Ukraine as a ground floor opportunity for a value-seeking investor. The 1998 crisis was followed by average growth rates in Ukraine of over 6 percent during the next decade. It doesn’t take a miracle to move from laggard to leader. Ten years ago many saw in Colombia a failed state; today it is the hottest market in Latin America. Slovakia was labeled the black sheep of Europe, but it emerged as the fastest growing economy in Europe. It is all possible with a real commitment to reforms. We believe the key ingredients are there for Ukraine to bounce back to prosperity and our efforts and those of our portfolio companies are an integral part of that rebound.
What about exits?
Over the last two and a half years, we had five exits from our portfolio, Fidem Life, AVK, Platinum Bank, a partial exit with Tinkoff Bank and most recently, exiting MTBank in Belarus in March. Most of these investments have achieved spectacular returns and, in other cases, have preserved our investor’s capital in full.
Three deals were exited at a gross cash-on-cash return of 5.6 times, 3.2 times and 2.9 times, respectively. For MTB, we booked a profit despite a seven times currency depreciation and a three times fall in valuation multiples. We helped management turn around the bank after the 2009 crisis and build a consumer retail business. This makes me bullish about our team and the private equity potential in the region. Just watch what is possible when growth resumes!
Lenna Koszarny is founding partner and chief executive officer of Kyiv-based Horizon Capital, a private equity fund manager managing $600 million in three funds, primarily invested in Ukraine.
