Investment bankers and managers of private equity funds in Ukraine are warning that bad flow of capital — essentially not enough money reaching intended destinations — coupled with an overall lack of foreign direct investment could continue to throttle Ukraine’s economic growth.
The experts also say that the creation of decent jobs, fuelled by investment into small and medium-sized businesses, is being put at risk by a lack of investable “dry powder” capital across the Ukrainian private equity and venture capital landscape.
Ukraine’s economy grew by about 3.8 percent over the first nine months of 2018, according to the government, and this has been seen by many here as cause for cautious celebration. But the World Bank has downgraded its growth forecast for Ukraine in 2018 to 3.3 percent, noting that in 2017 the country recorded just under $113 billion in gross domestic product — only $2,522 per capita for Ukraine’s nearly 43 million inhabitants.
Most analysts and observers agree that the country’s economy is still far from realizing its full potential, while bankers and fund managers say that there simply isn’t enough capital in the country being properly deployed to sustain strong economic growth.
More capital needed
When bankers complain that they don’t have enough money, few people immediately feel much sympathy. But given that the capital deployed by private equity funds and investment banks is often a huge driver of economic growth and job creation, it pays to listen to what some bankers are saying about the Ukrainian equity and venture capital landscape.
“There’s only about $1 billion or $1.5 billion across the entire private equity landscape in Ukraine right now,” says Dan Pasko, a managing partner at Diligent Capital Partners in Kyiv. “But most of this was already deployed over the past five years, so right now it’s more like $500 million in dry powder available… there’s lots of scope for more money to come in (to Ukraine).”
“$500 million sounds about right,” says Sergey Chuikin, director of investment banking for Concorde Capital, a Ukrainian investment bank. “It’s a very, very small amount, and shows that Ukraine is suffering badly from investment isolation.”
He added that insufficient capital flow from banks and investment funds was having a negative effect on the whole economy. The handful of investment funds in Ukraine also currently have very little competition and are choosing to deploy their capital slowly and carefully.
From the estimated national total, up to $300 million of dry powder capital is tied up in funds managed by one player, Horizon Capital, with an estimated further $100 million ready to be deployed by Dragon Capital.
According to investment bankers like Chuikin, a country the size of Ukraine with such a diversified economy should have many more funds and access to a larger pool of capital.
He estimates that neighboring countries like Poland could have ten or twenty times as much readily available capital.
In fact, Polish funds and investors have more liquid capital available than they have opportunities to invest in — they’re looking to make acquisitions from Ukraine, especially in the tech sphere, according to Andriy Romanchuk, a Ukrainian lawyer based in Warsaw with the EUCON law firm.
“Ukrainian companies need capital… Polish investors are looking very closely at opportunities in Ukraine, but want to take the companies to Poland where the environment is more secure and stable,” he said.
Untapped opportunity
“Russian aggression against Ukraine is putting a red flag over the country, especially in the east, for foreign strategic investors and capital funds,” said Chuikin.
Last year, Ukraine attracted little over $1 billion in foreign direct investment.
But it’s not just conflict in the east and the slow pace of political and judicial reforms that is constricting capital flows into and around Ukraine — lots of fund managers and venture capitalists who have made the move into Ukraine have struggled to secure a return on their investment.
“Most private equity firms in Ukraine are struggling to make money for their investors,” says Makar Paseniuk, head of investment banking at Investment Capital Ukraine.
“Only a handful of firms have succeeded, possibly because the portfolios were built at the wrong time and private equity is always about timing.”
But despite presenting significant challenges, most bankers also seem to agree that Ukraine also has lots of untapped opportunities. “It’s the best time to invest in Ukraine… because there’s so little competition on the deals that are available,” says Pasko.
“It would be better if a larger number of smaller funds came into Ukraine and invested in smaller batches of ten to twenty million dollars,” he said, adding that Ukraine wouldn’t benefit as much from larger funds.
Pasko admitted, however, that it pained him to promote Ukraine as a place for more investment bankers to come, as he preferred having less competition.
