Bankers say poor cap­i­tal flow threat­ens growth

Kyiv Post - - Business Focus - BY JACK LAURENSON [email protected]

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. 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 neigh­bour­ing 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, es­pe­cial- ly 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 op­por­tu­nity.

“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.

This grain el­e­va­tor based in Cherkasy Oblast be­longs to KMZ In­dus­tries, an agri­cul­tural ma­chine-build­ing com­pany, that is owned by in­vest­ment firm Dragon Cap­i­tal. The firm is one of the few play­ers that is driv­ing Ukraine's cap­i­tal flow. (KMZ In­dus­tries)

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