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Nadiia Kaznacheieva: «The main factor in the recovery of investment activity in 2021 is pent-up demand»

Chief Investment Officer of UMG Investments shared with Forbes Ukraine Investment Guide market trends of 2021.

20.01.2022

Read Nadezhda Kaznacheyeva’s full commentary below:

 “UMG Investments is an investment company founded by SCM, a big investor in Ukraine. We have been investing and plan to invest further, find projects and make a profit. A financially healthy investor invests, including during a crisis. COVID-19 slowed down the economic growth, but for us, this was a sign to accelerate. For example, during the first lockdown in April 2020, we closed a deal to acquire a stake in the Ukrainian company Feednova. We could have claimed force majeure, but we didn’t.

As a local investor, we understand the situation in Ukraine. We try to structure transactions under British law with the possibility of international arbitration. There are limiting factors for more active investment, including government regulation, the impossibility of attracting cheap long-term financing, and difficulties in finding the right partners who are ready to work transparently and create value in the long term.

Our minimum yield threshold is 25%. On average, all our businesses reach this threshold. For green projects, we can also focus on 18-20% returns. The main factor in the recovery of investment activity in 2021 is pent-up demand. 2020 scared a lot of people. Investors lay low in anticipation, but as soon as mass vaccination began, business activity resumed. People were able to meet face-to-face, take flights, etc. This greatly boosted the business environment. In addition, the availability of liquidity in the world as a whole and in Ukraine in particular. Money staying in the bank mostly has a negative return, as it does not cover inflation. Therefore, all investors are looking for an opportunity to make a profit.

As a general trend, we’re currently observing the outflow of foreign investment from Ukraine. However, there are some new projects and new ‘faces’, such as Neqsol Corporation, which operates in several industries and is actively investing in Ukraine, or, for example, Kaspi. We expect a greater influx of investments from the Middle East as well as East and Southeast Asia. Investors in Europe and the US are looking for less risky assets and geographies. The largest financial investors in Ukraine, the EBRD and IFC, continue to invest through loans and equity investments. New teams appear on the market, attracting this and other funding.

In our projects, we try to focus more on opportunities than on risks, which we consider and work on mitigating them from the get-go. If we enter a partnership, we try to structure transactions according to the British law to minimise the risks of conflict situations, since we cannot yet fully trust the Ukrainian courts in corporate disputes.

The most significant factor that influences our willingness to move faster and invest more actively is the small number of good projects that are economically independent of the state and would meet our strategy and our investment criteria.

I would like to see the law on industrial parks realised. The draft law on benefits for industrial park enterprises was adopted in the first reading. If it works, Ukraine will become more competitive in this respect compared to India, Turkey, Poland. The demand is huge, since the relationship between China and the United States is forcing investors to move production from China and look for places closer to Europe. And there is no location closer than Ukraine.

We look forward to the development in our traditional industries: we expect to close several deals in clay mining next year; we are planning to scale up the ‘green’ pilot project on capturing coal mine methane and processing it into electricity. Perhaps we will expand the fertiliser and agriculture directions. We are also considering industries that are new to us, such as healthcare and pharmaceuticals.

We focus on export-oriented projects with revenues from abroad. But the cost of production is tied to the Ukrainian hryvnia, and inflation directly affects it. Some businesses can immediately shift the cost to the end consumer, while some do it gradually. We control the cost of production, looking for options to optimise it.

We look out for assets abroad, enter international markets, not for diversification but in order to implement the strategy of a particular business area. Our priority is investing in Ukraine. The target investment is $2 to $30 million. This year, we invested about $32 million, including investments in existing businesses.”