The cover of the latest 2021 issue of The Economist features a panorama of Kyiv. Since late October, Ukraine has regularly been on the front pages of the world’s media as a possible target for invasion by the Russian army. Viacheslav Klymov, co-founder of Nova Poshta, is concerned about this news, but not enough to change his investment plans. In 2022, the company will invest up to UAH 4 billion, 50% more than the previous year. “We want our services to see a noticeable increase in the lives of Ukrainian businesses and consumers,” he said. Klymov is not the only optimist among Ukrainian entrepreneurs. For example, Vladyslav and Iryna Chechotkiny, founders of the Rozetka retail chain, are considering buying a bank and thinking about holding an IPO. Meanwhile, 32% of member company CEOs of the European Business Association (EBA) have investment projects in the works worth up to USD 400 million in the next 12 months (according to a September survey). The ambitious plans for 2022 did not come out of thin air. In 2021, there were 120 M&A deals in Ukraine over 11 months, which is almost twice as many as in 2020, and more tellingly, one and a half times more than in the pre-crisis 2019. There are sufficient funds for major acquisitions. Companies and banks are breaking profit records and paying generous dividends – over USD 8 billion in payments a year, according to Serhii Nikolaichuk, Deputy Governor at the National Bank of Ukraine. Macroeconomic trends are positive. For instance, Ukraine’s GDP in 2021 will exceed USD 190 billion, the highest in the country’s history. From January to October, according to the NBU, foreign investors brought USD 5.3 billion to Ukraine – the highest in the last nine years (this includes reinvested earnings from offshore Ukrainian businessmen). Major investors from Kazakhstan, Georgia and Azerbaijan are focused on the Ukrainian market. EY’s leading partner in Ukraine, Bohdan Yarmolenko, says there may be several “mega-deals” over the next year related to IT companies valued at more than USD 1 billion. Why didn’t Russian tanks, sluggish economic growth and a poor investment climate scare investors in 2021, and will the investment boom continue in Ukraine next year?
Bold foreign investments
In 2021, the Ukrainian M&A market reached USD 1.2 billion, says Dmytro Anufriiev, a Partner of Financial Advisory in Deloitte Ukraine. “And these are only the 32% of deals where the amount is reported”, says Svitlana Shcherbatiuk, Director, Head of Transaction Services, KPMG in Ukraine. According to her estimates, out of 120 deals, 81 exceeded USD 5 million, and the average “price tag” was USD 33 million. This is still below the pre-COVID level. In monetary terms, almost half of the M&A market, according to KPMG, came from three sectors: IT, agriculture and energy. But its not only domestic businesses that are keen invest in Ukraine. “Risks are high in Ukraine, but because of that local assets are undervalued,” says Volodymyr Lavrenchuk, Former Chairman of the Board, Raiffeisen Bank. In April 2021, he headed the Ukrainian office of Azerbaijan’s NEQSOL Holding, the largest foreign player in the Ukrainian M&A market. Volodymyr Lavrenchuk, Former Chairman of the Board, Raiffeisen Bank. In 2019, NEQSOL acquired Vodafone Ukraine from Russia’s MTS for USD 848 million, and in 2021, it acquired Vega’s telecommunications operator for USD 15 million, and initiated a deal to buy Ivano-Frankivskcement. The latest takeover is worth USD 300–400 million. This is a ten-year maximum for Ukrainian industry. Why are Azerbaijani investors so active in a high-risk region? “We consider the risks associated with Ukraine to be manageable. Following the transformation of the economy, the value of assets will significantly increase,” Lavrenchuk says. “NEQSOL has been popular in recent years, buyers from Eastern Europe are interested in Ukrainian assets and appear to be less sensitive to local risks (Russian threats, corruption, bad investment climate) than investors from Western Europe and America,” adds Giovanni Salvetti, Head of Rothschild & Co for the CIS Region. The business news headlines back up his words. In 2021, the Kazakh fintech giant Kaspi.kz entered Ukraine. The company has already bought the Portmone local payment system and BTA Bank, with an investment of about USD 24 million. One of Georgia’s largest banks, TBC Bank, was among the contenders to buy Idea Bank, but in the end the bank was acquired by Rinat Akhmetov’s SCM. We will probably hear about the Kaspi and TBC deals in 2022. Kaspi’s business model requires a marketplace. Oleh Horokhovskyi, co-founder of the monobank project, said in an interview with NV Business in December that Kaspi had a good chance of reaching an agreement with the Rozetka retail chain. Two guests told about Forbes that the Kasta marketplace is another option on the financial market. The arrival of investors from the east does not mean that Ukraine is closed to investors from other countries. Two deals were struck with large Australian mining companies in 2021: European Lithium acquired Petro‑Consulting lithium producer for USD 15 million, while Volt Resources Limited acquired a 70% stake in Zavalievsky Graphite for USD 5.9 million. Polish Avenga acquired the Lviv-based outsourcer Perfectial (for about USD 20 million). American VistaPrint paid USD 85 million for Depositphotos. Creatio raised USD 68 million.
Ukrainian businesses remain the No.1 investor.
According to KPMG, the buyers in two of the three deals were local companies. What did Ukrainian investors like about 2021 and what are they likely to be looking at in the next year? For SCM owner Rinat Akhmetov (age 55), 2021 was a year of acquisitions. He acquired Dnipro Metallurgical Plant for USD 336 million, took control of the Pokrovske Coal Group, acquired a 24.5% stake in Kirovogradoblenergo from the Russian owners of VS Energy and took control of Idea Bank, having paid about USD 50 million to the Polish Getin Holding. Local players understand the situation in Ukraine and are more active than foreigners, says Nadiia Kaznacheieva, Investment Director at UMG Investments. The profitability threshold of businesses considered by UMG is 25%. “There are lots of sectors in Ukraine that can bring such returns,” says Kaznacheieva. Energy is an area of interest for the co-owner of ATB largest retailer, investor Hennadii Butkevych. In 2021, he acquired the Odessa-based Ukrnaftinvest. He previously invested in the production of small nuclear reactors and hydrocarbon extraction on the Black Sea shelf. There were two significant investments in retail: Silpo retail acquired the Furshet retail chain, while the American Horizon Capital Fund acquired a minority stake in Avrora’s chain of discount stores. Oleksii Baranov, Andrii Ivanov, Vasyl Khmelnytskyi. Photo — State Property Fund of Ukraine / Oleksandr Chekmeniov / A Development / Illustration by Anna Nakonechna In 2021, the state made a positive contribution to investment activity. For the first time in 16 years, a major privatised facility was sold in Ukraine – a consortium of UDP companies owned by Andrii Ivanov and Vasyl Khmelnytskyi. In addition, Oleksii Baranov’s A‑Development acquired Kyev’s Bilshovyk plant for about USD 53 million. The State Property Fund also sold seven distilleries for a total of USD 29.6 million and the Danube Bakery. The latter asset was acquired by Epicenter K owned by Oleksandr and Halyna Hereh. “Total budget revenues do not matter – more important is the number of bidders, which has doubled on average,” says Dmytro Sennichenko, the Fund’s Chairman. “Hundreds of properties have been sold as part of ‘small-scale privatisations'”, he added. The Ministry of Justice has learned how to sell prisons. One of the largest IT companies, SoftServe, acquired the Lviv Correctional Facility for UAH 377.5 million. The company plans to build a campus in the area of the former 10-hectare prison.
Private investors are getting more active
Private investors are now contributing to the investment resurgence. Ukrainians doubled their investment in government bonds to UAH 24.6 billion in a year. According to the NBU, investments in foreign assets (within the EUR 200,000 limit per year for individuals) reached USD 427 million in January to August 2021, one and a half times higher than the entire previous year. (This figure includes money that Ukrainians transferred to purchase cars, real estate and shares.) The reason for this is clear. Interest rates in banks fell below 10% per annum, said Denys Mikhov, CEO of Univer Investment Group. Ukrainians are employing new investment tools. Billions A separate story – the generation of Ukrainian IT billionaires. Mykolaiv resident Vlad Yatsenko is a co-founder of the UK’s largest neobank. In July, investors valued the fintech startup at USD 33 billion. According to these estimates, the shares owned by Yatsenko are worth about USD 1.3 billion, making him the youngest Ukrainian billionaire. He was the only IT expert at the company of billionaires for 4 months. By November, Grammarly’s founders, Ukrainians Aleks Shevchenko and Maks Lytvyn, had a fortune consisting of nine zeros. Their company was estimated to be worth USD 13 billion. American Forbes included Shevchenko and Lytvyn in the Real Time Billionaires list, worth USD 4 billion each. This makes them the second and third richest Ukrainians. In October, GitLab, founded by a Kharkiv resident Dmytro Zaporozhets, held an IPO on the New York NASDAQ, with a capitalisation of over USD 15 billion and share price of USD 400 million. What does the success of these IT experts have to do with the M&A market in Ukraine? They have not lived in their homeland for a long time, and their companies are located outside Ukraine. For example, Revolut is a potential foreign investor in Ukraine: In 2021, the company registered a legal entity in our country. Grammarly and GitLab are large employers with development centres in Ukraine. The former has already stated that it plans to recruit 130 more employees at its Kyiv office (from 270 to 400). The need has been heard by fintech entrepreneurs. In 2022, Ukraine will have at least three mobile apps for trading in foreign securities. The releases were announced by monobank, Alfa‑Bank and Treeum financial marketplace (majority owned by Dragon Capital). In late 2021, Treeum closed a deal to purchase the Wotan investor program. Konstantyn Weissman, Co-owner of Treeum, estimates that there will be 100,000 app users in the first year and 5 million investors within three years. 2022 is perhaps not the best time for tens of thousands of unskilled investors to enter the foreign market. The explosive growth in the stock markets in 2020 and 2021 will not be repeated next year, according to the founder of First Kyiv Investment Club, Ivan Kompan. Inflation will be a barrier. “This is forcing central banks to strengthen monetary policy with expensive, hard-to-borrow money policies,” explains Eric Naiman, Managing Partner at HUG’S. “In times like these there is a slowdown in investments.”
The growth of investments in business projects is a global trend that gained momentum in 2021 and will continue next year. According to a global EY study, M&A activity worldwide significantly increased in Q3 2020. The total value of M&A deals in the first nine months of 2021 was USD 3.9 trillion, 3.5 times more than in 2020. The clear revival of investment activity in 2021 is a consequence of the pandemic. “Business is making up for lost time. 2020 scared investors. Many people dropped out of sight,” says Kaznacheieva, UMG Investments. In addition to deferred demand, the huge amount of new money is an important factor. “In two years, the US Federal Reserve’s balance sheet has grown from USD 4 trillion to USD 8 trillion,” explains Mykhailo Demkiv, ICU analyst. “Simply put, every second dollar was made during the pandemic.” The second factor is increased inflation. “For investors, this is grounds for investing in business projects, rather than keeping money in a bank where it depreciates,” explains Volodymyr Kryvko, Managing Partner, Chernovetskyi Investment Group. In the context of the global investment boom customers are making important investment decisions much quicker. “They are investing in all sorts of things, which will lead to negative consequences in the long run,” says Kryvko. He believes that in 2022, the trend towards business investment will continue. Will investment activity in Ukraine continue to grow in 2022? There are grounds for this, says Anufriiev from Deloitte. “We have good macro indicators and a large market. The well-being of the population is increasing,” says Oleksandr Kulykov, Founder of Green Candle Finance Investment. “No wonder Kaspi’s capitalisation increased by a billion dollars just after the announcement of the event in Ukraine.” Infographics by Leonid Lukashenko Yarmolenko from Deloitte believes that 70% of Ukrainian businesses can be considered attractive to investors. “There are many great prospects in the M&A market,” he says. “Apart from the obvious TMT sector (IT, media, telecommunications), there are interesting companies in traditional industries as well.” The hot spot on the M&A map will be the agricultural sector. “Thanks to one of the most successful seasons in the history of the industry, in which high prices and high yields coincided, companies are cash rich and ready to invest,” says Ihor Verkhohliad, Partner, Soul Partners investment banking boutique. “There will be high activity in the IT sector, with several deals closed worth USD 50-100 million,” adds Verkhohliad. “There will be deals in the healthcare area – telemedicine, the pharmaceutical industry and healthtech,” says Shcherbatiuk from KPMG. The investment plans of UMG Investments, which operates as SCM’s private investment fund, confirms the assessment of investment bankers. “Perhaps we will strengthen the fertiliser business and agro-industry. We are also looking into new industries, such as medicine and pharmaceuticals,” says Kaznacheieva. UMG’s target investment in Ukraine is between USD 2 and 30 million. Consolidation of the M&A trend is gaining momentum in Ukraine: Bigger players are buying SMEs, explains Verkhohliad. However, there are sectors that do not benefit from the current macroeconomic situation and are not likely to experience an investment boom. For example, manufacturing. This is impacted by high industrial inflation. The investment banker believes that this reduces the profitability of manufacturers, which in turn affects the valuation of companies. Ukraine may become more attractive to investors due to growing tensions between China and the United States. For this to happen, according to Kaznacheieva, a law on industrial parks should be passed sooner rather than later. “Strained relations between China and the USA are forcing investors to move their production facilities closer to Europe. And there is no place closer than Ukraine,” she said. What else can attract investors to our country? A great success story. “It would be great if the Ajax IPO is held in 2022,” says Verkhohliad.
The main barrier.
And even Russian saber-rattling near the border won’t improve Ukraine’s investment attractiveness. “Geopolitical risk is a barrier to both direct and portfolio investments,” says Andrii Dmytrenko, Director, Dragon Capital. But it does not take our country off the radar of investors. “The news of recent weeks is unlikely to affect the strategy of large companies,” says Lavrenchuk from NEQSOL. “This could only affect deals that are in the works – we may delay them for a few weeks.” Even risk-sensitive financial investors are in no hurry to leave the country. So far, there is no large outflow of funds from Ukrainian assets, according to Mikhov from Univer IG. “Investors are not closing their positions, instead, they reinvest in short-term IGLBs,” he said. For SCM owner Rinat Akhmetov (age 55), 2021 was a year of acquisitions. He acquired Dnipro Metallurgical Plant for USD 336 million, took control of the Pokrovske Coal Group, acquired a 24.5% stake in Kirovogradoblenergo from the Russian owners of VS Energy and took control of Idea Bank, having paid about USD 50 million to the Polish Getin Holding. Photo by Getty Images “The threat from Russia is a factor we have little control over,” says Ihor Mazepa, Founder of Concorde Capital. He is more concerned about the state of the Ukrainian economy. “Six months ago, I was optimistic – all the prerequisites were in place for GDP growth of 4.5% this year,” says the investment banker. “We are now looking at 3%, and next year we may well get no more than 3% again. He says that there are dozens of countries around the world that are growing faster. Why should investors choose Ukraine? Along with the traditional bottlenecks to top it all. “Decades later, the problem of the judicial system remains unresolved,” says Dmytrenko without hesitation. In addition to protecting property rights, Forbes interviewers often mentioned the following issues: Staff shortages, unskilled state employees, over-regulation, corruption, of course, and the small number of economically independent medium-sized businesses. How can you drive growth when there are so many risks to navigate? Klymov from Nova Poshta predicts that revenues in his company will grow by 20% next year, as they did in 2021. An additional UAH billion of funds are required to “increase the degree of ambition.” How can he not be afraid of risk? The businessman answers succinctly: “It simply does not bother us.”