FUNDS: East Capital closes its Ukraine fund at $100m

By bne IntelliNews February 27, 2007

Nicholas Watson in Prague -

East Capital closed its Bering Ukraine Fund at $100m on January 16, just weeks before the Ukraine stock market began to soar. The PFTS index is up 45% since the start of the year.

For those who invested in the Bering Ukraine Fund from its inception 18 months ago, the value of their investment has risen 72.5% to the end of January as the economy steams ahead with little heed to the mounting political problems in the country.

At the start of 2006 most economists were expecting GDP growth of 2-3%, but this proved to be a massive underestimate after the economy put in a better-than-expected 7%. According to preliminary estimates from Ukraine’s State Statistical Committee, the Ukrainian economy grew by 9.3% in January from the year before.

Few doubt that Ukraine will enjoy another year of sterling growth, despite the running battle between President Viktor Yushchenko and his political nemesis Prime Minister Viktor Yanukovych. Yet for Aivaras Abromavicius, a partner of East Capital International and manager of the Bering Ukraine Fund, such political machinations are merely part-and-parcel of doing business in the region.

Aivaras Abromavicius, director of East Capital's Ukraine fund

"In our universe of 20 countries in the region, there's not one that doesn’t have political problems – in Latvia you've had 15 or 16 new governments in as many years since independence," he says. "None of that has derailed the economies of these countries from this path of growth."

Abromavicius doesn't expect much from the region's political leaders, just for them not to get in the way of entrepreneurs and business – the forces that drive these countries forward. "We hope politicians do not pass bad laws. They are not expected to pass good laws either at this stage but if they do, that would be a bonus for the market."

Tried and tested

The fund invests in the same stories that have done so well all over Central and Eastern Europe since the collapse of communism. As people make more money and with taxes relatively low, there is a huge growth in disposable income, which flows into property, retailers and consumer goods. Concurrent with this is an enormous increase in credit, so banks and retail lenders benefit. This credit in turn feeds back into property and consumer goods, creating a virtuous cycle.

"We are exposed to banks, consumer goods companies, retailers, property companies - these are all sharing above-average growth and will continue to show these above-average rates of growth for quite a few years to come," reckons Abromavicius.

The rewards in Ukraine far outweigh the risks, says Abromavicius, though risks there are aplenty.

The biggest difficulty is of course shoddy corporate governance – a problem common to the whole region. While a lot of Ukrainian companies are learning by example from the improvement in corporate governance at Russian and Polish companies, Abromavicius says there are still a large number of firms acting solely for short-term gains rather than in the long-term interests of the business. "There are still a lot of businessmen in Ukraine who don't care about their reputations and that is something we've been extremely surprised to see isn't changing faster."

For example, the owners of the steelmaker Zaporizhstal are busy diluting the stakes of minority Western shareholders ahead of a possible IPO by merging into the parent company some asset-less trading companies that were used for tax optimisation. Against such shenanigans, investors in Ukraine are pretty powerless.

"There's very little you can do, because the courts in Ukraine are still quite far from being a place where you can get a fair judgement," says Abromavicius. "Unfortunately, the legislation protecting minority shareholders is one of the weakest in the former Soviet Union."

Such problems make the very hands-on approach of East capital, which has been investing in Ukrainian listed and unlisted companies for about four years, all the more vital.

"I myself have travelled to Ukraine 25 times in two years. You really need to go there and sit down with managers to find out about the strategy and competitive situation, because that way you learn substantially more than you would through broker reports and the media," he says. "It's a very hands-on approach we have investing in Ukraine, particularly because we have 20-25% invested in unlisted companies."

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