Nicholas Watson in Prague -

The global economic crisis was certainly unkind to Ukraine's major companies, but has proved something of a boon to private equity players who target this upper end of the country's corporate market.

"In the meat of our market, which is the market leaders and top companies, the valuations did not fall, but what has happened is that those companies became available to private equity," says Natalie Jaresko, co-managing partner at Kyiv-based Horizon Capital.

Whereas before the crisis these companies in the consumer, B2B and financial sectors had access to very "easy" money - bank capital, private placement money or hedge fund money - today they don't have the same choices. "What changed for us is not the valuations so much as much as our ability to source high-quality companies whose owners weren't willing to share control before the crisis since capital was available from many other sources, and participate in those companies in a meaningful fashion," she says.

That's not to say valuations of these Ukrainian companies haven't fallen. Ukraine was hit harder by the crisis than most of its neghbours, suffering a massive 15% contraction in its GDP in 2009 and a consequent drop in corporate earnings. So if companies are being valued on 2009 earnings, while the multiples might not have fallen, the price is being based on a weak year for most industries.

Additionally, Horizon is a dollar-denominated fund, so could take advantage of the devaluation in the Ukrainian currency, the hryvnia, which at one point in 2009 had lost half its value. Today, The Economist's "Big Mac Index" - which seeks to find out whether a currency is under- or overvalued based on the cost of a McDonald's Big Mac - indicates that the hryvnia is still 51% undervalued.

Pool of capital

Horizon is in a good position to take advantage of these opportunities, having raised $390m in 2008 for its third fund, the Emerging Europe Growth Fund II. "We're sitting on a great pool of capital which we're investing actively, while many of our peers are running down and not in position to fund-raise yet because of global as well as Ukrainian issues," Jaresko says.

Horizon closed on three investments in its region - which as well as Ukraine includes Moldova and Belarus - in the first half of 2010. In June, it bought a majority stake in Moldova's Bostavan Wineries Group for $15m and a stake in Ukrainian diversified agricultural corporation Agro-Soyuz for $40m.

Looking ahead, Jaresko believes that private equity in the region will come back in a bigger way only once the M&A market comes back. "I think people are focused on when and how that might happen," she says.

If there were a domestic IPO market that would help, she notes, but Ukraine's stock market has not and is not expected to become a major source of funding for companies, given the lack of similar pension reforms that have occurred next door in Poland. There, Jaresko says there are signs that the IPO market is reopening up for select companies. Before the crash, the Warsaw Stock Exchange (WSE) was a magnet for Ukrainian companies looking to raise cash. Companies have raised $4.28bn in 32 IPOs so far this year on the WSE, whose CEO, Ludwik Sobolewski, has said he's counting on one or two companies from Ukraine, including Agroton, to list in 2010.

For now, Jaresko expects private equity players in the region to remain concentrated on their core markets, ie. Moscow-based funds will focus on Russia, London-based funds will focus on EU markets. "Pre-crisis, everybody was reaching to the very edges of their markets, so they were reaching over the border into Ukraine and trying to do deals. That stopped during the crisis and I haven't seen people return to Ukraine market," she says, adding that from a competitive landscape, "it's all good news for us."