Ben Aris in Kyiv -

Orange Capital was set up immediately after the Orange Revolution to cater to the huge demand that appeared amongst international investors looking for exposure to the Ukrainian growth story. Now the asset management firm has its eye on the huge amount of local wealth that is set to enter the Ukrainian fund industry.

The first fund, the Ukraine Opportunity Fund, was set up in the summer of 2005 in the wake of the revolution and was initially marketed in Switzerland and sold to high net-worth individuals. The fund has progressively attracted more and more institutional investors, who today contribute about 60% of the $50m under management - money that has enjoyed a 57% return since the fund's inception.

Dmitri Isupov , managing director of Orange Capital

"The idea was to facilitate the interest in Ukraine when there was a sudden boom in appetite," says Dmitri Isupov, managing director of Orange Capital. "The market re-valued upwards and people wanted to get some exposure to Ukraine, but they didn't know how to do it and were short of information – they needed the help of Ukrainian specialists."

The owner of Orange Capital, Dragon Capital Partners, which has some overlap with the owners of the local brokerage Dragon Capital, is now in the process of launching a second fund called the Ukraine Virgin Fund, which will be a pre-IPO fund buying into companies with definitive plans to float within a few years.

Orange Capital has just started marketing this fund and hopes to raise $150m, with a minimum investment of $1m. Management fees will be 2% a year plus 20% of the gains at the end of the fund's three-year life.

The idea is to tap into a surge in IPOs expected over the next few years. Since the revolution two years ago some 20 small and medium-sized enterprises have sold shares to investors, either as private placements or in formal IPOs. Although figures are sketchy because not all details of the private placements are announced, analysts estimate Ukrainian companies have raised about $675m through stock placements. But that will pale to insignificance if even half the 60 or so companies that have expressed an interest in IPOs over the next two years actually go through with their plans.

"While managers see the IPOs that the Russians are doing and are keen to cash out their businesses, the firms are not big enough to enable them to tap international capital markets and IPO," says Isupov. "Many are selling small stakes in order to raise capital to fund expansion and they can see that within a few years they will reach a size where an IPO on London's AIM or Frankfurt will be possible."

The new Ukraine Virgin Fund will be marketed to mostly foreign high net-worth individuals, and Russian investors are playing an ever more prominent role in these investments.

"The problem for most fund managers in the past is they have been nervous about accepting 'grey' Russian money as it can be of questionable origin. However, Russian money is becoming increasingly 'white' as more and more Russian owners sell their companies or organise an IPO," says Isupov.

"Russian hedge funds began taking this money about two or three years ago and it is a big chunk of cash," he adds.

As well as Russian money, Isupov is also looking forward to the time when local money will start playing a larger part in Ukraine's fund industry. Foreign investors dominate Ukraine's fund investment business in comparison to Russia where domestic money is playing the dominate role amongst private equity funds. Though Orange Capital has no local money invested in the Ukraine Opportunity Fund, Isupov says domestic money is on its way.

"The same story is expected to unfold in Ukraine [as in Russia]," Isupov says. "There is a lot of local wealth, but this is still a little bit down the road."

Ispuov says Ukrainian businessmen who want to invest in securities have either invested directly or set up their own funds after being burnt in so many business deals over the last decade.

"Ukrainian businessmen are still mistrustful of handing over their money to other people to manage, but the need for professional managers is pressing already," he says. "It is coming: the local wealth is quiet substantial and eventually this capital will return home, but we are only just entering into this phase."

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