Ukraine’s stock market, as might be expected for a country in such dire economic straits, is dead: in November the number of transactions was down 180% from two years previously, just before the revolution that eventually led to the ongoing conflict with Russia, with some days seeing just $50,000 of business transacted.

Yet during that same month the Ukraine-focused private equity outfit Horizon Capital announced the successful exit from the Ukrainian outsourcing IT service provider Ciklum Holding, selling “a significant equity stake” to Ukrainian Redevelopment Fund (URF), which is managed by Soros Fund Management.

This was actually Horizon’s second successful exit from an investment in 2015, following the March sale of MTBank, a leading Belarusian bank. It also acquired a stake in Rozetka, a leading e-commerce company based in Ukraine, in July.

“The local stock market is in hibernation, private equity is the game going on and smart capital is deploying in this area,” says Peter Bobrinsky, managing director at Dragon Capital, which like Horizon was the beneficiary last year of ‘the smartest capital in the room’, that of George Soros.

On the same day that Horizon announced its deal over Ciklum on November 18, Dragon said Soros’ URF had agreed to be one of the seed investors in its New Ukraine Fund, which will focus on providing funding for Ukrainian companies in the growth stage.

The timing wasn’t a complete surprise: apparently Soros and his advisers flew into Kyiv in mid-November and took a whole floor of the swanky Hyatt Regency, where one dealmaker said the lobby on one day was full to bursting with Ukrainian businesspeople and investors, all trooping upstairs at the appointed time to meet the legendary financier.

The arrival of Soros is usually an early sign that the market is turning. For veteran Ukrainian investors like Lenna Koszarny, co-founder and CEO of Horizon, Soros’ interest merely confirms her view that Ukraine, notwithstanding the economic turmoil and the devastating war in the east, offers private equity investors a large pool of entrepreneurs who are building the ‘new economy’.

“We back visionary entrepreneurs transforming the business landscape in Ukraine and the region, together building businesses that offer potential outsize returns in good times and are able to withstand economic downdrafts. We target export champions as well as domestic leaders. We are achieving solid results despite a difficult environment, so imagine what it will be like when the economy starts to rebound”, Koszarny tells bne.

She says Horizon is in the process of raising its third fund, following the Emerging Europe Growth Fund II and Emerging Europe Growth Fund. Its funds, which target investments in small and medium-sized enterprises in the $5mn-20mn bracket, have invested over $450mn in 29 companies during the last decade.  “If you have capital, then you have the pick of great companies,” says Koszarny.

Waste management

The sectors that private equity is targeting remain those during the boom years prior to the 2008 financial crisis: financial services, fast­moving consumer (FMCG) and industrial goods, IT, retail and e-commerce. Areas to stay away from are heavy industry and regulated businesses, where the country’s oligarchs operate, fostering the massive corruption that continues to blight this country.

“The sheer waste in this economy is staggering, there’s leakage in all senses of word,” says Dragon’s Bobrinsky. “There is a lot of low hanging fruit to change, and these new companies are doing that.”

What could be done to improve the investment climate in Ukraine? Improve the rule of law and get rid of the party-list voting in elections, which accounts for 225 of the Rada’s 450 seats.

Party lists allow political parties that cross the 5% threshold for parliament to nominate anyone, often-murky businesspeople seeking the blanket immunity from prosecution that comes with being an MP. “That’s how you get these shadowy influences. If you can change that, you get rid of one of the perennial problems in Ukrainian politics and business,” says Koszarny.