Clare Nuttall in Almaty -

Ukraine's main stock index shot up last year by 139%, but the shares of firms connected with the country's oligarchs did better, rising by over 170% on average.

Ukraine's leading businessmen are well connected and have amassed fortunes since 2000. However, following 2005's "Orange Revolution," they are turning to the West en masse partly to open up new markets, but more pointedly to buy some political insurance against re-nationalisation by the government. As they clean up and get ready to IPO their companies, the six dominant oligarch groups are expected to significantly outperform the rest of the market, Concorde Capital predicts.

Concorde has launched a series of indices tracking six of the country's largest and most powerful business groups, selecting groups with well-defined business strategies that include approaching the capital markets. Privat, which is structured around its key asset PrivatBank, has the most listed stocks of the groups tracked and is the second largest by total capitalization, with the highest free float capitalization. SCM, headed by oligarch Rinat Akhmetov, is the most politically influential business group in the country. The total market capitalization of its listed stocks is $21.6bn - the highest among the business groups - though the free float is just 3%. Also included on Concorde's index are the holdings of Viktor Pinchuk, son-in-law of the former president Leonid Kuchma; Konstantin Zhevago, whose assets are structured around his bank Finance & Credit; Konstantin Grigorishyn's Svarog Asset Management; and the Industrial Union of Donbass.

Of the total market capitalisation of Ukraine's PFTS exchange, almost half is made up by these six business groups. As of November 7, SCM companies accounted for 19% of the PFTS's total $110bn market cap; Privat represented 12%; Pinchuk's assets 7%; Grigorishyn's group and the Industrial Union of Donbas 4% each; and Zhevago's group 3%. "It would be no exaggeration to say that every portfolio investor in the Ukraine has group exposure," Concorde explains in its report entitled, "Oligarch Indices: replicating business group exposure."

This report reveals that four out of the six business group indices, which started from January 2006, have outperformed the PFTS index. The main distinguishing factor of those that performed well was their exposure to industrials; those that lagged behind had a higher exposure to basic materials.

Grigorishyn's group, whose listed assets include manufacturing companies Zaporizhtransformator, Sumy Frunze and Turboatom, performed the most strongly, with every one of its public stocks beating the PFTS in the first 10 months of 2007. Pinchuk also significantly outperformed the PFTS index. The indices for Privat and the Industrial Union of Donbass most closely tracked the PFTS index, while SCM lagged behind during 2006 before catching up in 2007, and Zhevago's group underperformed relative to the PFTS.

The indices also demonstrated that all the groups tended to be more volatile in their uptimes compared with the PFTS average, while being less volatile in their downtimes. Pinchuk's holdings have the lowest overall volatility. "Those seeking maximum diversification away from the market proxy will find exposure to the Grigorishyn and Zhevago groups useful, while exposure to Pinchuk provides the largest excess return for the volatility assumed," Concorde says.

Since the indices started in January 2006, all of the groups tracked have evolved dramatically. Having weathered the Orange Revolution, they have gone on to transform themselves into entities more closely resembling business groups in the West. In particular, each one has now defined its business strategy, and the public markets have become increasingly important as a source of liquidity. They are also bringing in the "big four" financial services firms to carry out audits of their consolidated financials.

"In the last two years, the structure of property rights has stabilized in the Ukraine," Concorde Capital's director of research Konstantin Fisun, told bne. "During the 1990s, they grabbed what they could during the Ukraine's chaotic privatizations. Now the large businesses have accumulated what they want and some are even divesting their non-core assets. By focusing on their core activities, they can create significant value. This gave us the idea for the investment index."

Viktor Pinchuk, for example, recently announced plans to diversify into high tech, while gradually selling his controlling stakes in companies in the industrials and basic materials sectors.

M&A activity on the part of the Ukraine's largest business groups is intensifying, with an increasing number of major cross-border deals taking place. SCM's Metinvest - the industry sub-holding for metals and mining - has agreed to acquire steel assets from Smart Group, while the Industrial Union of Donbass has acquired assets in Poland, Hungary and the US during the last three years.

The summer of 2007 saw the $420m IPO of the Ukraine's largest iron ore exporter Ferrexpo on the London Stock Exchange by Zhevago's Finance & Credit group. To date this has been the only instance of one of the Ukrainian business groups going public on a major international stock exchange. "Several more placements are expected. Akhmetov, Pinchuk and Zhevago are all planning IPOs. We plan to catch these assets before they float; it's very interesting to keep an eye on assets with a high chance of being part of a future IPO," says Fisuv.

IPOs coming up in the near future include Pinchuk's Interpipe, including Novomoskovsk and Nyzhnyodinprovsk, in the first half of this year, with steel producer DNSS, another of Pinchuk's assets, expected to list in late 2008 or early 2009. Meanwhile, Zhevago is planning to follow up the Ferrexpo flotation with IPOs of manufacturing companies AvroKraz and Stakhaniv Wagon, and possibly Bank Finance & Credit. Industrial Union of Donbas is expected to float its metal division in 2008 or 2009.

As yet, for many of the groups the listed portion of their assets is the tip of the iceberg. But the IPO of Ferrexpo is a sign of things to come. Having set their houses in order, Ukraine's largest business groups are looking to increase their value further, both through M&A and a greater public market capitalization.

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