Hope hangs on VC deals as Ukrainian buyouts disappear

Much as Russian private equity has diminished in popularity in the two years since Russian invaded Crimea in 2014, investors also appear to have shied away from Ukraine, in large part due to the risk associated with investing in a country that has been engaged in armed conflict on its home soil.

While Ukraine saw a high-profile private investment in late 2015 when George Soros’s Ukrainian Redevelopment Fund acquired an undisclosed stake in software developer Ciklum from Danish founder Torben Majgaard and private equity fund Horizon Capital, no buyout transactions by LP-backed private equity funds were recorded by unquote" data in 2016.

Historically I've done quite a few deals in Ukraine, but I haven't done a single deal since 2014" – Konstantin Kroll, Orrick Herrington & Sutcliffe

Anecdotally, this is the experience of industry advisers in the region as well: "Historically I've done quite a few deals in Ukraine, but I haven't done a single deal since 2014, which may well be a reflection of the market," says Konstantin Kroll, Moscow-based partner at law firm Orrick Herrington & Sutcliffe.

Kroll’s observation is supported by Olga Afanasyeva, CEO of the Ukrainian Venture Capital & Private Equity Association (UVCA), which was formed in the wake of the Crimean crisis in 2014: "I think the deals we are seeing are more investments in early-stage [companies] than larger buyouts."

Soros’s Ukrainian Redevelopment Fund has committed to invest up to $1bn in companies based in the country to support the economy. Subsequently, in 2016, the management team of Europe Virgin Fund span out from Dragon Capital and formed Ukraine-focused 4i Capital to manage the New Ukraine Fund – backed by Dragon Capital, the European Bank for Reconstruction and Development, the Swiss Investment Fund for Emerging Markets and the Black Sea Trade and Development Bank.

Despite these positive developments, most indications suggest institutionally backed buyout funds with a CEE remit are not seeing enough reward for the perceived risk in Ukraine, instead focusing their efforts on the countries in the region that benefit from EU membership and stronger economic performance indicators.

Venture undeterred
According to a report on Ukrainian venture capital and private equity activity compiled by UVCA, there were 60 growth capital and venture investors active in different forms in 2015, with an approximate $132m's worth of private equity and venture deals completed over the course of the year. In 2015 there was more than three times the deal volume seen in 2014, when activity had dropped to less than half that of the preceding year.

"There is of course the perception that Ukraine has a special economic and political situation, but investments in Ukraine are still going," says Afanasyeva. "In [UVCA], the growth of members in 2016 was around 36% compared to the previous year, and most of them are foreign investment funds. This is a sign they do invest in Ukraine and consider Ukrainian companies something they can invest in."

New members of UVCA include Silicon Valley-based HP Tech Ventures, the venture arm of Hewlett Packard – an indication of the sector that is attracting the most interest in Ukraine: software.

Afanasyeva says the Ukrainian software industry is booming, and investment into the space has grown substantially since 2013, attracting institutional funds such as Almaz Capital and Siguler Guff, as well as corporates such as Samsung. Despite the perceived geopolitical risk and the ongoing issues with corruption that saw Aivaras Abromavičius, minister of economic development and trade, resign in protest in early 2016, it seems investors are pressing on.

Afanasyeva says seed investors appear less worried about the geopolitical risk, partly due to the cloud-based nature of software development reducing the risk profile. "I think the VC industry is more independent of the political pressures," she says. "There are certain concerns, but still the investments are being discussed and being made."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• CEE
• GPs
• Performance
• Top story
• Ukraine
• Orrick
• Ukraine Crisis
• Venture