Launch of Ukrainian industry association shows market resilience

Ongoing tensions between Russia and Ukraine have been the subject of much column space around the world in recent months. Since a shaky truce began on 5 September, leaders around the globe have watched nervously as international agreements strain under the weight of an election by separatists in eastern Ukraine, and the EU becomes guarantor of negotiations for Russia to supply Ukraine with gas.

But in the private equity space, industry professionals have taken the bull by the horns in an attempt to dispel the negative press. In September, the Ukrainian Private Equity and Venture Capital Association launched, with the aim of promoting investment opportunities in Ukraine and improving the local investment environment.

"Some investors hear the news about Ukraine and think it is a bad time to invest here. But actually, to some extent, it is a good time to consider investing in Ukraine," says Jaanika Merilo, executive director of the association and former managing director at US Invest, a private equity investment company in the Baltics, Russia and Ukraine. "Of course war affects us, but it is 10% of the country, not all of the country. We have a new government that is very pro-reform and pro- Europe. Things are really happening and the market is developing."

Investment, not loans
One of the association's central aims is to attract inbound investment; a priority shared by the new Ukrainian government, according to Merilo. "The new government understands that inbound investment is crucial. What Ukraine needs is not only loans and grant programmes, but strategic investors too, especially in areas such as energy and other value-add sectors. You can only go a certain distance with European Union grants; you have to structurally reform the economy. The new government is full of very business-oriented people, so I think improving the investment environment will very much be on the agenda," says Merilo.

"We see the war in the news, but we do not see the opportunities. There is also a war in Israel, but actually the high-tech and IT sectors are doing really well. There are many venture capital firms in Ukraine that are continuing to make good investments in IT, too," she says.

Indeed, there have been deals in the sector this year, including Russian VC Life.Sreda's $1.5m commitment to mobile payments company Advice Wallet in August and a $3m series-A round for Ukrainian bus ticket platform developer Gill Business Systems, provided by InVenture Partners, Intel Capital and FinSight Ventures.

According to Merilo, of the six venture capital deals in the IT space this year, four were completed with co-investment from Russian funds, suggesting the market operates above and beyond political tensions. And this emerging trend could be set to continue as international LPs targeting Russia and central and eastern Europe, many of which are public funding bodies, curtail allocations to the country as a result of international sanctions.

"LPs are perhaps not so eager to invest in Russia, but they have a mandate for central and eastern Europe. You really feel it; we are seeing Russian fund managers looking at Ukraine," says Merilo. "Markets such as agriculture are quite developed already because of foreign investors. But there are other markets like production, manufacturing and infrastructure that really need renovation and investments. We have investors that are targeting Ukraine, investors that are considering the market and others that we would really like to introduce to Ukraine," she says.

The association currently counts 32 members, more than half of which are private equity and venture capital investors. Membership is expected to grow imminently, as the association partners with European counterparts including EVCA. But despite the optimistic approach, the association remains realistic: "The government is really looking at how to improve the investment environment, but it will take time. We have a new government that is reform-oriented and European Union-oriented. But to change such a big country and change the system will take time," says Merilo.

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