Investors look for opportunities in post-conflict Ukraine

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Asset managers are taking tentative steps to invest in Ukraine’s reconstruction, potentially providing the funds necessary to restore the country’s battered infrastructure and economy.

Kyiv officials have made several trips to London to promote investment in the country, which could cost about $349 billion to rebuild, according to World Bank and European Commission estimates.

Some investors are nervous about Ukraine’s record of corruption before the war and are unlikely to distribute funds until the conflict is over. But some asset managers are studying potential investments in Ukrainian and European companies, potential suppliers of much-needed materials and equipment, especially after Russia stepped up its attacks on Ukraine’s energy infrastructure.

“We need to be hopeful and ready,” said Alexandra Morris, investment director at Skagen Funds.

“It’s hard to think of investment opportunities in such dire circumstances, but for active value investors, a positive outcome of the war will present many opportunities. … We’d rather [act] sooner or later. “

Earlier this month, Ukrainian Deputy Economy Minister Oleksandr Gryban told delegates at the Ukrainian Infrastructure Forum in London that the country would “become one of the countries in the world that offer the most opportunities for investors”.

“We are working on political and military risk insurance vehicles and developing fund structures that attract private investment,” he said.

Last month, the Ukrainian government also signed a memorandum of understanding with BlackRock Financial Markets Consulting, which is independent from BlackRock’s asset management arm and does not engage in any investment activities, to attract investment for Kiev provide support.

At the Ukraine Investment Roadshow hosted by the Strategy Council, an agency representing European businesses, in London in November, several investors told the Financial Times that they were actively exploring investments in companies in Ukraine and neighboring countries.

Most of the funding provided to Ukraine so far has come from the government and public international financial institutions such as the European Bank for Reconstruction and Development, which has raised 1.4 billion euros since the war broke out in February.

However, the risk that Western governments will gradually reduce this support is driving the inclination towards attracting private financing.

Mykhaylo Demkiv, a financial analyst at Investment Capital Ukraine, a Ukrainian asset management and advisory firm, said: “I’ve heard that 2023 looks financially safe, but some rhetoric from the U.S. is worrying” as some U.S. politicians scaled back their support.

CrossBoundary Energy Ltd., an investment management and advisory firm focused on emerging markets, is working with four investment management teams to develop debt and equity funds focused on Ukraine. A cross-sector fund targeting small and medium-sized enterprises is targeting an initial $40 million capital raise, but could expand to $250 million.

“It’s going to be a push and pull,” said Scott Richards, the firm’s head of Eastern Europe consulting.

“We are seeing growing investor interest in Ukraine [military] Progress, then a pause or pullback as Russian infrastructure attacks significantly increase… I would expect investors to manage risk by initially targeting investments in western Ukraine, then pushing toward central or eastern Ukraine. “

Investors are particularly interested in infrastructure and property; Moscow has intensified its bombing campaign against the country’s critical infrastructure in recent weeks, darkening it. However, Ukraine’s existing agricultural and technological capabilities are also sectors with high economic potential.

However, until the hostilities subside, large financial institutions are wary of committing money.

“Until the war is over, it’s hard to expect significant investment. Without proper wartime insurance, any investor building a new factory will be worried that drones will fly in,” said agricultural investor and former partner at asset management firm East Capital Group. Said Aivaras Abromavicius.

The sector is primarily focused on individuals, family offices and experienced emerging market specialists. “It’s some brave people who want to take a chance,” said one investor who is exploring investing $20 million to $30 million in a multi-family office.

However, concerns about corruption and the rule of law could be obstacles. In 2021, Ukraine ranked 122 out of 180 countries on Transparency International’s Corruption Perceptions Index, and its judiciary faces allegations of weakness and inconsistency.

Ukraine points to its possible EU membership as evidence that corruption will recede. Economic Development Minister Yulia Svyrydenko said she planned to let investors operate under British commercial law to allay concerns about the country’s judicial system. Still, investors say President Zelensky’s peacetime administration will have a lot to prove.

“He’s been a great wartime leader,” said Richard Deitz, president and chief investment officer of VR Capital Group Ltd., an asset manager focused on emerging markets.

“The question is what will happen the day after the war? Will we have the rule of law or more idiosyncratic controls on business? Investors need to be confident that political risk will trend towards European norms.”

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