Managing Partner of Capital Times, which has been operating in Ukraine for 15 years, spoke about the development of the M&A (mergers and acquisitions) sector, international investors' attitudes toward Ukraine, and what is required for rapid economic growth.
- How has the Ukrainian M&A market evolved over the last five years?
- The market was at its lowest point in 2013-2014. It has been rebounding and developing during the last few years. Whereas 73 M&A transactions were completed in Ukraine in 2016, the number fluctuated around 100 throughout the next two years. The number of transactions surpassed 140 in the year preceding the pandemic.
The Ukrainian market niche is defined by relatively low competition. It is not as developed as it is in richer countries. In 2020, the total volume of the Ukrainian M&A market totaled $ 1.2 billion.
- How did the pandemic affect the M&A market's activity?
- I wouldn't say the pandemic had a significant impact. When comparing 2019 and 2020, we can see that last year there were around 15% fewer transactions in Ukraine. In terms of sheer numbers, it's 144 to 124. However, in a world where the market is currently breaking records, public corporations were given a very high evaluation.
- What is the primary reason for Ukraine's exclusion from this boom?
- The market in Ukraine is still in its early stages. As a result, it is accompanied by risks. M&A activity is much lower due to Ukraine's lack of integration into global economic systems. Our country is not a member of the EU. In recent years, the market's development and the uncertainty associated with the war in the east have stifled growth.
The country's investment climate, as well as market infrastructure, both have an impact. This, obviously, includes the development level of the financial or stock market. Furthermore, investors are concerned about the absence of reforms and the weak judicial system.
A significant disadvantage is that, besides family offices of foreign corporations, Ukraine only has about 20 funds that raise money and invest in a business, and that is a relatively small number. These companies are active market participants who generate demand for businesses, as well as execute their evaluations and negotiations. There are 5-10 times as many similar funds in Poland or Germany.
All of this, when combined, makes the Ukrainian market less appealing to international investors than the markets of many Western countries.
- How crucial is corporate publicity in the market's development? Could the presence of a stock market help in reviving the market?
- We conducted research on the subject. The amount of money that may be invested in Ukraine if the majority of the enterprises went public ranges from 17 to 30 billion dollars.
How does it work? According to estimations, Ukraine's GDP in 2021 will be $170 billion. If we analyze the markets of neighboring countries having effective stock markets, we may estimate that the capitalization of businesses in Ukraine might reach around 40%.
The percentage of shares traded on the stock exchange is around 25%, and this amount is credited to the companies' accounts. This equates to a minimum of $17 billion.
This entails new jobs, taxes, and salaries. When these factors are combined, they may produce an ambiguous indication of economic development. Imagine what would happen if Ukraine's economy grew at a rate greater than 10% for several years in a row.
- What is required for this to actually happen?
- The market's infrastructure is built by the state. Government establishes the legislative grounds and the rules of the game. The government should be the primary agent of change. There would be a direct result if there were more actual steps taken instead of Prime Minister Denis Shmygal's statements regarding the development of the stock market.
The initiative must start at the top and work its way down. The government should support market participants. As we've been going through a time of the unification of legislation with the European one for the past 7-8 years, there ought to be mechanisms that help enhance the market rather than narrow it.
- In Ukraine, small-scale privatization was carried out successfully last year. It is anticipated that the big privatization will follow this year as well. How big of an impact will these processes have on the M&A market?
- Certainly, this will spark some activity. These are the proper measures and approaches to shaping the investment landscape and attracting investors eager to buy and upgrade enterprises.
However, privatization is only one of the M&A market's directions. Fundamentally, it is necessary to improve the investment climate, attract direct investment, provide conditions for new investment funds within the country, and facilitate the improvement of the stock market.
- Which sectors in Ukraine are most appealing to international investors?
- If we look at the M&A market, the TMT sector (technology, media, and telecoms) became the most active in 2020 as a result of international investors' interest in local companies. Last year, the IT sector accounted for 35 of the 124 M&A transactions. Foreign investments account for about 60% of all transactions.
By the end of 2020, 22 Ukrainian startups had raised over $ 125 million in funding. The acquisition of a leading Ukrainian telecom provider Volia by Datagroup in 2020 was a defining moment.
Growth is observed in the food processing sector as well. It is directly linked to the start of privatization - 17 transactions for the sale of Ukrspirt assets were finalized. The privatization of more than 30 independent units of the Ukrspirt continues in 2021.
The agriculture sector was one of the least hit by the COVID-19 pandemic, allowing it to maintain its position at the top of the transaction list.
The quantity of transactions in the energy sector has dropped drastically. Particularly as a result of a "green" energy tariff reduction and Ukraine's failure to meet its obligations regarding payments to investors.
- Please, tell us about the most noteworthy cases that your company has worked on.
- We finalized a deal last year between OREXIM and Glencore Agriculture, the world leader in the production, processing, and export of agricultural products, for the sale of the largest maritime terminal in Ukraine for the transshipment of sunflower oil Avery.
The other significant case was the investment for the construction of a massive grain terminal by Orexim, wherein we attracted a major investor - POSCO Daewoo.
This project may well be considered a showcase not just for us, but also for the market. For the construction of a grain elevator, we have raised over €30 million in financing. We executed the deal from start to finish, assisting the company in overcoming all obstacles.
Following that, OREXIM assigned us the task of finding a strategic partner to ensure cargo traffic. This is critical for the project's ROI. Before choosing POSCO and assuring its involvement in the terminal project from 2018 to 2019, we consulted with more than 10 possible partners.
We provided assistance throughout the acquisition of the IPost crowdsourcing platform by Nova Poshta.
Our portfolio includes 33 major closed deals and more than 170 successfully accomplished consulting projects.
- What makes your company's services stand out?
- Companies rarely employ M&A tools. For many, it is a once-in-a-lifetime experience. To ensure the success and efficiency of the process, it is important to engage an advisor who has relevant expertise, knows how to undertake complex negotiations, work under pressure, and so on.
Because the market in Ukraine is still in its early stages, many people do not recognize the benefits of professional consultants. In the financial market, we are comparable to doctors. Self-medication is, surely, possible, but when it comes to something serious, it is best to seek expert advice. We both play much the same role.
We have worked with a variety of teams. And as result, working with us is basically a purchase of experience and expertise. This is an opportunity for any company to close a deal with the least number of errors possible.
It is critical to accurately evaluate the company at the outset, organize all processes, and perform Due Diligence (a procedure for detailed independent verification of the investment object, carried out on behalf of the investors).
We assist in coming to an agreement on the key terms of the deal in order to reach a reasonable price. Its success is determined by the price of the object and the quality of the deal's terms design. In 40% of the cases, the price of the M&A transaction cannot be agreed upon. We execute in-depth market valuation analysis and assist in reaching a compromise.
Once Due Diligence has been executed properly and a reasonable evaluation of the company has been developed, there is only work for lawyers to finalize the transaction. For example, we supported Intellias and Horizon Capital investment case. The period from the initial kick-off to the signing of the papers lasted 4 months due to Capital Times's earliest possible involvement in the deal. We joined at the stage of discussing the fund's interest, and after one month, we launched the Due Diligence process. With the proper structuring of the deal, its final value turned out to be higher, and a professional eye and expertise enabled us to optimize other terms of the deal for the customer benefit. As a result, all participants were satisfied.
- When comparing the M&A markets of Ukraine and Belarus, where you also work, where does it prove to be more effective? How does the market function in a political dictatorship?
- It is not quite appropriate to compare the two markets. The Belarussian market is substantially smaller. Unfortunately, given the current political climate, working in this industry is becoming increasingly challenging.
In Ukraine, a major portion of the economy exists in the "shadow." This scares off large institutional investors.
There is no such thing in Belarus though. This aspect is frequently decisive for large Western investors. The reason why foreign investors do not queue in Belarus is linked mainly to political issues.
Capital Times has been providing investment banking and investment consultancy services in the Ukrainian market for 15 years. Throughout this period, the company has closed 33 deals and accomplished over 170 consultancy projects.
Capital Times offers services such as selling a company or a stake of a business, buying a company or a stake of a business, optimizing value and expanding a business, attracting a financial and strategic partner, attracting financing, and corporate governance. All processes related to M&A transactions are supported.
The team consists of 30 members.
Capital Times has two offices, one in Kiev and one in Minsk, and is part of the Globalscope Partners network, which has over 50 offices worldwide. The company is now focusing on the M&A sector and supporting businesses for this process.