ICU was first set up in 2006 and has now grown to become one of Ukraine’s largest fund managers. Makar Paseniuk and Konstantin Stetsenko, the two managing partners at ICU, started by focusing on distressed debt but have since expanded to include private equity, investment banking, asset management, and venture capitalism.
ICU has been on the ground throughout despite the events of 2014 and has been able to grow its market share as many international firms retreated during that period. Makar Paseniuk believes there is still $15bn of loans that the state needs to auction and with the reforms of the slowly bear fruit, international investors are once again looking at opportunities to invest in Ukraine.
ICU’s flagship fund, the CIS Opportunities Fund, covers the whole CIS region as Ukraine’s equity market remains pretty small, has generated returns of 18% net of fees since it launched in 2009.
The firm has about 30 percent market share in the local fixed income market after almost a decade of investing in distressed debt according to Paseniuk. They were the only buyers there for a while as banks started rethinking their strategy during the events of 2014 and 2015 and were selling the banks or selling their corporate exposure.
Distressed debt remains one of the most significant asset classes in Ukraine with financial institutions accounting for the bulk of them. Paseniuk says that there were more than 180 banks in Ukraine not so long ago and that has gone down to 80 banks as the rest are now under the control of the Ukrainian deposit guarantee fund. He adds that the state is sitting on some $15bn of loans which is a big number for Central and Eastern Europe, almost comparable to Italy or Spain and is a great investment opportunity.
The government has been selling down the debt periodically and the trend ICU have noticed is that these auctions have increasingly become more competitive as there’s now more interest from international investors.
Ukraine is still in its nascent stage in opening up and has a long way to go, but Makar Paseniuk is optimistic as Ukraine is expected to launch a western style private managed defined contribution system as part of the pensions reform, which will boost the Ukrainian asset management industry and in turn, transform the capital markets industry.
ICU has, in the meantime, also set its sights beyond finance into the budding startup sector as Ukraine is now home to one of the third largest IT outsourcing sectors behind China and India. Paseniuk said that more than 13 percent of Ukrainian graduates have degrees in exact sciences or technology and given the interest in tech startups globally, expects Ukraine to play a bigger role in it.
Commenting on energy, Makar Paseniuk said that Ukraine has historically imported much of its energy supply from Russia despite having one of the largest natural gas reserves in Europe. He pointed to the fact that the gas prices were low then and there was no incentive to invest in exploration and production, but that isn’t the case now as Ukraine has to buy gas at international rates. This should encourage potential investors to look into it and the government is also looking to auction production rights sometime this year or next.
Agricultural land reform would bring another investment opportunity according to Makar Paseniuk as Ukraine is the second largest country in Europe. He believes the government should lift the moratorium on agricultural land to make land an asset worth investing in. Given the size of the country, this represents about 10 million hectares and based on ICU’s calculations, the state-owned land could be valued at approximately $15bn. For Ukraine, this number could potentially shift the Ukrainian macro story as the number is bigger than all the state-owned assets set aside for privatization.