Polar switches its focus from Moscow to Ukraine

Financial News

Jason Corcoran in Kiev

03 March 2008


The decision by UK investment group Polar Capital to relocate its east European operations from Moscow to Kiev comes amid rising interest among international investors in Ukraine’s economy.

Polar, which runs traditional funds and hedge funds, said the move was prompted by a lack of opportunities in Russia and the growing importance of Ukraine.

Investors are lured to Kiev by attractive valuations and improvements in corporate standards, despite its low liquidity and lack of transparency.

Anton Khmelnitski, a director of Polar, said: “Russia is entering a period of sub-par returns compared with historical margins, and some of the value has disappeared. Ukraine is insulated from the credit fallout and its stock market has been a star performer in global equities. The main index was up 135% last year, which was only bettered by China.”

Investors believe Ukraine will grow following its admittance last month to the World Trade Organisation and the announcement of its co-hosting the 2012 European football championships with Poland.

Polar will shortly launch a Ukrainian fund to invest $500m (€332m) in public and private companies at early stages and those launching initial public offerings. It plans to hire four analysts in addition to the two fund managers transferring from Moscow.

The manager has taken stakes in Ukrainian insurance company Oranta and locally listed property developer Dragon-Ukrainian Properties & Development. The group has also made money for its investors through a series of pre-flotation Ukrainian investments, taking stakes in companies shortly before they listed.

The new Kiev operation will primarily focus on property, domestic food, pharmaceuticals, high-technology companies and insurance businesses.

Khmelnitski said: “The property market is at the beginning of its cycle and there are a lot of obvious opportunities in food, consumer goods and the beverage market. Accession to the WTO is a milestone event and will be key to this economy.”

Polar cut the Russian exposure of its $220m Elbrus fund from 70% to 15% six months ago and has sold its holdings in blue chips, including Russia’s electricity monopoly UES and Golden Telecom.

Khmelnitski believes Ukraine will outpace Russia or any other market in a bull market or even during a global slowdown because it is “cut off from the international capital markets”.

Russian bank Troika Dialog has also set up an office in Kiev, where it has secured an asset management licence.

Stephen Cohen, chief executive of Troika’s hedge fund business, said: “We are managing money for a Ukrainian pension fund and looking at different opportunities. The political climate is friendly for doing deals and people want to believe the story. If it’s this good without any government, how good
can it be?”

Ukraine’s legislative programme is at a virtual halt under President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, who are in a coalition for the second time after elections last autumn.

But Troika’s hedge fund has zero exposure to Ukraine and Cohen believes Russia is a better play.

The Ukraine’s main stock exchange, the PFTS, has fallen 5.9% since the start of the year, compared with Russia’s RTS index, which is off by 9.1% – Cohen believes Moscow is undervalued.

Moreover, turnover on Kiev’s stock market is just $28m a day, compared with about $6bn on Moscow’s. Cohen said: “Liquidity is difficult. If you start talking about an investment, you prevent yourself from executing.”

Tom Adshead, head of research at Sito Capital, an emerging markets hedge fund manager with offices in Kiev, said: “It is a very illiquid market but there is great value from buying and holding stocks benefiting from strong domestic growth.” Sito recently launched a Ukraine fund with $50m under management, which is about 40% invested in banks and 40% in steel.

Sweden’s East Capital and Baltic investor Parex Asset Management have also dedicated Ukrainian funds offering foreign investors access to the market.

US-owned, Moscow-based, Pio Global has announced plans for three mutual funds in Kiev focusing on emerging mid-cap companies. Russian commercial bank Uralsib is also establishing retail funds, a segment that is dominated by local participants.

Ukraine’s gross domestic product rose 7.3% last year, beating original targets. GDP growth this year is expected to slow down only fractionally. The value of domestic funds is not yet measurable as a percentage of Ukraine’s GDP. This compares with 5% of GDP in Russia and 10% in the US.

Alexander Pertsovsky, chief executive of Moscow-based investment bank Renaissance Capital, believes a growing boom in the number of retail investors this year will help market conditions.

Pertsovsky said at a Renaissance Capital conference last month in Kiev: “Once the boom starts in Ukraine, the mutual fund and asset management sector will grow dramatically, helping to expand domestic liquidity.”