Asset managers getting ready for future

by Roman Olearchyk, Kyiv Post Staff Writer

Nov 23 2005, 22:20

Photo by Serhiy Zavalnyuk

Dmitri Isupov, the fund manager for asset managment firm Orange Capital, previously worked in Moscow at a firm managing $1 billion in assets. He says opportunities are ripe for those working in Ukraine’s asset management sector. Companies are gearing up for an investment boom, and trying to attract Foreigners

Asset management companies are priming up for an investment bonanza in the wake of the Orange Revolution, which moved Ukraine onto investors’ radar screens.

Institutional and individual investors from abroad now consider Ukraine one of the most promising markets to invest in, despite continuing risks and concerns. The increased interest has fueled opportunities to establish investment funds that are bigger than ever before – and professional asset management firms to administer them.

The new firms are playing by Western rules, too. Before them, with the notable exception of SigmaBleyzer, many companies blurred the line between brokerage houses and asset management firms. The high standards of foreign investors are changing that.

Orange fever

Orange Capital Group, one of the newest asset management companies, is currently raising money for a Ukraine-focused hedge fund. Dmitri Isupov, the group’s fund manager, is enthusiastic about his firm’s chances.

“This business is developing rapidly because there is money to be made and lots of interest in Ukraine from investors,” he says.

“Where there is demand, there is also supply. Ukrainian companies are increasingly realizing that in order to compete internationally they need to open up their companies to become more transparent and raise capital by floating their stock or issuing bonds on the debt market,” Isupov adds.

Orange Capital, established just months ago, has already raised about $10 million from Western institutional and individual investors who expect nice-sized returns in Ukrainian equities and debt. The company hopes to raise in excess of $100 million for a fund dedicated to Ukraine by June of next year.

Orange Capital is not alone. A handful of Ukrainian investment firms have announced plans to establish funds of their own.

Some, like Orange Capital, will strictly focus on investments in Ukrainian securities, both equity and debt. Others, such as Kyiv-based Concorde Capital, expect big returns in Ukraine’s real estate market too. This summer, Concorde announced the launch of a $200 million real estate fund in tandem with real estate agent Colliers International.

There is lots of room for growth, according to Oleh Medvedev, executive director of Optima Capital, an asset management company based in Lviv.

“Last year, Poland’s asset management business accumulated more than $10 billion, compared to about $6 billion in Russia,” Medvedev says, adding that in Ukraine, that number is only in the hundreds of millions.

The liquidity issue

Despite excitement, some analysts aren’t sure that there is enough room for all the planned investment funds.

Daily trading on the PFTS, Ukraine’s principal trading platform for stocks and bonds, averages several million dollars daily. That’s a fraction of the $1 billion traded every day on the Russian market, not to mention on larger markets in the West.

Isupov remains optimistic. He says that as the market becomes more liquid – in other words, as Ukrainian companies open up and begin selling shares – the market volume will increase, creating room for newcomers. Ukrainian firms, he points out, are increasingly likely to choose bond and stock placements as a means of raising funds rather than borrowing at expensive rates.

Isupov is also counting on large Ukrainian firms to opt for IPOs on foreign markets next year, further increasing liquidity.

The very presence of foreign investors provides another impetus for companies to place bonds. Heightened interest from foreign investors means higher share valuations, which in turn means Ukrainian companies can raise more for each share they float.

Isupov adds that private pension funds will bring even more opportunities to the market. Many of Ukraine’s large factories – where tens of thousands of people work – are expected to launch pension plans and even provide medical coverage.

“When Mittal decides to establish a private pension fund for its 57,000 employees and potentially for their family members, they will have to hire professionals to manage it,” an upbeat Isupov added.

“The asset management business will flourish in Ukraine, without a doubt,” Isupov said, citing opportunities which will follow later in the development of the nation’s private pension business and mutual fund industry.

Oleh Medvedev, executive director of Optima Capital, a Lviv-based asset management firm, says that Ukraine’s asset management market is a good one for ex-pats to look into. (Serhiy Zavalnyuk)

Tricks of the trade

Asset management services have existed in Ukraine in various forms. But only now, amid escalating interest, is the industry taking on the traditional “civilized” form seen in developed markets, according to Isupov.

Influential Ukrainian businesses groups established asset management firms of their own to manage their Ukrainian assets, companies that were owned by complex webs of offshore vehicles.

The lackluster performance of Ukraine’s stock market and low demand for raising capital on the part of local companies has in the past restrained the development of the asset management business in Ukraine, Isupov said.

As a result, brokerage companies flirted with the asset management business amidst flickers of activity.

In developed markets, however, asset management companies and brokerage houses are kept separate to avoid conflicts of interest.

Brokerage houses buy and sell shares upon request and demand a fee for every transaction. Clients entrust asset management to buy and sell for them; these firms typically charge an annual fee of 3-4 percent, plus a percentage of profits made in some cases.

Foreign investors with strict requirements are helping to develop this healthy divide.

Orange Capital is structured as an asset management company only.

“We are structured like a typical hedge fund seen in the West,” Isupov said. Orange Capital’s hedge fund is, appropriately, called Orange Opportunity Fund.

“We will be one of the few traditionally-structured asset management firms on the market,” says Kyiv-born Isupov, who worked in Moscow in recent years at a firm managing $1 billion.

“I always wanted to come back home. Now, as investor interest increases, I have the opportunity,” adds Isupov.

“There is great potential here in Ukraine. I expect an investment boom in line with what was seen in the last decade in Poland and other Eastern European countries.”

Local breeds

While the lion’s share of cash making its way into funds in the near future is expected to come from foreign sources, Optima, which manages several million dollars largely of Ukrainian origin, expects more Ukrainians – and possibly even ex-pats – to entrust more money to professional asset management companies in the future.

“Little by little our citizens are beginning to understand that money is an instrument to make more money,” Optima’s Medvedev says, adding that a growing number of Ukrainians are eager to invest their money into funds that can offer returns competitive with the 11-17 percent interest offered on annual bank deposits.

Optima, which pumps most of the funds it manages into Ukraine’s domestic bond market and equity, urges foreigners earning salaries in Ukraine to tap into such opportunities.

Compared with so-called Western investors who don’t spend most of their time in Ukraine, “ex-pats have a clearer view of what is happening in Ukraine and whom to trust,” Medvedev says.

“A foreigner who works and lives in Kyiv, for example, can easily go out with his fund manager for coffee and stay in tune with the performance” of the fund, he says.

“We are seeking to attract capital into our funds from Western institutional investors too, but ex-pats should keep in mind that there are good opportunities for them to invest in Ukrainian funds too,” Medvedev says.