Opportunity and rationale
The Opportunity: to acquire high quality assets at compelling valuations.
Value Dislocation: Historically, EM countries experiencing political and economic crises typically observe significant value dislocations and strong subsequent recoveries. Ukraine’s situation is no different.
Political and economic risk substantially ameliorated. Aid packages are in place and reforms are underway.
This opportunity can ONLY be properly evaluated locally, both in terms of execution and analysis:
- Access to local securities paramount. No ETF available and few ex-UA traded assets.
- Local knowledge crucial due to managerial and ownership considerations. ESAM possesses over 50 years of EM and crisis investment management experience. ESAM has strong contacts and “boots on the ground”.
- Pipeline of opportunities already identified, including self-generated deals.
Compelling investment factors
Political risk attenuating: Active area of hostilities is highly localized and occupies only ~1/5 of Donetsk and Luhansk regions (<16% of GDP)
Economic risk ameliorating via monetary and trade support: Ukraine received aid from the IMF ($17b), World Bank ($750m), US ($1b in guarantees), the EU Commission ($14b), and trade relief from the EU Commission (up to €500m per year). S&P recently changed rating outlook from Negative to Stable.
Strong underlying fundamentals: Abundant natural resources, educated work force, low debt to GDP, many resilient and well-run companies.
Valuations Compelling: Credit spreads high and equity multiples low relative to historical and world levels.
Groundwork for recovery in place: After market crises, keys to recovery have typically included aid packages, political change, economic reform and currency devaluation. –All underway in Ukraine.
Potential return attractive: Over the last 30 years, annualized returns have averaged 45% in the 3 years after market crises.
Local knowledge. Boots on the ground: Professionals in Kyiv able to swiftly navigate Ukraine’s evolving and complicated legal and regulatory environment. ESAM personnel travel throughout Ukraine to perform due diligence on investments, as well as meet and engage in on-going discussions with business managers, political figures and legal experts.
Existing relationships. Extensive existing relationships with political and business figures, members of the press, national banking institutions, local securities brokers and professional networks. Perhaps more so than at other funds, ESCP’s advisory board will play a active role in pipeline generation and risk management.
Experience in similar cases. ESAM has over 50 years of investment experience across asset classes during recent EM crises. Taking advantage of recoveries including Russia, Argentina, Mexico, and Greece. Management can duplicate the same value approach and risk management policies in today’s Ukraine market.
Infrastructure in place. ESAM will work closely with Empire State Capital Partners (ESCP), a new local IB and BD comprised mostly of former Foyil Securities personnel. ESCP has an office in central Kyiv, full IT infrastructure and more than 20 people at its disposal.
Pipeline. As a result of our local knowledge, ESAM possesses a strong understanding of the most attractive existing value dislocations in the public markets. Network provides us a unique advantage to source private transactions at attractive rates of return. In addition to identifying attractive investments, our local knowledge informs us as to what investments to avoid.
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