The political future of Viktor Yuschenko, the pro-Western president of Ukraine, may be unpredictable at the moment, but the private equity industry seems in no doubt that his reforms have made the country a more attractive place to invest.

Advent International certainly thinks so – the firm is set to open its first office there in September. Managing director Joanna James believes the opportunities outweigh the risks: “There's a slight divide between the Polishleaning west and the Russian-leaning east, so there's still some political risk. But the government isn't likely to interfere with the economy too much; it's keen to attract foreign investment.” Others may soon follow in Advent's footsteps, since most regional specialists are looking to increase their exposure to the country.

“People see Ukraine as a hidden gem”, says Natalie Jaresko, managing director of Ukraine-based buyout firm Horizon Capital. “Since the orange revolution, the market has started to recognise that Ukraine is a relatively homogeneous country of 48 million people on the border of the EU whose population is educated and has increasing purchasing power. It's hard to find such a substantial, fastgrowing market anywhere else.”

M&A activity in the country has been growing steadily, particularly in financial services. “About a third of the banking sector has been bought out by foreign firms, who have deeper pockets and lower cost of capital,” says Juresko. So far, take-private deals have accounted for a tiny proportion, but there are signs that this is changing.

And, as in the rest of the CEE region, funds already established in the country could be best placed to profit. Horizon, which has been making buyout and growth investments in Ukraine and Moldova since 1995, now manages more than €280 million across two funds. Jaresko says the market has become increasingly international. “The risks are no different from any other emerging market, but it's growing; there's been steady GDP growth for five consecutive years, and – conservatively – a 20 percent rise in disposable income.”

Not surprisingly, international firms are starting to take notice. Horizon recently brought in Warburg Pincus as a co-investor in IMB Group, a Ukrainian lender. “The situation's changing for deals over €50 million – global players are getting involved.”

As well as financial services, Jaresko thinks consumer goods, manufacturing and media are also likely to prove popular. “The bulk of deal flow is still expansion capital, though corporate restructuring and succession issues also play a part.”

Business is booming for Horizon, which recently made the first exit from its latest fund. It generated a return of almost six times its money from the sale of Shostka City Milk Plant, a Ukrainian cheese manufacturer. Jeresko says she is not too worried about competition. “A few firms are looking closely at the region, but the market is not terribly deep because of its immaturity. The bigger challenge is that globally, it's a capitalrich environment – it's easy for companies to do a private placement, where they get non-engaged minority shareholders. But private equity has an opportunity to come in pre-placement and help improve their transparency and processes, because then they can sell for much higher multiples.”

But she believes more reform is still needed, if private equity in Ukraine is really to flourish. “The legal system is still an issue. In the domestic financial sector the only true private equity funds are foreign, and there hasn't yet been the necessary legislation or pension fund reform to remedy this.”