“It’s not a country that many dare to touch or look at right now, but at the same time there is a very significant opportunity up for grabs.”

That is what drew Michael Fiebig, head of financial institutions equity at Swiss impact investor ResponsAbility Investments, to acquire Ukrainian Bank Lviv in July. The Zurich-headquartered firm, which operates exclusively in developing markets, invested through its SFr140 million ($140.4 million; €122.3 million) permanent capital vehicle ResponsAbility Participations.

Ukraine’s appeal may not be immediately obvious. Russia’s annexation of Crimea in 2014 and subsequent military build-up in the surrounding region is cause for concern.

“It’s a region which is a bit overlooked at the moment,” Fiebig says.

“Valuations are actually down and international banking groups have removed themselves from large parts of the Ukrainian market. There is an SME segment in dire need of financing.”

Limited partners have identified the scale of opportunity and few established fund managers as the biggest deterrents to investing in the region over the next two years, according to EMPEA’s 2018 LP Survey. But Ukraine and its neighbouring markets – not your typical private equity destinations – are on the up.

Slovakia and Bulgaria are in the top five fastest growing EU economies for expected real GDP growth in 2019, based on the European Commission’s spring 2018 forecast. Belarus and Moldova have both rebounded strongly from a dip into negative GDP growth in 2015, per World Bank data.

Nevertheless, a somewhat negative historical perception has equated to cheap deals. The median EV/EBITDA multiple for Eastern European buyouts completed from 2006 through 2017 was only 5.8x, the lowest globally, according to PitchBook.

Managers seem to be taking note. Private equity fundraising for Central and Eastern Europe climbed to €1.3 billion in 2017, the highest since 2014 and the second-largest sum raised post-2008, according to Invest Europe figures.

Investment in CEE’s most developed market, Poland, more than trebled to €2.5 billion last year – including CVC Capital Partners’ acquisition of Polish convenience-store operator Zabka for just over €1 billion in February 2017 – but so, too, did activity in Romania to €500 million. Dealmaking in Latvia climbed more than six-fold to €18 million and Hungarian investment doubled to €200 million.

Divestments were also healthy; Hungarian exit values climbed fourfold to €250 million, while Romanian and Slovakian exit values were both marginally higher than in 2017. Slovakian private equity generated €100 million of exits last year, compared with €7 million in the previous three years combined.

“These markets are more appealing for the reason that fewer investors are looking at them; in any given deal there will only be a small handful of people,” Kustaa Aima, managing partner at Baltic and Balkan investor KJK Management, tells Private Equity International. “Close to the EU the risk is much lower and more manageable compared to some emerging markets.”

The Luxembourg-headquartered firm – which was launched in 2010 by four former Danske Capital executives – is seeking up to €250 million for its third fund targeting private buyouts or stakes in publicly-traded companies across “frontier” Balkan countries such as Romania, Croatia and Slovenia, as well as the three Baltic states.

KJK Fund III held a first close on €138 million in September through a mix of insurance companies, pension funds and high-net-worth individuals from Finland, Denmark, Estonia and Lithuania. KJK Fund II, comprising €125 million across two sub-funds with 2012- and 2014-vintages, had generated a 2.14x and 1.99x net multiple respectively as of 30 June, according to Preqin. Competition is unlikely to be scant for much longer, with local financial players bolstered by CEE’s recovery now able to put more money to work in the region. Investors based in the region accounted for 24 percent of the €1.3 billion raised for it in 2017, compared with just 13 percent of the €900 million raised in 2016, according to Invest Europe.

Ukraine’s Horizon Capital is seeking $150 million for its 2017-vintage Emerging Europe Growth Fund III, which will invest in agribusiness, technology, media and telecommunications, and manufacturing across its home market and Moldova, per PEI data. Croatia’s Inverva Equity Partners is seeking €100 million for its maiden private equity fund, targeting markets such as Bosnia and Herzegovina, Montenegro and Slovenia.
The region is also attracting a different type of LP, with insurance companies providing 7 percent of CEE fundraising last year, having not invested there since 2014.

“Our local competition is more real these days,” Aima notes. “It took local private equity and trade buyers a while to recover from the crisis and for banks to start giving acquisition finance again.”