Practice Areas Review: Private Equity

Private Equity Financing in Ukraine

Oleksander PLOTNIKOV

Oleksander PLOTNIKOV

Partner, Arzinger



Eurasia Business Centre, 75 Zhylyanska Street,
5th Floor, Kiev, 01032
+380 44 390 5533
+380 44 390 5540

Arzinger is an independent law firm headquartered in Kiev with regional offices in Western and Southern Ukraine. For over 10 years now Arzinger has been among the leaders of the legal business, providing high-quality legal support to clients throughout Ukraine. Top representatives of international and local business are among the firm’s many clients.

Arzinger follows high standards of legal services and is an advantageous partner in view of its great experience in a wide range of industries and legal practices: M&A, corporate law, real estate and construction, antitrust and competition, litigation and arbitration, IPR, tax, banking & finance, PPP, public procurement, labor law, regulatory, private equity/investments, capital markets and IPOs. We serve clients operating in financial services, energy, mining and natural resources, pharmaceuticals, food & beverages, investment banking and corporate finance, telecommunications, retail & leisure, hospitality, aviation and automotive, agriculture, insurance, and infrastructure & transport industries.

Arzinger employs highly-qualified professionals with vast hands-on experience in a wide range of legal matters, deep knowledge and understanding of the local market, international education and background. The firm has a team of over 60 seasoned legal professionals led by 5 partners. All of them are acknowledged among leading experts on the Ukrainian legal market and are recognised by reputable international and local rankings. As a result, Arzinger can offer extensive legal assistance to effectively support a variety of complex and challenging transactions, including cross-border matters.

The firm renders tailor-made legal services of unsurpassed quality to meet the client’s expectations. The following are among Arzinger’s many clients: Adecco, ADM Ukraine, AGI, Alcon, Altcom, Alfa Bank, BNP Paribas, Bunge, Commerzbank AG, Credit Agricole, Credit Suisse, CSAV, Deutsche Bank AG, EKF, Erste Bank, EBRD, Euralis, Ferrero, First Ukrainian International Bank, GLD, IFC, IKEA, ING, Leroy Merlin, Medcom, Nestle, OTP Bank, Peugeot Citroen, Porsche Holding  (Volkswagen Group), Prominvestbank, Puratos, Raiffeisen Bank Aval, Raiffeisen Bank International, Raiffeisen Leasing Aval, Sandoz , Sineat, Softline, Takeda, Turkcell, UkrSibbank, UniCredit Bank, Vienna Insurance Group, Yandex, Venbest, Rosneft, Ministry of Justice of Ukraine and others.

With a view to providing its clients with high-quality services Arzinger has established successfully-operating French, Austrian and German Desks in the firm, which efficiently serve French and German speaking clients in Ukraine as well as Ukrainian and Russian companies operating on international markets.


Due to the current political and economic situation in Ukraine foreign investors are quite reluctant to invest in Ukrainian business, as evidenced by the decline in the level of foreign investment. 

At the same time, the Government has announced “big privatization” of state-owned banks and enterprises in the near future. And, with a view to prospects for the Ukrainian economy, these plans may be very attractive for international business and could restore the interest of foreign investors in Ukraine.

It is evident that Ukraine has made a final choice towards the European Union and aims to meet the expectations of foreign partners. Though the speed and efficiency of declared reforms are not largely satisfactory, it would be fair enough to say that there is clear positive dynamic in changes within the country. And in some sectors of public life the reforms that have been implemented have already proved to be quite successful.

In order to achieve substantial growth and further development on the international market in the current turbulent environment, Ukrainian business requires significant modernization of production facilities, development of a transparent corporate structure and introduction of international management standards. This requires sufficient financing and the involvement of the relevant experts to ensure proper implementation of all plans.

While banks are improving their liquidity and getting rid of distressed assets, private investment funds may become an extremely useful partner for Ukrainian business due to their ability to provide both financial resources and profound expertise in a particular business. Positive local examples show that cooperation with leading private equity funds may give an impressive impulse to a company’s development not only because of financing but by bringing unique know-how, a broad view and new contacts for business.

At the same time, Ukraine is quite a complicated jurisdiction for foreign investors, and has a number of features which anyone should be aware of prior to arriving in the country for doing business, just to be ready for certain difficulties.

When talking about relations with potential Ukrainian business partners, the following risks should be outlined: 

— false financial statements;

— division of the business into several legally unrelated parts (real estate, production facilities, operations, trade);

— use of SPVs in various jurisdictions for tax optimization;

— financing of non-core businesses by funds raised for the core business.

I am not saying that all these features are relevant to all or the majority of Ukrainian companies. However, notable recent cases connected with insolvency of big Ukrainian companies show that, unfortunately, famous brands and the previous reputation of shareholders do not guarantee clean conduct of business and fair relations with business partners and creditors.

The formula for minimizing possible risks is well known, though it’s sometimes ignored in practice. A potential target must be examined thoroughly by experts before any deal is concluded and further permanent control should be established. It should include:

— studying the target’s corporate structure and restructuring, if necessary, before concluding the deal;

— conducting an independent audit;

— appointing an independent financial supervisor and implementing an efficient management reporting system;

— establishing good relations with mid-level management;

— establishing close relations with banks that finance the business.

It is fair to note that most representatives of local business are quite resistant to external influence and reluctant to share business with investors on a pari passu basis. And this may cause a problem, since Ukrainian realities require thorough control over business and investments to protect them. Unfortunately, save for some exceptions, the culture of communication with investors and reporting to them remains at a very low level.

The specifics of the Ukrainian market require permanent presence of a local team on the ground. As follows from the experience of investment funds operating in Ukraine, the presence of a professional local team and deep industry expertise is a prerequisite for successful work in Ukraine.

Another factor that complicates the work of investment funds in Ukraine is imperfect legislation that does not adequately protect the rights of investors and creditors. In this respect, a team of qualified lawyers is a must for anyone considering any business activity in Ukraine. In addition, in order to compensate loopholes in local legislation, relations with Ukrainian business partners should be formalized through foreign jurisdictions based on contracts governed by foreign law (English law in most cases).

As practice shows, the existence of agreements with direct beneficiaries of the business considerably reduces the risk of fraud on their side, or at least allows investors to effectively protect their rights. The main purpose of such agreements is to obtain rights of direct claims against beneficiary owners of the business and their assets in the event of any conflict. This may be a heavy argument in resolving any conflict situations with local business partners.

Apart from capital contributions, private equity funds sometimes provide financing to Ukrainian companies or offshore SPVs in the form of loans.

As already mentioned above, equity relations should be governed by English law and, as a rule, require execution of Shareholders Agreement, Put Option Agreement, etc.

With regard to securing repayment of loans, it should be taken into account that Ukrainian currency control regulations are quite tough and significantly narrow the possible ways to recover loans. Furthermore, in order to have an adequate picture in case of the borrower’s default, it is absolutely necessary to proceed from the practical possibility of efficient enforcement of various security instruments. Unfortunately, most of the security instruments commonly used in international business do not provide efficient protection to a foreign lender in Ukraine. For example, such agreements as pledge of receivables, pledge of rights to bank accounts, pledge of rights under various commercial contracts prove to be useless in case of default. I must admit that quite often a situation transpires where a creditor has around ten security agreements, none of which can be used to recover at least part of the disbursed funds. This situation brings us back to the thesis that a skilled and experienced local team supported by experienced local experts (lawyers, auditors etc.) is essential for successful operation of private equity funds in Ukraine.