You're reading: Citing bleak investment climate, BG Capital closes Ukraine office

BG Capital, one of Ukraine’s leading investment banks, announced Oct. 31 that it is closing its office in Kyiv because of the negative outlook, both in terms of market activity and political environment.

BG Capital, the investment arm of Bank of Georgia, became the first major player to leave Ukraine after a number of smaller investment banks threw in the towel earlier this year. Insiders say some of the remaining big investment banks are downsizing their staff and freezing or cutting salaries amid tough conditions.

Risk-averse investors are pulling their money out of the local market and turmoil on global capital markets is pushing Ukrainian companies to delay plans of IPOs on the stock exchanges in London and Warsaw.

The increasingly bearish market has already claimed such smaller investment banks as Arsenal or Energy Capital. Now BG Capital, a Warsaw Stock Exchange IPO partner and Euromoney’s top Central and Eastern European investment bank in 2010, has decided to quit Ukraine.

Bank of Georgia consolidated control in the investment bank, formerly known as Galt and Taggart Securities, in 2005 in a plan to expand operations in key frontier markets like Ukraine, Belarus, and Azerbaijan.

Rebranded as BG Capital in 2009, the company focused on the local market, accounting for close to 10 percent of trading, and Ukrainian companies listed abroad, managing the Warsaw Stock Exchange IPOs of battery-maker Westa and coal producer Sadovaya Group.

BG Capital’s chief executive officer Nick Piazza, who also announced he was quitting his role on Oct. 31, said the investment bank’s parent company decided to focus on its home market, adding that its shareholders were concerned about the current political trend in Ukraine and anticipated losses on the back of recent market troubles.

“They left the market when they could without incurring any losses,” he said. “They had a negative view on the future of business opportunities here.”

Piazza said BG Capital had not held its parent back. “We’ve been profitable for the last three years, so there was no major financial problem,” he said. “It had to do with the outlook on making future profits here.”

Indeed, the local market has taken a turn for the worse, with the UX Index dropping 50 percent since its peak in March this year.

Vadym Samar, a former trader at BG Capital and veteran of the Ukrainian market, explained that the market saw a bullish run starting end-2004, which lead to a proliferation of hundreds of brokerage or trading outfits, only to be broken by market crashes in 2008, 2010, and 2011.

One of the main problems of the Ukrainian market, Samar said, was the lack of long-term investors, like pension funds, that would provide a cushion for the falls in periods of recession. As a result the market has shown the extreme levels of volatility more propitious to day-trading than saving for one’s retirement.

In light of past experience, BG Capital had pulled out of local trading prior to the August collapse. “We closed the local trading operations on July 28. From the day we’ve made this decision Ukrainian stocks have fallen around 40 percent,” Piazza said.

Meanwhile, a stagnant global economic environment and no internal drivers to be seen has the industry in a shroud of gloom.
“2008 was a bigger crash in absolute terms, but at the time we believed that it would be short, and that everything would be alright.” Samar said.
“Now in 2011, we also have a significant crash, but it is worse in terms of the number of brokerage companies closing down and the general outlook.”

He added that the worsening outlook can be felt throughout the industry, as funds are seeing their assets shrink, with expected firings and salary freezes. “I believe that 2012 will be worse.”
Experts also point to the market’s saturation. The UX currently has 182 exchange members, half of which are dormant and 20 of which no longer have trading rights. The current crisis thus presents a chance to make the industry slimmer and more efficient.

For others it is also an opportunity to grab up the talent entering the job market.

Igor Mazepa, CEO of Concorde Capital, a Kyiv-based investment bank that has hired part of the BG Capital team, said that his competitor’s closure would not affect the investment banking sector, but was rather an opportunity for those left standing after the crisis subsides.

“This is a great chance for those who are left to build up on good expertise and talent,” he said.

Kyiv Post staff writers Jakub Parusinski and Vlad Lavrov can be reached at [email protected] and [email protected]