A responsAbility-managed private equity vehicle has just taken a majority stake in Bank Lviv, Western Ukraine’s leading regional bank (see media release). This step follows the approval of the transaction by the Ukrainian National Bank and nine months of intense collaboration between the responsAbility investment team, the bank’s owner and a new management team brought in to boost the further development of the institution. Michael Fiebig, Head of Financial Institutions Equity Investments, explains why Bank Lviv perfectly fits into the responsAbility portfolio.
Michael Fiebig, why did you want Bank Lviv in your portfolio of financial institutions?
Bank Lviv is a regional bank active in Western Ukraine, based in Lviv, a city with a great history and a lot of economic potential, which is starting to show strong growth dynamics as a region in Ukraine coming out of years of difficulties and crisis. We’re very confident that this bank can grow significantly larger in a market where other banks have entirely withdrawn from financing small businesses and the agricultural sector, which is very strong in Western Ukraine.
“After years of difficulties and crisis, Western Ukraine is starting to show strong growth dynamics.”
What is the typical target audience of the bank, what sort of clients does the bank target?
The bank is a truly regional player within Ukraine - already the name Bank Lviv demonstrates that. On the deposit side, it is carried by a large number of private individuals and companies in Western Ukraine, that have experienced it to be a very stable player and a safe place to put their money. On the lending side, we are now developing with Bank Lviv a very strong focus on small business lending, and a particular focus on agricultural lending. We see a lot of potential, and this will be the main profile of the lending client base of the bank. In addition the bank will continue to serve private individuals on the lending side.
How to invest? INVESTMENT PRODUCTS
“We see a lot of potential in SME and agricultural lending – and this will be the bank’s main focus.”
While you usually aim at taking minority stakes, you have opted for majority in Bank Lviv. Why?
You are right: This is an unusual project in that we are much more actively involved in day-to-day operations than we would usually be, and this fact is reflected by a stronger ownership role. When we enter into equity investments, we look for partnerships. We look for strong co-owners, and we look for strong management teams. In this case, we are entering into a partnership with Margeir Petursson, an Icelandic individual – a chess grandmaster, by the way – who has lived in Lviv for many years and has been the sole owner of Bank Lviv so far. Margeir Petursson was looking for a partner to further develop the bank. When we teamed up, we started with significant changes to the management by bringing in a new team. The new management team includes expertise from the region, in particular in SME banking, and works very well in combination with the existing managers. Furthermore, we have significantly expanded the business strategy.
“When we enter into equity investments, we look for partnerships. We look for strong co-owners and strong management teams.”
What does it mean to be involved in day-to-day operations?
Given that the new management team, in very close coordination with Margeir Petursson and ourselves, has made a contribution to almost every area of the bank – delivering new technology, new approaches, new processes – we are much more involved in decision making than in other cases where, as a minority shareholder, you would only go to quarterly board meetings. Here, we are basically talking about a weekly contact with the bank to take significant decisions with the bank.
The investment opportunity FINANCE
“The new management team has made big changes to almost every area of the bank.”
Does the bank appreciate having the support from responsAbility?
Yes, this really is a three-way partnership between Margeir Petursson and ourselves as owners, and the management team. The management services are delivered by a Frankfurt-based company called Inspiring Development which is mainly a team of former bankers from a banking group which has built very strong SME banks in Eastern Europe over the last 20 years. This team of specialists is a very important ingredient to this investment, because they can deliver on the strategy which we and Margeir Petursson strongly believe in.
“The management team consists of very experienced specialists that can deliver on the strategy.”
responsAbility is active in impact investments, always targeting development impact. How can this investment contribute to development in Western Ukraine?
The bank will contribute in many ways to development in Western Ukraine. Our ambition is for Bank Lviv to be a reference example of what a solid, clean bank can look like in this difficult market environment. Another ambition, as mentioned before, is to serve as many SMEs as possible in the region and to help them to grow, to create jobs, to generate income in this region of Ukraine. We foresee this to be the main impact of this development.
“Our ambition is for Bank Lviv to be a reference example of what a solid, clean bank can look like in this difficult market environment.”
Why did other banks withdraw from the SME and agricultural segments, and why is Bank Lviv certain that they will succeed with this strategy?
Ten years ago, we saw very large locally owned commercial banks in Ukraine, and they were growing fast. We also saw some of the European banking groups enter Ukraine over the last twenty years and become active in Ukraine. However, as crisis hit the country and the region, many European banks withdrew or reduced or refocused their activities in Ukraine, reducing availability of financing for the agricultural and SME sectors. Some of the largest local commercial banks actually went into deep trouble and had to be rescued by the government. As a consequence, they had to focus on restructuring their business, and basically are not very active these days. All of this has left a vacuum which Bank Lviv intends to fill.
How we measure impact DEVELOPMENT IMPACT
“As crisis hit the country, many banks withdrew or reduced their activities in Ukraine, reducing availability of financing for the agricultural and SME sectors.”
Ukraine has just come out of crisis – in many people’s mind it is still a region where investors would be cautious to place funds. Why are you so certain this is a good investment?
Ukraine is an environment where you have to expect volatility and some degree of crisis. At the same time, you can also expect a high degree of entrepreneurship and resilience of the local business community. To be prepared for a lot of challenges, you need a really experienced management team which has known and seen and handled difficult situations in the past – and we have that. And you need to remain cautious, conservative, very risk aware and with very strong risk management mechanisms in place to capture the opportunities which are there in this market. We see this strength in managing risks in Bank Lviv.
“Ukraine is an environment where you have to expect volatility, but also a high degree of entrepreneurship and resilience.”
How does this latest acquisition fit into the existing equity portfolio of financial institutions?
Overall, we are looking at countries and markets where there is high growth potential; and we are looking at businesses that can capture that growth potential in a proactive way. When you look at our portfolio, we are investing in different types of business models. Some of these business models are fintech and at the forefront of digital innovation. Others, like Bank Lviv, are focusing on delivering solid SME financing solutions in markets that show big growth potential. In this sense, Bank Lviv perfectly fits into our global portfolio which spreads from Latin America, to Africa, to South East Asia, but also covers Eastern Europe and the former CIS.
“Overall, we are looking at markets where there is high growth potential; and we are looking at businesses that can capture that potential in a proactive way.”