Ukraine’s IT sector: a new Mecca for emerging markets PE?

When people think IT outsourcing, they think Bangalore or Hyderabad or any number of tech hubs in South Asia. But Ukraine is rapidly emerging as a leader in competitive IT services, creating new opportunities for savvy private equity investors.

A.T. Kearney’s Global Services Location Index ranks Ukraine among the largest outsourcing markets worldwide.

The country’s IT sector, which now accounts for more than 3% of GDP, grew 150% in 2011-2015 and is estimated to reach $5.7 billion in value by 2020.

No wonder, then, that global IT players have turned to Ukraine as a base for their software-development centers. Leading PE firms have already taken advantage of this lucrative opportunity.

One example is GlobalLogic, a full-cycle software developer employing more than 12,000 worldwide, including 2,500 engineers across four R&D centers in Ukraine.

In 2013, Apax Partners acquired a majority stake in GlobalLogic, which boasts Cisco, Verizon, and Microsoft among its clients. Terms weren’t disclosed, but the transaction value is estimated at $420 million.

In 2017, Apax sold 48 percent of the company to Canada Pension Plan Investment Board, halving its stake in the developer. And recently Apax Partners fully exited GlobalLogic to another financial sponsor, Partners Group of Switzerland, in a transaction that valued the outsourcer at more than $2 billion and yielded a 5x cash-on-cash return for Apax.

While the GlobalLogic deal is a prime example of an M&A transaction between financial buyers in the software-outsourcing space, the recent announcement of Magento’s acquisition by Adobe in a $1.68 billion deal presents a case of a strategic investor buying out an IT-product-development company.

With more than 250 engineers in two offices in Ukraine, and nearly 450 more in other locations, Magento develops and supports its own e-commerce platform used by global clients ranging from Japanese cameras and imaging-equipment giant Canon to French fashion-footwear designer Christian Louboutin.

Magento is backed by the U.K. private equity firm Permira and Chinese investment company Hillhouse Capital. Hillhouse invested $250 million in 2017 and was reported to sell its stake to Adobe along with Permira, which is set to make a 5x cash multiple on its initial $200 million investment in 2015.

As the dust starts to settle after the economic crisis of 2014-2015 and Ukraine’s economy gains momentum, potential M&A opportunities for private equity in the country’s IT sector look abundant. Of 100 companies in the 2018 Global Outsourcing ranking, 18 were operating out of Ukraine, including 12 founded by Ukrainians.

Most of the outsourcers serve a set of global accounts ranging from Fortune 500 companies to smaller firms, allowing them to generate recurring revenue streams and maintain healthy operating margins, while enjoying low capex requirements.

While Ukraine’s IT market remains below the radar for megafunds such as Blackstone, KKR, Carlyle and Apollo due to relatively small ticket size, mid-market PE firms may want to consider riding the wave of the country’s fast-growing IT sector.

Price tags for Ukraine-related software developers are affordable and vary across the spectrum — from $5.5 billion and $1.3 billion in enterprise value for NYSE-listed EPAM and Luxoft to an estimated $50 million to $750 million for smaller privately held firms.

As valuations go through the roof in developed markets, now is a good time to take a closer look at emerging peers. Smart PE investors will move fast, while Ukraine’s IT sector is still at its lows, and wait for the “carry” to ripen.

Nick Gaidai is an MBA candidate, Class of 2019, at the Wharton School of the University of Pennsylvania. He previously was investment director at Diligent Capital Partners, the Ukraine mid-market PE firm. He also served as adviser to the prime minister and presidential administration of Ukraine. He can be reached at +1 267-506-5501 and