Dear Friends and Partners,
VI2 Partners is happy to share with you our recent newsletter on the most important developments and economic trends in Ukraine.
Mind September/October for a serious stock market correction
The World is developing fast from a post WW2 liberal world order into a Nationalist Pre-Fascist World Order. Unfortunately, the President of the United States has hijacked the GOP and is leading this movement with an evil determination; the US has effectively stopped to be an advocate of human rights, a liberal world order, free speech, and media, strengthening of the rule of law.
This changing US role in the World will have dramatic consequences in the coming years and decades, and we should be prepared that we are heading into a post-democratic age. It gives an excellent pretext for other political leaders/movements to abolish inconvenient democratic standards. And it will have a significant impact on global trade and investment flows. These developments happen slowly but steadily while being blurred by the amount and speed of new scandals and while societies wrongly and dangerously get accustomed to the new normal.
Typical signs of a Pre-Fascist political order (and recent examples) are:
This erosion of global democratic norms and safeguards takes place, while the economy is booming – watch out for the looming recession. On a populist foundation, where masses have smelled blood and have been whipped for aggression against media, foreigners, political opponents, worse developments might happen. Pre-Fascist World Order implies that we are on the verge to a Fascist World Order. Unfortunately, the next recession is written on the wall:
Mind September/October for a serious financial market correction. Cash is king. An un-orderly Brexit caused by an incompetent UK Government and a reckless Tory party will only be an additional footnote in this scenario.
By Marc-Milo Lube and Alexei Chernyshov
VI2 Partners GmbH
When John Wayne entered the Saloon in his famous Hollywood Western movies, the gangsters knew he was ready to shoot first and ask questions later. Consequently, in most situations, he did not have to shoot at all. Bad debt business is like a real-life Western movie: exciting, nothing for the faint-hearted, sometimes dirty. And when your opponents arrive with knives, you better have your gun ready and unlocked.
The Non-Peforming-Loan (NPL) Saloon in Ukraine is wide open. With a 56% NPL ratio of the total countrywide loan book and a volume of close to USD 20 billion, the Ukrainian NPL market deserves an in-depth investigation from institutional investors as well as workout companies. Most of the NPL volume is concentrated within the corporate sector (> 80% of the NPL volume) and is highly covered with underlying assets, and therefore interesting for a workout. Both for the Government, the National bank, and supranational institutions, the clean-up of the NPL portfolio is a priority, as it acts as a congestion to the credit system and slows down new loan issuing and economic growth. Dynamics in the sector will be high in the coming 2-3 years and rewards high for the successful players.
Bad debt business is very simple. A debtor is not able or does not want to pay back the principal and/or interest to his lender(s). The cheapest and easiest way out is most of the time not taken, namely a co-operative agreement on a restructuring of the debt or the forfeiture and subsequent sale of an asset covering the total of the debt. The modern game theory has many explanations for this situation: it is a mixture of greed, misplaced morality, chicken run, compliance frameworks, criminal behavior and personal egos.
Enters the outside (who is sometimes inside!) investor and buys the debt from the lender to go for the extra yield, either interested in a fast cash payback of the debt or in an appropriation of underlying assets. This is the big greed game, where yields are over-proportional but difficult to realize. Having fought on all fronts of the spectrum, there are some lessons learned to share for lenders, investors, and debtors. Here are some general observations in the field of bad debt business, which are relevant for all players.
All successful wars start with thinking through the end-game. It is astonishing to see even with experienced market players, how a) banks start lengthy court proceedings and appropriation processes without knowing what to do at a later stage with an asset, how b) investors are led by a superficial yield calculation/greed without being clear how and when to ever realize any gain and c) debtors believe they can avoid or ignore proceedings and commercial necessities in the long-term.
Both investors and lenders are constantly over-estimating the true value of bad debts. A different view would lead many lenders to sell assets earlier, and at lower prices, and investors to take a much more selective approach to bad debt transactions. Realistic valuations need to
For any debt investment, the same wisdom holds true as for equity transactions. Only invest in debt, when you understand the underlying business, industry, and country of the debtor, otherwise do not touch it, even if the price and yield appeal to the greed factor. Too many debt investors and banks who appropriate assets from bad loans treat bad debt transactions as a pure financial game. Rough awakening guaranteed.
Take is as granted, that the debtor does not want to pay back the debt and accumulated interests. Depending on the legal seat of the debtor and the location of any pledged assets and the nature of the assets, there are plenty of obstacles that can be built to render the task of appropriating an asset extremely costly and lengthy or to devaluate the asset. We have seen many surprises and unlimited creativity in this area.
The ever-interesting question in this field. Both strategies can work, junk strategies will need the extra stamina from the investor and require a very strong understanding of the local market conditions and powerful local boots on the ground. Nothing for the new-comer to the market. Also, beware of the debt market life cycle.
Debt investors need to have the financial power to live through years of legal proceedings and commercial negotiations. Expecting the unexpected, especially in timing, is quintessential to survival.
Debt recovery and enforcement can be a dirty business. And opponents will fight back, with legal, half-legal and sometimes criminal means. Legal and commercial loop-holes in some countries allow for situations, unthinkable in others. In case that the reporting, legal or compliance regulatory frame is too strict or in case that one is not ready to answer the knife attack of opponents with a gun, it is better to stay outside of the Saloon.
Open and transparent negotiations, ideally moderated by a neutral party, tend to be in most of the cases the best, most efficient and fastest way for conflict resolution. However, sometimes both parties have to get bloody noses before a real negotiation process can start, sometimes it never happens. In these cases, the winner will collect the whole lot, but often the value is then already negligible. Yet, over and over again, players are overestimating their bargaining position and enforcement or obstruction options or do not dare to tell the ugly truth of losses to their superiors – which lead in turn to unrealistic expectations, vast time delays and a further destruction of value.
Last but not least, one of the most important factors in bad debt deals – the human factor. The success of bad debt deals is not decided by spreadsheets, but by human beings, and the negotiation processes are highly sophisticated interactions in which psychology and the right tactics often make the difference between make and break. Both for lenders/investors and debtors there is one very common attribute that we observe and that often proves to be disastrous and very costly for the respective party: lenders and investors lean towards punishing debtors for not willing to pay back the debt (also as deterrent for other failing debtors) or towards envying them realizing a profitable debt restructuring. Debtors lean towards overestimating their own power and control position and are often driven by personal ego and pride vis-à-vis lenders, employees and business partners, not recognizing the need for drastic changes.
Bad debt deals can be highly rewarding, especially in highly volatile economies like Ukraine. The investors and debtors, who are ready to invest in appropriate planning, who are disciplined in their execution and ready to test unchartered waters are in for the extra yield.
On VI2 Partners
VI2 Partners is an independent investment company that invests on its own books and provides a full range of investment banking services. The activities of VI2 Partners are aimed at ensuring economic growth, efficiency and increasing customers’ profitability. Our qualified and experienced team plans, scouts and executes investment opportunities, performing customers’ tasks on a high-quality level, above the accepted standards.
VI2 Partners specializes in portfolio assets management, direct investments, investment banking, ICO, capital raising and debt restructuring, services for investors to enter new markets (Ukraine and Eastern European counties, EU). We also provide services for the assets acquisition and protection in Ukraine for international investors, develop mechanisms for the complex structured transactions’ regulation, provide services for the problematic assets’ management and their transformation into sellable investment products, M&A.
Founded by Mr. Alexei Chernyshov and Dr. Marc-Milo Lube, the company operates in CEE and Western Europe markets, with registered offices in Vienna (Austria) and Kyiv (Ukraine). VI2 Partners actively cooperates with commercial, government structures and investors around the globe, with whom we built long-term relationships based on the principles of transparency, trust, effectiveness, and confidentiality.
Tuchlauben 7, A 1010 Vienna, Austria
+43 1 925 7575
4, Volodymyrska Str., Kyiv, 01001, Ukraine
+38 044 364 5203
Contacts for media
or How to Realize Fast that You Cannot Eat the Pasta and Have It.
The Trumpist revolution of narcissism, denial of reality, national egocentrism, and pre-dominance of lies has reached a new climax in Italy – although admittedly briefly outshined by Trump’s letter to cancel the nuclear summit with North Korea. It looks like Italy did not study the Greek adventures of Professor Varoufakis, another case where a self-declared expert wanted to save the country by denying basic economic laws. Alas, we will take front seats in the Colosseum, watching how Professor Conte – whom a French magazine already attested to show all characteristics of a professional crook – will explain, how Italy can avoid bankruptcy while spending additional billions of Euros on the back of an already bursting deficit and debt status of its public finances. While the German Hausfrau is developing an immediate allergic reaction, even the French are scared big time now. Given this situation, the political life of the Professor might be as short-lived as his academic visits to the US.
Following bigger footsteps from across the Atlantic, the Italy First Movement wants to eat the Pasta and make the World (first Europe) pay for it. This undertaking is doomed to fail dramatically. Obviously, the Italians do not have the USD, the strongest military in the World and also not the consumption power of the US. The bullying potential is limited in this case. Remember the Greek experience of trying to enforce on Europe and the Euro-System a carte blanche spending spree for Greece. It ended in an economic disaster that left the Greeks with a prolonged crisis, a humiliated Government, stronger controls, more unemployment and additional lost years. They had to swallow the savings dictate from Brussels and Frankfurt.
The real choices for Italy are very simple. Restructure profoundly or leave the Euro and devaluate. All else is another aria, that nobody wants to listen to anymore: the French have to look for themselves, the Brits are no more interested, the Germans do not want to pay, and the Spanish have run through the painful experience, why spare the Italians the same? And all Governments face at home the identical outcries of Germany, France, England, Dutch, Whoever First. Nobody is willing or able to come to the rescue. Perhaps the Italian drama will finally enforce on the EU to have the discussion that Macron started, but nobody wanted to lead and decide on: further integration or looser association.
The real scary part of the story is, that the Italian voters wanted to have exactly the Government, that they have received now, implementing the very same agenda, that is now promoted. This is contrary to Brexit, where one could argue, whether voters were just tricked by BoJo and alike. No, this time, all was clear and stated during the campaign, and the announced political program reflects a soft version of the election promises. Here are the main reasons for this situation:
All this has led to a profound change of the political landscape, the Government will stay longer than many expect and implement the will of the voter. However, Italians cannot expect other nations to pay for this emotional overreaction and the following political experiment. What does this all mean for the EU and Italy in specific:
Italians voted for change. They are sick of their political elites. They are sick of the most inefficient public service in Europe. But they lack the strength and perseverance to go through radical reform programs. Spending the way out of this crisis does not work within the Euro System. The departure from this system is, therefore, the only credible, viable and productive way forward. Everything else is a lie and illusion. A devaluated Italy leads to a restructuring of the country through lower standards of living for a certain period (less German cars), a relative reduction of wealth and pain for the old and poor in the country. But after this period of pain and the revaluation of the Italian asset base, it would also lead to much stronger competitiveness, an orientation towards the future and attract big streams of foreign investment into the country, which would, in turn, reduce unemployment.
Other Governments and the ECB need to wake up to this new political reality. If not now, at a certain point in the near future, the economic development of Italy and/or financial markets will force a decision on them. As Turkey and President Erdogan are currently realizing: economic laws cannot be denied ad infinitum. Professore Nebuloso and his masters will soon have to decide, whether they surrender, lead the EU to an institutional crisis or their country out of the Euro. We bet they will first try with the crisis.
Investment Climate and Opportunities in Good Old (New) Europe
This analysis was presented and discussed in a different format by VI2 Partners at the
NUS (National University of Singapore) Medicine International Council Berlin Conference: New Europe and Germany on April 23, 2018
Many political and financial analysts believe, that Europe is doomed to fall behind in the competition with the new economic and technological powerhouse China and the massive talent hoover and technology breeding ground US. We want to argue in a different direction and explain why we believe more in a next level European Renaissance than in Europe turning into a Museum for the World. The reasoning will start on a global level, move on to European developments and give an outlook, on which industries we are particularly bullish for the future.
The Global Arena – War is in the Air
The World is moving fast into diverse armed conflicts, without any power showing significant interest or activity to stop or contain these developments. The political post WWII order is trembling and shuttering and will ultimately make room for a new world order following a big earthquake. War is in the Air everywhere and in multiple dimensions:
Europe – Renaissance or Museum?
To Europe. Given the global percussions, Europe feels like a safe haven of stability, which will be rewarded. There are signs, that Europe can stay a main player in the future and enjoy a bright economic future:
Certainly, there are risks around. Brexit, Catalonia secession and traditional Italian political chaos will keep the European capitals and Brussels busy. But in our view the economic impact of Brexit will only be short lived (on the EU side of the Channel), and in the mid-term already prove beneficial to the continent. The constant aging of the population is cause for concern and will require a massive overhaul of social security systems and massive attraction of qualified foreign immigrants against the general mood in the population. Alone in Germany 500.000 qualified immigrants will be needed per year, to keep the pension age at its current level. Europe is falling back in patent applications and industrial production in comparison to Asia, but do not mix up quantity and quality of patents and innovations.
Key Investment Areas – Go and No-Go Zones
Looking to the key investment sectors in Europe for future investments and why we have chosen those:
NO-GO: Banking (weak capital base and legacy systems in a fintech world) and car Industry (emission scandals, new ownership models, electric vehicles).
COUNTRIES: We would overweigh France, Netherlands, Germany, Austria, Poland and Romania. The risk-takers should have a look into Albania, Serbia and Ukraine.
During the next decade we will experience the technological, political and military rise and transformation of China to a real super-power. And most probably also its first major economic crisis. Constitutional changes in China will enable its current leader Xi Jinping to stay longer in power than the currently foreseen maximum of two Presidential terms. We reflect on the current situation and potential in China, the reasons why a prolonged reign of Xi Jinping is a blessing for China and the World, and the reasons, why the Western world has difficulties to accept this.
Even after 30 years of an incredible economic boom, we still tend to underestimate the power and energy of the Chinese dragon. We take for granted that China is a giant workbench for cheap mass products, not reaching the technological level, design optics, and reliability of Western, i.e. US and European products and services. Just recently, being in Romania, a senior banker told me, they are not interested in leasing offers for Chinese investment goods – because of the risk, that they would have to take these goods to their balance sheet later. Guess what, now the Chinese arrive with their own leasing offers, at much better rates than any Romanian player can offer, of course cross-subsidized by Chinese producers and export-financing agencies. China is slowly, but steadily conquering key markets, through clever and orchestrated market entries and selective acquisitions. Together with the clear path of China to technology leadership in many areas, this entrenchment in other markets will also make China much more resilient for any future domestic downturn. For the fatal under-estimation of the Dragon’s firepower, the next generations of the Western World will pay dearly, some food for thought:
Economic Situation and Development Potential
Xi Jinping is the leader of a new global super-power
The envy of Western leaders
So, despite wide-spread criticism: The signal that the reign of XI Jinping will go beyond the current Government cycle is good news for China – and for the World, at least for all who believe in the sake of a multi-polar World. China will be a stabilizing factor in today’s epic of Twitterman and Rocketman and a strong contributor to global growth and technological progress: The World needs a strong dragon rider.
Merkel did it again. Another grand coalition between Conservatives and Social Democrats is sealed and will rule Germany for the coming 4 years – should not the youth organization of the Social Democrats be able to mobilize members to reject the coalition contract. While most political commentators are proclaiming the victory of the Social Democrats and the beginning descent of Angela Merkel, I would recommend not to write her off, yet. It is not the first time, that observers and commentators are underestimating her political skills and her brutal instinct for power. Like it or not, Germany has developed into the European powerhouse over the last 12 years of Merkel’s rule with by far the strongest economy and industrial basis, practically no unemployment, budget surplus, and a high reputation in the World. And while Trump and Macron will enter into the competition of the biggest military parade (chased by Putin and Kim), she will continue to do her job, perhaps not at high speed, but silently and steadily. Here are the takeaways what this Government will mean for Germany and the World:
Or in a nutshell: Germany will continue to be a stabilizing factor, for now. The Government is not what the population would prefer today, but it could prove stronger or more popular than expected. European integration will benefit. US and UK relations will be challenging.