Page 122 - IFR Opportunities in Russian capital markets

CHAPTER PRIVATE EQUITY FUNDS 08 Background
Private equity is booming in Russia, but while foreign investors dominate the private equity business in most of the markets of Central and Eastern Europe, in Russia it is the Russian businessman who swamps all other sources of private equity funds.
Poor corporate governance, a weak judicial system and political instability have put most foreign investors off and only a handful of firms are actively targeting private equity investments in Russia. However, the few that are operating funds have all proven to be spectacularly successful. Anecdotal evidence suggests that in the last 18 months foreign investors have overcome their fears and the volumes suddenly picked up at the start of 2006, but even this up tick has not been enough to keep pace with the growing domestic enthusiasm for private equity investment.
Figure 8.1: Russian private equity investment, by sector, 2005 (%)
0.1% 6.5% 0.4% 2.0%
0.4% 4.9%
4.0%
7.9%
20.9%
31.2%
21.6%
Communications
Other
Consumer market related Light industries Medical/health related Computers related
Energy
Financial services Industrial equipment Chemicals and materials Biotechnology
Source: Russian Private Equity & Venture Capital Association
Market opportunities
Private equity investors say the range of target companies is broadening rapidly, but funds remain spoilt for choice. Funds like Barings Vostok Capital say they review up to 300 potential deals a year but actual invest in only five of them. Companies looking for money report that the funds can drive an extremely hard bargain as there are few alternatives.
"There are lots of companies looking for capital, particularly as local debt markets are not well organised for small ones, and international markets are inaccessible", says Richard Sobel, CEO of Alfa Capital Partners, who still sees private equity as the best way to invest in the Russian economy.
Private equity funds are limited by the number of potential targets with a combination of high levels of transparency, good management teams and high growth prospects. Returns have been exceptionally good in recent years, with firms making several times their money. Portfolio company growth rates stand at around 25–30%, according to industry sources. The director of one firm says the main constraint on private equity is the limited length of the funds, as some portfolio companies are growing so well that he is disinclined to sell them.
The place where most opportunities are to be found is in the industries that did not exist at all in Soviet Russia, such as retail, financial services, distribution, media and information technology, which are still relatively young and so growing very fast. The distribution of investment equity by industry sector in 2005 is shown in Figure 8.1.
"Basically all kinds of consumer services are good examples. In many industries strong growth has attracted a lot of players and we are now seeing active consolidation. Both growth and consolida- tion offer good opportunities for PE investors", says Ulf Persson, managing partner at Mint Capital.
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