Page 123 - IFR Opportunities in Russian capital markets

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ifrintelligence reports/Opportunities in: Russian Capital Markets
New target areas
Funds are already branching out as the frenetic pace of growth is throwing up new possibilities. Prosperity Capital, another big Russia-specific fund, launched the Voskhod fund (Sunrise) in October 2006 that takes a slightly different tack to the vogue consumer story.
It assumes the Russian economy has gone through a fundamental change in the last two years. By seeking out companies that are growing thanks to reform and restructuring rather than simply catering to ballooning consumer consumption, it is targeting the companies that service the main economic drivers such as metal and oil producers rather than supermarkets and food producers.
The fund's manager, Mattias Westmann, argues that although Russian retailers are growing fast now they will not be able to stand the competition from the big international retailers that will eventually enter the market and so will only be good medium-term investments. However, the service companies are likely to have decades of good growth.
Another consequence of the lack of private equity fund activity and the huge demand is that the existing funds, spoilt for choice, tend to invest into well-developed companies that are almost certain to succeed and hunt for expansion capital, which accounts for just under two-thirds of all private equity investments. Seed capital for start-ups gets almost nothing and late-stage developed companies are left entirely to fund further expansion from their own retained earnings, or via other instruments such as debt, according to the Russian Private Equity & Venture Capital Association and shown in Figure 8.2.
Figure 8.2: Private equity investment, by stage, 2005 (%)
26.2%
6.7% 4.9%
62.2%
Expansion Buyout
Seed & start-up Early stages
Later stages (0%)
Source: Russian Private Equity & Venture Capital Association
Another indicator that it is still very early days for Russia's private equity is the fact that the deals are very concentrated among the big urban populations, with Moscow taking the lion's share: the Central Federal District (where Moscow is located) accounted for 72.8% of all private equity investments in 2005, whereas the Far East Federal District took in only US$2.8m, or 1.1% (see Figure 8.3).
This will change in the next few years, as the regional cities are now growing faster than the Central District and the centre of commercial gravity has already moved to the regions. In all, Russia has a total of 13 cities with populations of more than 1m people, including Moscow and St Petersburg.
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