Page 124 - IFR Opportunities in Russian capital markets

CHAPTER08
ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 8.3: Private equity investment, by Federal District, 2005 (US$m,%)
Central US$180m
North West US$33m 13.5%
Far East US$2.8m 1.1%
72.8% Volga Ural
Siberia US$8m 3.2%
US$7m
South 2.9% 5.1%
US$3.6m 1.5%
Source: Russian Private Equity and Venture Capital Association
US$12.6m
Oligarch funds and the rise of the minigarch
Foreign investors typically dominate private equity investments in other emerging markets, with the locals accounting for up to 10% of the funds under management. In Russia, domestic high net worth individuals not only invest more than the foreigners, but it is the foreigners that only account for 5% of the total under management.
Rich Russians have their core businesses in hand and the more successful have turned these businesses into cash cows. A few years ago they began investing in interesting projects on a whim, but increasingly the high net worth individuals are treating their private equity projects as a serious second business. While they spend most of their energy on running their core businesses, they are looking for funds or professional managers to invest in prospective companies in attractive sectors as a secondary line in which they play the role of financial rather than strategic investor.
It is a form of insurance. As business becomes more political again, these oligarchs are looking for ways to diversify out of their main business and have been pouring money into private equity investments.
One of the most famous examples is GMC (Group Menatep Capital), a private equity fund owned by Mikhail Khodorkovsky and other main shareholders of oil major Yukos. At the time this management company was created, Khodorkovsky was the richest man in Russia and the founders poured several hundred million dollars into the fund. The managers were drawn for the most part from Russian bankers that Khodorkovsky had come across in the course of his work at Yukos who had prepared various structured and equity products for the company, although he also hired a few foreign nationals with fund management experience. The brief was to "invest into anything and everything except oil", which is typical. The fund was very successful and became a major force in the Polish telecoms market among other things.
Few of Russia's high net worth private equity investors are as organised as this, but the amount of money these few have earmarked for private equity investments make them a serious force in the business.
The new investment class
A few rungs down the ladder and there are several thousand Russian businessmen who are worth over US$100m; domestic private equity funds have begun to target this group as a major source of money. These ‘minigarchs’ are increasingly happy to pass their money on to professional managers and due to the general improvements in corporate governance – many minigarchs have made their money in ‘new economy’ sectors which tend to be less corrupt – their money tends to be ‘whiter’ than the wealth created in the 1990s, so fund managers have less risk accepting it.
"In the last three years the rate at which the oligarchs are making private equity investments slowed after the Yukos affair and they have become more subdued," says Michael Calvey, managing director of Barings Vostok Capital Partners (BVCP). "This has created an opportunity for the 50–100 smaller industrial groups. They see this as their time to become serious players and they are growing aggressively."
117