Page 125 - IFR Opportunities in Russian capital markets

CHAPTER08
ifrintelligence reports/Opportunities in: Russian Capital Markets
Minigarchs are entrepreneurs who have built up a strong business that contains 5–10 companies with cash flows of the order of US$50m. With the bank sector's capital growing by over 40% a year, these minigarchs now have access to substantial credit, which allows them to finance deals of US$20–40m – enough to buy a factory or successful publishing company.
There are few Russian institutional investors and those there are consist almost entirely of the likes of state-owned banks, such as Sberbank, VTB and Gazprombank, which are also making proprietary private equity investments. But these banks are also the main source of funds for minigarch investors.
Sources of private equity capital
Russian money being invested into domestic industry has massively distorted the normal structure of private equity investments. Everywhere else in the emerging market universe it is in- ternational private equity funds that dominate the business. In Russia, the private equity investments made by high net worth individuals swamp all other sources of funds.
Foreign managed private equity funds raised an estimated US$1.5bn in 2006, or about 5% of the market, mainly from foreign institutional investors. However, domestic money dwarfs the inter- national investment. There are no reliable statistics available but experts believe Russian businessmen have about US$40bn invested in private equity investments, as of the start of 2007.
Foreign private equity investment is growing fast, but domestic private equity investments are growing just as fast and it is unlikely that the foreign share will get over 10% of the total in the next five years, believes Calvey.
Despite the healthy returns reported by the existing firms, international groups have also been reluctant to enter Russia, with investments in Europe and other markets perceived as less risky than Russia. Carlyle, the Washington DC-based giant, opened a Moscow office in 2004, but shut up shop abruptly last year, having only made one modest investment.
Paul Murphy, a partner with Ernst & Young in Moscow, says that despite the lack of activity from global funds to date, the chances of their arrival on the market will increase as acquisition targets become larger and cross their minimum investment threshold. Several large funds paid visits to Russia in 2006 to check the lay of the land, including the US-based firm Texas Pacific Group (TPG) and the UK-based firm Gartmore.
In 2006, the sector broke down into three broad sections according to the Russian Private Equity & Venture Capital Association:
0 Large funds – 11 funds and seven fund management companies with a total of US$2.5bn under management, with between US$151m and US$800m in each fund;
0 Medium-sized funds – 27 funds and 20 fund management companies with a total of US$1.9bn under management, with between US$51m and US$150m in each;
0 Small funds – 41 funds and 33 fund management companies with a total of US$0.5bn under management, with between US$5m and US$50m in each.
However, this still only accounts for US$4.9bn of the estimated US$40bn of total private equity investment in Russia. In other words, high net worth Russians have some US$35bn in unorganised private equity investments. In most emerging markets private equity is evenly spread between the three main sources. However, Russia is unusual as private domestic capital massively outweighs other sources of capital. Comparing India and Russia, which are at similar stages of development, in Figure 8.4 highlights the anomaly.
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