Page 127 - IFR Opportunities in Russian capital markets

CHAPTER08
ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 8.5: Russian IPOs (ex–Natural Resources and Sistema), 2000–06, rebalanced (US$bn)
US$bn
20
15
10
5
0
Source: Investment bank research
0.4 0.2 0.4
3.8 1.9
2005 2006 2007 YTD
2000 2001 2002
2003 2004
Improved M&A options have created their own problems for private equity firms. Target companies also have more choices for attracting investment than simply selling to buy-out firms. Calvey of BVCP says company owners are becoming more reluctant to sell with these expanding alternatives: bank financing is cheaper than before, and debt capital will be more accessible than in the past, meaning private equity will be seen as an increasingly expensive alternative.
Another issue is the reluctance of owners of rapidly growing businesses to sell shares while they still see several years of potential upside, a factor that in turn is pushing up valuations. "Strong Russian managers are not quick to sell their businesses", says Alfa Capital's Sobel. "They want a financial partner but don't want to give up control."
Despite all the progress, making private equity investments still involves cutting deals with individuals and Calvey says that corporate governance is still a concern; BVCP likes to maintain a controlling stake in their companies.
"In a raging bull market corporate governance is usually pretty good," says Calvey. "The problems appear once the market turns, then the incentives for founding owners deteriorate and you can expect more serious problems for minority shareholders. If you have a controlling stake, you can control the cash flow and so if sentiment turns sour it is still possible to make money."
And at some point the Russian raging bull will run into a wall. Calvey says that after six straight years of extraordinary growth, investors into Russia are bound to get ahead of themselves.
"It will not happen in the near future, but at some point we are expecting the market to overshoot and there will be a correction – probably a very serious one," says Calvey.
The main Russian private equity funds
Russia has always tempted foreign investors, as the huge potential of a country with 150m citizens that is stuffed with raw materials is obvious. But few have taken the plunge, as the risks of doing business in Russia were more than obvious. Still, a few brave souls decided that the rewards outweigh the risks and set up private equity firms in the 1990s. The brief description of the funds below is not meant to be exhaustive, but contains some of the best known names and highlights the different strategies being adopted by fund managers to deal with the very real risks of doing business in Eastern Europe.
Troika Capital Partners
Troika launched the Russia New Growth Fund in December 2006 and attracted a US$35m investment from the EBRD and raised a total of US$370m. Troika is one of the most experienced asset management companies in Russia and makes most of its money from investment banking and its mutual fund business, having a total of US$3.5bn under management by the start of 2007. Troika Capital Partners, the private equity arm of the group, was set up in 2005 in conjunction with Temasek Holdings of Singapore, which has a total of US$80bn under management around the world. The Russia New Growth Fund targets companies predominantly in the industries whose development is tied up with an increase in consumer demand, such as retail trade, financial services, consumer services, and related sectors. The fund looks to buy blocking and controlling equity packages in these companies.
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