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48 I Eastern Europe bne April 2018
on the consumer sector, healthcare and pharmaceuticals, technology and the telecommunications sector.
“The midmarket is the most interesting,” says Reed. “Forget the geopolitics, which are a distraction and often distorted. The real issue you need to address investing
and other snacks, beating the global giants like Pepsico, and it now exports a whole line of confectionery to the Chinese market. UFG also owns shares in the Russian-made kids cartoon series “Masha and the Bear” which has turned into a global phenomenon equivalent to the UK’s "Peppa Pig" with more than
generating double digit growth and high profits. That is a function of its 143mn people, which makes it by far the largest market in the region.
“We have the Cokes, the IKEAs the Danones – all these consumer companies. And Russia has been highly profitable for them. It has been a very high growth market for many years. Even with sanc- tions, the ruble instability and collapse in 2015, the big multinationals continue to see high levels of profitability, even if the growth has slowed down,” says Reed.
“The irony,” says Reed, “is that this is not replicated in the financial sector which, while it tends to see a lot of ‘hot’ flows of money, the longer-term patient capital investors required for private equity, who needs to commit over a 10-year cycle, misunderstand the short term risks and too often stay away. Frankly, they are missing an open goal.”
“At the end of the day a lot of these guys don't need to have a Russia strategy. They do have to have a Chinese strategy, but they don't necessarily need a Russia one. So the default position is to stay away,” says Reed.
The country’s poor press and own-goal PR disasters like the current spy scandal in the UK has depressed investment. The attempted assassination of Rus- sian double agent Sergei Skripal in the UK has brought speculation over new sanctions being imposed on Russia.
But recently investors have started to shrug this off, focusing more on an
“To date that fund has generated a gross internal rate [IRR] of return north of 40% on its investments”
in Russia is its potential for volatility and susceptibility to outside shocks. If from one year to next the ruble drops but you have a business that can grow at 30-40% then this mitigates the downside while allowing you to capture the strong upside available in the market.”
A good example is UFG’s investment into Russian Towers, the largest inde- pendent tower company in Russia. Rus- sia Towers is an infrastructure business that has been driven by the growth in mobile services and data over the last several years. The early days of mobile telephony in Russia was a straight race to cover the whole country by build-
ing towers everywhere and installing base stations to provide coverage. But, says Reed, “ it makes no sense for the operators to build in triplicate the capital-intensive ‘passive’ real estate of the telecoms towers, which in most mar- kets globally are a shared resource. So Russian Towers has taken on this role, building the new generation of towers and poles as operators roll out their data networks, and buying back and leasing towers, freeing up the mobile operators’ resources to concentrate on their net- work upgrades and services to custom- ers”. It is a classic developing market story and the company has enjoyed growth in double digits for several years.
This is a story that UFG has seen repeated in its other target sectors. UFG holds stakes in Russia’s largest consumer snacks manufacturer, KDV, which has seen consistent top line growth for the last five years, selling chocolates, crisps
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20bn views on YouTube – the largest non-English following online – and a worldwide distribution of its series, with associated toys and merchandising.
Foreign investors’ interest in Russia is starting to pick up again and currently in the public markets Russia is the second most overweight holding in the benchmark MSCI EM index. But almost all that overweight is concentrated in
a handful of names, with state-owned retail banking giant Sberbank topping the list. Russia was sent to Coventry by investors following the annexation of the Crimea in 2014 and it has not really returned yet.
A yawning gap has opened up between the political story and what investors are looking at – and for the most part, those investors that take the trouble to look at Russia – still a minority – like what they see.
“Even with sanctions, the ruble instability and collapse in 2015, the big multinationals continue to see high levels of profitability”
“Foreign investors are still coming to Russia and they have always been,” says Reed. "If you read the Western press then you’d assume everyone steers clear. But if you look at the corporate sector then in fact Russia has been and remains one of the key markets for multinationals oper- ating in the broader Eurasia, consistently
upcoming $3bn Eurobond issue that carries a fat premium thanks to Russia’s tarnished reputation, reports Bloom- berg. On the corporate front fertiliser producer Phosagro just issued a $500mn Eurobond with the lowest yield on a corporate bond ever that was five-times oversubscribed, CEO Andrei Gurev