Evolution of PE in Russia
“Заграница нам поможет!”
О. Бендер (И.Ильф, Е. Петров “Двенадцать стульев”)
“The foreigners will help us!”
Ostap Bender, a character in the famous Soviet novel The Twelve Chairs
by Ilya Ilf and Evgeniy Petrov
The Financial Times published two articles in recent weeks about the PE market in Russia. One discussed at length the current struggles of the Russian Direct Investment Fund (RDIF), whilst another noted US firm Blackstone’s withdrawal from Russia. Both painted a rather negative picture.
Those General Partners that currently operate in the country, myself included, admit that the next couple of years will be tough for Russia’s investment climate (see Moscow Times, “Private Equity Funds Predict Years of Hardship in Russia”). Yet the 6th Annual Private Equity Conference in Moscow last month demonstrated that the withdrawal of the international community has provided a unique opportunity for Russians to take the driving seat in navigating the local PE industry through the challenges it faces.
The negative FT coverage can be attributed to a misunderstanding of how RDIF operates. It is a $10 billion fund which was set up to facilitate foreign direct investment, talent and technologies into Russia by offering an attractive co-investment platform. An article in this month’s Private Equity International magazine commends the contribution of RDIF in supporting the domestic PE industry over the past few years. The author points out that even in the last year there have been two “promising bellwethers of good returns” as Tinkovv Credit Systems and the hypermarket chain Lenta achieved London IPOs.
The reported limited success of RDIF is not connected with sanctions, but due to a lack of backing amongst local institutional investors. Even though ongoing geopolitical events led to the likes of the European Bank for Reconstruction and Development (EBRD) suspending its investments into Russian-focused PE funds, 90% of capital deployed by the Fund to date has been through investors originating from Asia and the Middle East. The national PE association “NAIMA” has long argued to allow local pension funds and insurance companies to invest in Russian PE, as a prerequisite for sustainable growth in the industry. But the legislator has been slow to respond.
So while there are doubtless challenges ahead, perhaps the present situation will finally allow local Russian partnerships to get their own house in order. The RDIF is now freed from a statutory obligation to have international co-investors on Russian ventures, and these investment platforms are expected to disrupt the current standing, forcing the established funds to quite simply adapt or perish.
This could also lead to a domestic player challenging EBRD’s longheld position as the No 1 investor into Russian PE, both by number of funds invested and amount of capital deployed. The experience of this in some Latin American markets demonstrates that such change is always for the better. In fact, usually once local institutions take the lead in investing into local funds, the number of international Limited Partners increases, as well as the amount of capital they allocate to those regions.
It is in this landscape that RosNano made the well-timed decision to establish an industry-wide lobbying initiative to foster a strong and sustainable local PE industry. The memorandum for the institution of an Industry Development Council was signed at September’s PE Conference in Moscow. With the likes of Baring Vostok and Russia Partners on board, the ambition here contrasts starkly with the anonymous judgment reported by the FT that: “in the good times, Blackstone couldn’t find anything to do and in the bad times, Blackstone can’t imagine doing anything.” In fact, as Kommersant noted, this agreement will provide local limited partnerships the recognition and promotion they have long deserved.
These developments recall the plight of Mr Bender, the infamous conman of Soviet literature, who was attracted by the promise of overseas assistance in times of hardship. In his all-consuming quest for wealth abroad, Bender manages to obtain the funds, but soon discovers he ca not put it to any good use domestically. He ends up losing all the money, as he attempts to flee the country by crossing the border into Romania.
With this in mind we are fully behind the new Council and look forward to its growth into an efficient body for the consolidation of the domestic Russian PE industry. Though never forgetting our overarching goal of delivering above-market returns to our Limited Partners, we must now focus on entrenching a solid foundation for local PE initiatives. This will enable us not only to make efficient investments but also achieve valuable and sustainable exits. And should the legislator finally come around (whether through RosNano and/or RDIF) to providing the industry with a source of desperately needed domestic capital, it will only strengthen the market yet further for both domestic players and the global LP community.