Alexander Abolmasov Managing Partner NRG www.nrgc.com Understanding Russia: Abyss or good ride? SuperReturn Emerging Markets 2011 26 - 28 June 2011, Geneva, SwitzerlandGood morning! Let’s discuss private equity investments into Russia. For many foreigners investing in Russia is like extremeskiing. It could be exciting, but many are afraid to get injured.
What is Russia: ?So what pictures come to you mind, when you think about Russia?
Have you imagined one of these?To many people it is something of these.
British Point of ViewYour stereotype image of Russia may depend on your cultural background. In UK most people thing about Russians as veryrich people, who buy real estate in London. The same thing in Switzerland. On arrivals in Geneva airport I’ve see only onereference to Russia: an HSBC advert stating that Russian billionaires are 18 years younger than American ones on average.
German Point of ViewIn Germany they pay more attention to Russian natural resources, especially gas. Another problem is that on the map ofEurope you always see only a small part of Russia. The rest just doesn’t fit on the screen or page. So it is hard to understand
US Point of ViewFor Americans it is even harder, because Russia historically is the Arch Rival. Also Russia is broken into two parts on anAmerican map of the World. America is in the center and Russia is surrounding World from the left and from the right. Thisis quite an uncomfortable notion for the most peoples minds.
Russia is so HUGE ?But actually Russia is not so huge. To understand that you should look at Russia … from space at night. Most activities arelocated in Central Russia and near this zigzag of light, which is Transiberian railroad.
Not so huge for private equity deals Central and Northern Russia Urals SiberiaThis corresponds with population density map. 90% of private equity deals are done in highlighted regions, which have thesize similar to Europe. Once people understand this, it is much easier to fit Russia into their minds.
Now to Russian economy. For the last two years it was in hate mode of love&hate cycle. However, yesterday’s poll results inthis conference, where Russia took second place for investment climate among BRIC countries, shows that we are movingback to love mode of this cycle.
If I bring Russian deal to Investment committee they could fire me. If I don’t bring Chinese deal to Investment committee they could fire me. Partner Leading LP companyHowever, sometimes personal courage is required a to present Russian funds on investment committee, because peopleare afraid to be fired for this.
Let’s Test the Perception Gap about Russia Do you Have you heard that Have you heard ofknow what “Let’s transform Goldman Sachs updated their report in 2010 and is BRIC? BRIC into BIC”? Russia is now #2 based on attractiveness?
Do you Have you heard of Have you heard thatknow what “Let’s transform Goldman Sachs updated their report in 2010 and is BRIC? BRIC into BIC”? Russia is now #2 based on attractiveness? Statistic from BVCA Summit, London (March 2011) 95% 45% 0%
Concerns about Russia are overblown and offer investors achance to buy into booming growth stories.Contrary to the email I get every two hours about why Ishould drop the R from BRIC, I quite like Russia. June 2011 Jim ONeill Chairman of Goldman Sachs Asset Management
Russia is still very attractiveAccording to latest Goldman Sachs BRIC and N-11 economic research http://goo.gl/sx6Vb#2 MCap growth10.2% forward 20-yr CAGR (#1 is China with 11.5%)#2 Allocation growthFrom 1% to 3% in MSCI in 20 years#6 GDPBigger than Germany and France in 20 years#11 GDP growthBut at least 30% GDP/capita higher than in countries with higherGDP growth#5 Strategic investors targetAccording to UNCTAD survey after China, Brazil, India and US46% of wannabe entrepreneursAmong people 20-29 years compared with only 29% for 30-47years.
Economic recovery in 2010-2011 Financial side Consumer side - Stock markets - Consumption - Exchange rate - Consumer credit - IPO window2500 14 700 New car sales (left axis) Loans for individuals growth (right axis) 500 # of Russian companies IPOs/SPOs RTS Index 12 600 4002000 300 10 500 Thousands units 2001500 8 400 RUR bn 100 6 3001000 0 4 200 -100 500 2 100 -200 0 0 0 -300 Source: RTS, PREQVECA Source: Autostat, Bank of Russia
Biggest deals raised $1.3bn in NASDAQ IPO Biggest Net IPO Since PepsiCo acquired 66% stake in Wimm-Bill-Dann for $6bn Mail.ru raised about $500m through IPO in LSE Nomos Bank raised $718m in first Russian private bank LSE IPO
Outstanding issues Corruption - Some progress, but not enough - Main political topic with approval rating of Russian government below 40% - Crowdsourcing in fighting corruption (Navalny and Rospil) Demographics - Population stabilized (growth rate 0% in 2010) - Main growth comes from CIS countries and minority ethnic groups - Russia is expected to have Muslim majority by 2050
Poll results SuperReturn Emerging Markets 2011 26 - 28 June 2011, Geneva, Switzerland If you had to invest US$1m in one of the countries listed below, based on the arguments, which one would it be? 11.2% 24% 34.4% 30.4% Brazil Russia India China
Russian PE consistently outperforms 20,1% EBRD Russia/CIS PE 32,3% Portfolio 16,7% 15,0% Cambridge EM 20,6% VC&PE Index* 8,3% 16,9% EBRD PE Portfolio** 25,0% 6,4% Ten years Five years One year Source: Cambridge Associates, EVCA/Thomson Reuters, Bloomberg and EBRD * EBRD tracked portfolio pooled end-to-end return, net of fees, expenses, donor grants and carried interest. Excludes property funds, and includes liquidated partnerships. ** Pooled end-to-end return, net of fees, expenses, and carried interest. “The "Since Inception" figure represents the net pooled IRR since inception for funds formed between 1980 and 2009.
Russian PE industry snapshot EBRD Funds Captive and semi-captive Russia Quadriga EastPartners BVCP Alfa CP Icon CP Capital Capital Rusnano VTB NRG UFG Capman Wermuth Svarog Uralsib Capital Independent New players Mint Aurora UCP Aton Capital Russia Elbrus Da Vinci Prometheus 50-100 private funds/ Capital family offices
Case Study: Genser Biggest Infinity and Nissan Dealer in Europe 12% of Nissan market in Russia 12 brands/24 dealerships in Moscow and in Central Russia Initial Hybrid equity: April 2009 investments: 2007 Secured loan with equity kickers Exit to IPO Multiple: 1.5x 2011 Multiple: 5x Current return 20% IRR: 45% IRR: 30% 24
Case Study: Begemot#2 toy retailer in RussiaMid/low pricesGrowth in 2 years: 50 -> 200 retail outlets. 90% EBITDA growth 70% sales growthMezzanine transaction summary• Secured loan with equity kickers• Use of funds: refinancing/working capital• Board seat and veto rights• Current return: 18%• IRR: 41% 25
NRG. Profile. Independent alternative investment manager Volga River One C.P. First Closing: 29 Sept 2006 Current size (cash): US$178 m Number of LPs: 20 (15 private + 5 institutional) Portfolio companies: 6 (telecoms, retail, food production) Tenor (years): 5+2 with 51% approval of LPs Volga River Growth First Closing: $135m, 4Q 2010 Target size: US$250 m LPs: EBRD, local Institutional LPs Tenor (years): 5+2 with 75% approval of LPs
Summary • Russian private equity consistently outperformed other private equity markets • Russia is #2 out of BRIC by investment attractiveness according to Alexander Abolmasov poll on this conference and also Email: firstname.lastname@example.org according to Goldman Sachs WWW: www.nrgc.com • Russian economy has fully recovered after the crisis • ~20 GPs with AUM of more than $150m before the crisis • Only a couple of GPs left with significant amounts of dry powderUnderstanding Russia could take years, but understanding Russian private equity is easy. Just come to Russia for two dayshave meeting with 10-12 major players and you will get enough information to make a decision.