Private Equity in Russia: Crisis and New Opportunities


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Presentation by Alexander Abolmasov on Russia & CIS Alternative Investments Conference
9-10 December

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  • Private Equity in Russia: Crisis and New Opportunities

    1. 1. N ew R ussia G rowth Private Equity Alexander Abolmasov Private Equity in Russia: Crisis and New Opportunities Russia & CIS Alternative Investments 9-10 December Moscow
    2. 2. Leverage and Reserves Foreign Currency Reserves Debt as % of GDP Government’s debt is small and reserves are sufficient to support banking system and national currency
    3. 3. Credit Crisis <ul><li>Companies and banks are not overleveraged </li></ul><ul><li>However: </li></ul><ul><li>Most debts are short-term </li></ul><ul><li>fundamentally healthy companies need money urgently </li></ul><ul><li>defaults on bonds and loans </li></ul><ul><li>banks increase collateral requirements and introduce equity kickers </li></ul><ul><li>interest rates are up from 10-13% to 18-22% </li></ul><ul><li>Level of consumer credit is very low </li></ul><ul><li>Consumer demand is driven by income growth NOT credit </li></ul><ul><li>However: </li></ul><ul><li>the crisis will filter through to consumer income via employing companies </li></ul><ul><li>devaluation would influence ruble salaries and savings </li></ul>
    4. 4. How people in Russia react to the crisis (%) Source: VCIOM
    5. 5. Source: VCIOM Where people in Russia want to invest during the the crisis (%)
    6. 6. Winners and Losers Discount retail Import substitution Fast-food Debt collection Food retail Telecoms Main-stream entertainment Pharmaceuticals Mid-priced FMCG <ul><li>Financial services </li></ul><ul><li>Luxury products </li></ul><ul><li>Durable goods </li></ul><ul><li>Tourism and travel </li></ul><ul><li>RE development </li></ul>--
    7. 7. New opportunities Companies Growth capital from a PE fund Opportunities <ul><li>Acquisition of assets or companies at low valuations </li></ul><ul><li>Better terms with suppliers </li></ul><ul><li>Larger market share </li></ul><ul><li>Easier debt-raising once credit market re-opens </li></ul>Debt capital from a credit opportunity fund <ul><li>Refinancing and/or M&A deals </li></ul><ul><li>Keep control despite liquidity crisis </li></ul>
    8. 8. <ul><li>Leading car dealer for Nissan in Russia with 11% overall market share </li></ul><ul><li>Balanced portfolio of 12 car brands </li></ul><ul><li>23 show rooms in Moscow and Central region of Russia </li></ul><ul><li>NRG role in value creation: </li></ul><ul><li>Strategic advice through NRG member of BoD </li></ul><ul><li>Pipeline of M&A targets, deal structuring </li></ul><ul><li>New CFO, comprehensive financial planning, budgeting and reporting process, IFRS accounts audited by PWC </li></ul><ul><li>Facilitation of debt financing </li></ul>Car market: case study Crisis Effect on car dealers industry <ul><ul><li>Industry sales structure before crisis: Moscow (50% credit, 50% cash), regions (20% credit, 80% cash). </li></ul></ul><ul><ul><li>Due to lack of credit sales started to decrease in September 2008, but still 30% growth is expected in 2008 (y-o-y). </li></ul></ul><ul><ul><li>Smaller dealers are expected to go bankrupt due to increased working capital requirements. </li></ul></ul><ul><ul><li>Sales in 2009 are expected to be flat, so only acquisitions and new showrooms construction growth is possible. </li></ul></ul>
    9. 9. Established leader in consumer electronics retail for 15 years with 63 stores throughout Russia <ul><li>NRG role in value creation: </li></ul><ul><li>Strategic advice to the majority shareholder – DOMO (5 th largest electronics retailer in Russia); place on the BOD </li></ul><ul><li>D evelopment strategy including aggressive regional expansion, active search for M&As, assistance in deal structuring </li></ul><ul><li>Corporate governance and financial transparency improvement </li></ul><ul><ul><li>Most electronics companies got pressure from both supply and demand: </li></ul></ul><ul><ul><ul><li>Demand decreased due to halt in consumer credit (25% of pre-crisis sales). </li></ul></ul></ul><ul><ul><ul><li>Supply is restricted due to working capital problems and reluctance of suppliers to extend their trade credit. </li></ul></ul></ul><ul><ul><li>Sales growth this year is expected to be 5-10% compared to 40-80% for previous years. </li></ul></ul><ul><ul><li>Only companies with enough working capital will get Christmas buyers. </li></ul></ul>Crisis Effect Electronics market: case study
    10. 10. Conclusions – Time to Invest <ul><li>Russian economy is on a long term growth trend </li></ul><ul><li>Financial crisis has temporarily moved valuation benchmarks and created huge demand for PE money </li></ul><ul><li>2009 vintage PE funds with hands-on teams in Russia will demonstrate high IRRs across the board </li></ul><ul><li>PE backed companies will come out of the crisis stronger than they were before </li></ul><ul><li>Or maybe wait for sometime </li></ul><ul><li>A lot of bankruptcies are expected in next 6-9 months. </li></ul><ul><li>Company valuation decreased, but didn’t hit the bottom. </li></ul>
    11. 11. Thank you!