Recent trends in Private equity and Hybrid financing in Russia
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Recent trends in Private equity and Hybrid financing in Russia

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Recent trends in Private equity and Hybrid financing in Russia Recent trends in Private equity and Hybrid financing in Russia Presentation Transcript

  • N ew R ussia G rowth Private Equity Advisors 2009 Alexander Abolmasov Recent trends in Private equity and Hybrid financing in Russia May I call you back? I am just in the middle of something.
    • Liquidity crisis
      • We expect second wave of liquidity crisis in 3-5 months
    • Private equity trends
    • Hybrid financing trends
  • Credit crisis – problems with liquidity
    • The amount of Russian corporate debt due in 2009 will be about $350bn out of $900bn outstanding:
      • $200bn Russian bank loans
      • $120bn external debt (syndicated loans and eurobonds)
      • $27bn domestic bonds
    • International debt capital (syndicated loans or Eurobonds) is accessible only to biggest Russian corporations
      • 24% of Russian Eurobonds are Gazprom, another 29% - VTB, Sberbank, TNK-BP, Gazprombank and Agricultural bank.)
    • Mid-sized Russian companies have problems with access to their usual sources of debt :
      • local bank loans
      • domestic ruble bonds
    Source: Central Bank of Russia Source: Central Bank of Russia
  • Russian Banking System – liquidity problems for next 2-3 years
    • New money is not available from the banks
    • State banks (all TOP 5 banks) share increased from 42% to 47% of total loans since August 2008.
    • Overwhelming share of government support goes to state banks
    • State banks prioritize large state companies
    • Private banks have problems with capital, because of losses and NPL, which could reach 10-30% by the end of 2009.
    Source: Central Bank of Russia, Sberbank, RenCap Source: Central Bank of Russia
  • Credit crisis – Corporate ruble bonds market will almost cease to exist Source: cbonds.ru
    • Banks were main buyers of bonds, but now the liquidity dried up
    • No new corporate bond issues since August 2008 apart from Gazpromneft and Russian RailRoads (expected in April 2009)
    • Average duration of domestic ruble bonds is just 0.86 years
    • For third tier issues only 0.45 years
    Source: Micex emission documents, evaluation of Bank of Moscow
  • Credit crisis – interest rates rise
    • The borrowing rate for companies in ruble terms has gone up from 10% to 25-30%
    • The borrowing rate for companies in USD terms has gone up from 8-11% to 16-25%
    • Average interest rate for ruble bonds are 26 -29% (for the third tier issues - 53%)
    • Eurobonds rates are 10-25% in USD.
    • Russian Government bonds YTM increased from 6% to 10%.
    Source: cbonds.ru Source: Central Bank of Russia
    • Liquidity crisis
      • We expect second wave of liquidity crisis in 3-5 months
    • Private equity trends
        • Private equity funds have problems with access to new money
    • Hybrid financing trends
    • Total AUM of the global PE industry has grown from $960bn in 2003 to just under $2.5trn in 2008
    • Overhang of $ 25 0bn of private equity fund interests:
      • Liquidity problem (28%)
      • Denominator effect ( 35% )
    LPs want to reduce exposure to private equity
  • PE still out-perform other asset classes Money weighted all PE average IRR’s Source : Preqin, Volume 5, Issue 1 Median return (%)
    • PE returns will decline, especially the 2005-2007 vintages
    • Median return from PE outperforms equities and real estate
    Median return by asset classes of public pension plans, as of June 2008
  • Problems with distributions and valuations
    • Distributions from PE funds reduced 3-5 times in 2008 compared with 2007
    • Problems with valuation:
      • Number of funds with no valuation change increased from 15% to 80%.
  • How long does it take to raise the fund Source : Preqin Average months spent on the road to close a fund
    • Fundraising is expected to take longer:
      • less money on the market
      • increase number of funds
      • poor economic conditions .
    • More focus:
      • past performance
      • fund manager reputation
    • Liquidity crisis
      • We expect second wave of liquidity crisis in 3-5 months
    • Private equity trends
        • Private equity funds have problems with access to new money
    • Hybrid financing trends
          • Hybrid financing funds is a temporary solution
    • Russian specific:
    • Distressed funds will have very risky investment profile.
    • Mezzanine funds will replace banks, which stopped to provide new money.
    • Corporate Restructuring:
      • Acquire defaulted assets at deep discounts to intrinsic value;
      • Swap debt for equity.
    • Distressed Portfoli os : Acquiring “Bad Bank” Assets
      • Seek deeply discounted portfolio;
      • Acquire and restructure portfolios into tranches and opportunistically sell off portions of portfolios; and
      • Manage “bad bank” assets sourced from western funds, banks and other investors.
    Example: Distressed debt strategy
  • Senior Debt with Equity Kickers
    • Strategy
      • 18-24 month senior loans in USD
      • Low volatility businesses
      • No distressed companies
      • Collateralized
      • $10-50m ticket size
      • 15%+ current return
      • Equity kickers – 30%+ gross return
    • Target industies
      • Non-cyclical (food and beverages, telecoms)
      • Counter-cyclical industries (discounters, fast food)
      • Import-substitution (agriculture, pharmaceuticals)
      • Exporters (petrochemicals)
    • Deal terms to include
      • Strong security
      • Control over use of funds
      • Board participation and strong shareholder-type negative covenants
      • Amortization after 15-18 months
    Volga River Credit Opportunity Fund