Recent trends in Private equity and Hybrid financing in Russia

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Recent trends in Private equity and Hybrid financing in Russia

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

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