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Will the Russian Bear Fall: How Protests and Rising Middle Class Affect Corruption and Private Equity Landscape ( with funny pictures)


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Will the Russian Bear Fall: How Protests and Rising Middle Class Affect Corruption and Private Equity Landscape ( with funny pictures)

  1. 1. Will the Russian Bear fall:How Protests and Rising middle class affect corruptionand private equity landscape Alexander Abolmasov Managing Partner NRG SuperReturn Emerging Markets 2011 25 - 28 June 2012, Geneva, Switzerland
  2. 2. We planned to visit Russia in 2007, but then somethinghappened. And now we would like to get update on what isgoing on in Russia June 2012 American LP Partner
  3. 3. I took a speed reading course and read War and Peace in twentyminutes… It involves Russia. Woody Allen
  4. 4. Middle class tripled in 5 years and wants more than money… Annual nominal households # of people, m Changes in # of people, disposable income 2005 2010 2005-10, % >$15,000 11,9 45,1 278% $10,000 - $15,000 17,5 36,1 106% $5,000 - $10,000 57,3 45,4 -21% $3,000 - $5,000 33,7 16,4 -51% <$3,000 21,0 <1 -99,9% Total 142,8 142,9 0,1%Source: McKinsey
  5. 5. 10.12.2011 50K peopleBolotnaya squareFirst big protest in 20 yearsReaction to fraud in the Parliament elections (04.12.11) andannouncement of Putin returning back to power
  6. 6. 24.12.11 70K people Sakharova Street After Bolotnaya success the movement grew
  7. 7. 6.05.12 70K peopleBolotnaya – 2One day before Putin inauguration, clashes with police
  8. 8. 13.05.12 20K peopleGarden Ring“Control walking”To show that people could do protests without agreeing locationwith government
  9. 9. 12.06.12 50K peopleLaw passed limiting demonstrations with fines up to $10-20K
  10. 10. Political pressure is rising, but revolution is noton the agenda… Demography specifics of Russia Concentration in Moscow and few big cities No protesting youth Protesters are middle class and want Retain status quo Respect and security And better government services
  11. 11. Russian population density map
  12. 12. Russian demography: protests as a conflictof generations Age Men Women 1933-34 YOB Famine 1932-1933 1941-45 YOB World War II 1937-39 YOB 1983 YOB 1981-1982 “Soviet” Generation: ruling class extra state support for 1967-69 YOBfamilies with “Echoes of children WWII” “New Russia” Generation: middle class 2007 YOB 1990-95 YOB “Echoes of war” Collapse of SU Children of1978-1987 YOB Generation Thousand people
  13. 13. One of protests’ results: corruption is goingdown Q: Whether you think it applies, or does not apply, to your country/industry, or whether you don’t know? 84 93 52 48 Corrupt 14 practices happen widely % of applies to 56 58 Corrupt practices have increased 20 26 18 because ofeconomic downturn % of applies to
  14. 14. …if we’re not going to “blackball” China (more authoritarian andrepressive than Russia), Brazil (arguably more corrupt than Russia)or India (corrupt, and also rather unhelpful on Iran), then theredoesn’t seem to be any real reason to “blackball” Russia. Mark Adomanis Journalist
  15. 15. My fellow Americans, I am pleased to tell you I just signedlegislation which outlaws Russia forever…The bombing begins in five minutes. Ronald Reagan Said during a radio microphone test, 1984
  16. 16. Russian PE industry snapshot EBRD Funds Captive and semi-captive Capman Merged Russia East CP Alfa CP Icon CPPartners BVCP Norum Quadriga NRG UFG Troika VTB RPEF Merged UCP Elbrus Wermuth Svarog Uralsib Delta Rencap Spin-off Independent New players Spin-off Mint Aurora Marshall Quadro Aton Da Vinci Prometheus
  17. 17. 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 yearSource: 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 liquidatedpartnerships.•** Pooled end-to-end return, net of fees, expenses, and carried interest. “The "Since Inception" figure represents the net pooled IRR since inception for fundsformed between 1980 and 2009.
  18. 18. Russian economy is still very attractive Great prospects for next 20 yearsDebt/GDP about 10% (#181 in world) #2 MCap growth 10.2% forward 20-yr CAGR (#1 is China with 11.5%)#5 Strategic investors target #2 Allocation growthAccording to UNCTAD survey after China, Brazil, India and US From 1% to 3% in MSCI in 20 years #6 GDP Bigger than Germany and France in 20 years46% of wannabe entrepreneurs #11 GDP growthAmong people 20-29 years compared with only 29% for But at least 30% GDP/capita higher than in countries with higher G30-47 years. growth According to latest Goldman Sachs BRIC and N-11 economic resear
  19. 19. You should be not afraid of Russians, becausethey already started a lot of companies in US 4 out of 10 USA largest companies listed on Fortune 500 rating were founded by immigrants or their children.
  20. 20. Did you know that these companies werestarted in Russia? And there even more…
  21. 21. NRG Portfolio Case Study: Genser Biggest Infinity Dealer in the World and Nissan Dealer in Europe 12% of Nissan market in Russia 12 brands/24 dealerships in Moscow and in Central Russia Current multiple 5X and 45% IRR on initial investment 2177.4 1600.1 1366.6 999.0803.0 723.2 26.7 65.2 44.6 56.1 62.7 73.6 2007 2008 2009 2010 2011 2012E Revenue, $m EBITDA, $m 21
  22. 22. NRG Portfolio Case Study: Begemot#2 toy retailer in RussiaMid/low pricesGrowth in 2 years: 50 -> 200 retail outlets. 90% EBITDA growth 70% sales growthStructured equity transaction summary• Secured loan with equity kickers• Board seat and veto rights• Current return: 18%• Exited IRR: 41% 22
  23. 23. Summary Rising middle class drives the transformation of Russia Russian PE consistently outperformed Russia is #2 out of BRIC (poll on SuperReturn EM 2011) Existing funds will be able to cherry pick projects It takes time for LPs to change their attitude, but contrarians will be able to harvest good returns Come and visit “New Russia” to see the Growth yourself! Alexander Abolmasov