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Understanding
Russia:Abyss or good ride?
Alexander Abolmasov
Managing Partner
NRG
www.nrgc.com
Good morning! Let’s discuss private equity investments into Russia. For many foreigners investing in Russia is like extreme skiing. It could be exciting, but many are afraid to get injured.
SuperReturn Emerging Markets 2011
26 - 28 June 2011, Geneva, Switzerland
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 View
Your stereotype image of Russia may depend on your cultural background. In UK most people thing about Russians as very rich people, who buy real estate in London. The same thing in Switzerland. On arrivals in Geneva airport I’ve see only one reference to Russia: an HSBC advert stating that Russian billionaires are 18 years younger than American ones on average.
German Point of View
In Germany they pay more attention to Russian natural resources, especially gas. Another problem is that on the map of Europe 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 Russia, because it is moved to subconscious.
US Point of View
For Americans it is even harder, because Russia historically is the Arch Rival. Also Russia is broken into two parts on an American map of the World. America is in the center and Russia is surrounding World from the left and from the right. This is 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 are located in Central Russia and near this zigzag of light, which is Transiberian railroad.
Central and
Northern Russia
Siberia
Urals
Not so huge for private equity deals
This corresponds with population density map. 90% of private equity deals are done in highlighted regions, which have the size similar to Europe. Once people understand this, it is much easier to fit Russia into their minds.
Russian Economy
Now to Russian economy. For the last two years it was in hate mode of love&hate cycle. However, yesterday’s poll results in this conference, where Russia took second place for investment climate among BRIC countries, shows that we are moving back to love mode of this cycle.
Partner
Leading LP company
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.
However, sometimes personal courage is required a to present Russian funds on investment committee, because people are afraid to be fired for this.
Let’s Test the Perception Gap about Russia
Do you
know what
is BRIC?
Have you heard of
“Let’s transform
BRIC into BIC”?
Have you heard that
Goldman Sachs updated
their report in 2010 and
Russia is now #2 based
on attractiveness?
Do you
know what
is BRIC?
Have you heard of
“Let’s transform
BRIC into BIC”?
Have you heard that
Goldman Sachs updated
their report in 2010 and
Russia is now #2 based
on attractiveness?
Statistic from BVCA Summit, London (March 2011)
95% 45% 0%
Jim O'Neill
Chairman of Goldman Sachs Asset Management
Concerns about Russia are overblown and offer investors a
chance to buy into booming growth stories.
Contrary to the email I get every two hours about why I
should drop the R from BRIC, I quite like Russia.
June 2011
Russia is still very attractive According 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 growth But at least 30% GDP/capita higher than in countries with higher
GDP growth
#5 Strategic investors targetAccording to UNCTAD survey after China, Brazil, India and US
46% of wannabe entrepreneursAmong people 20-29 years compared with only 29% for 30-47
years.
-300
-200
-100
0
100
200
300
400
500
0
100
200
300
400
500
600
700
RU
R b
n
Tho
usa
nd
s u
nit
s
New car sales (left axis) Loans for individuals growth (right axis)
0
2
4
6
8
10
12
14
0
500
1000
1500
2000
2500# of Russian companies IPOs/SPOs RTS Index
Economic recovery in 2010-2011
Source: RTS, PREQVECA Source: Autostat, Bank of Russia
Financial side
- Stock markets
- Exchange rate
- IPO window
Consumer side
- Consumption
- Consumer credit
Biggest deals
raised $1.3bn in NASDAQ IPO
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
Biggest Net IPO Since
Outstanding issues
Corruption
Demographics
- Some progress, but not enough
- Main political topic with approval rating of
Russian government below 40%
- Crowdsourcing in fighting corruption
(Navalny and Rospil)
- 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?
34.4%
30.4%
24%11.2%
Brazil Russia India China
Private EquityLandscape
Russian PE consistently outperforms
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.
6,4%
8,3%
16,7%
25,0%
20,6%
32,3%
16,9%
15,0%
20,1%
EBRD PE Portfolio**
Cambridge EM VC&PE Index*
EBRD Russia/CIS PE Portfolio
Ten years Five years One year
Russian PE industry snapshotEBRD Funds
Russia
Partners BVCP
NRG
Quadriga
Capital
UFG
Captive and semi-captive
New players
Mint
CapitalAurora
Russia
Da Vinci
Alfa CP Icon CP
Svarog
Capital
Rusnano VTB
East
Capital
Wermuth Uralsib
Elbrus
Capital
UCP
Prometheus
Aton
Capman
50-100 private funds/
family offices
Independent
Trends
MergersNorum/Capman, Delta/UFG
Spin-offs Elbrus, Quadro
Deathpool Eagle CP, Trifecta
New funds seeded
with HNW moneyAton, Prometheus, UCP
MezzanineNRG
Biggest Infinity and Nissan Dealer in Europe
12% of Nissan market in Russia
12 brands/24 dealerships in Moscow and in Central Russia
24
Case Study: Genser
Initial
investments: 2007Hybrid equity: April 2009
Secured loan with equity kickersExit to IPO
2011Multiple: 5x
IRR: 45%
Multiple: 1.5x
Current return 20%
IRR: 30%
Case Study: Begemot
#2 toy retailer in Russia
Mid/low prices
Growth in 2 years: 50 -> 200 retail outlets.
90% EBITDA growth
70% sales growth
25
Mezzanine transaction summary
• Secured loan with equity kickers
• Use of funds: refinancing/working capital
• Board seat and veto rights
• Current return: 18%
• IRR: 41%
43 42
50
58
10 1115 16
0
10
20
30
40
50
60
70
2008 2009 2010 2011E
Sales
EBITDA
1 384
724
1 000
1 465
66 44 56 54
0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
2008 2009 2010 2011E
Sales
EBITDA
NRG Portfolio
26
Ufanet: sales & EBITDA, $m (internet provider)Genser: sales & EBITDA, $m (car dealer)
Source: company data
Source: company data
Source: company data
Source: company data
123
106
125
178
12 15 1828
0
20
40
60
80
100
120
140
160
180
200
2008 2009 2010 2011E
Sales
EBITDA
Begemot: sales & EBITDA, $m (toy retail chain) Umnitsa: sales & EBITDA, $m (baby food)
11
19
54
68
03
1419
0
10
20
30
40
50
60
70
80
2009 2010E 2011E 2012E
Sales
EBITDA
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
• Russian private equity consistently
outperformed other private equity
markets
• Russia is #2 out of BRIC by
investment attractiveness according to
poll on this conference and also
according to Goldman Sachs
• 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 powder
Alexander Abolmasov
Email: [email protected]
WWW: www.nrgc.com
Summary
Understanding Russia could take years, but understanding Russian private equity is easy. Just come to Russia for two days have meeting with 10-12 major players and you will get enough information to make a decision.