Back in the USSR

After years of economic liberalisation Russia looks set to deliver on its potential as a private equity market for international firms as well as local operators, writes Nicholas Lockley.

This week's news that CapMan, the Finnish alternative assets firm, is expanding its operations to Russia and acquiring private equity firm Norum is confirmation of a private equity market that is open for global business.

The purchase price of around €3.4 million paid to the company’s senior management, DnB NOR Bank and Sitra Management will be adjusted on the basis of the final size of Norum Russia Fund III, which is currently in fundraising phase. CapMan’s own investment to Norum Russia III Fund is €13.5 million.

The Nordic firm's expansion follows hard on the heels of Lion Capital's acquisition of Russian Alcohol Group, the largest producer of vodka and pre-mixed alcoholic drinks in Russia, alongside Goldman Sachs and Central European Distribution Corporation, a Polish and Russian vodka producer. Lion Capital declined to disclose how much it had paid for its majority stake.

The Central European Distribution Corporation has made an equity investment of $156.5 million (€100 million) for an approximate 40 percent stake in the business. It has also acquired exchangeable notes worth $103.5 million which bear interest from 8.3 percent to 10.5 percent. These can be exchanged into additional shares in 2010.

Both transactions are evidence of a burgeoning market: Russia offers a fresh and exciting source of deals to firms whose domestic markets are slowing. But investing in Russia is fraught with political and legal risk. Local expertise is critical to getting a deal done and even more critical to success during ownership.

It is no surprise that both CapMan and Lion have teamed with domestic partners in the medium and long term. Lion's deal with Central European Distribution Corporation is clearly a marriage of considerable convenience on this deal. CapMan is making a more strategic commitment to a firm and its fund.

Expect more of both types, especially as Putin and his successor deliver their steady programme of economic stability. Say what you like about autocrats, but in this case market practitioners know where they stand.