Banking on Russia

In Russia, what some investors view as regulatory hurdles to investing in the banking sector, others interpret as necessary precautions for a developing industry. By Judy Kuan.

The banking and finance industry in Russia has attracted significant levels of interest and capital from private equity investors this year, spurred by a number of high profile examples of high return exits by private equity-backed Russian financial institutions.

Sasnauskas: Strong political will for development

An oft-mentioned successful exit was Moscow-based Delta Private Equity Partners’ receipt of 4.37 times book value when the firm sold its interest in commercial bank DeltaBank to GE Consumer Finance last year. Earlier this year, Delta also signed an agreement to sell mortgage bank DeltaCredit, which has been growing at 100 percent annually and holds 50 percent market share, to European financial group Societe Generale.

These levels of growth and returns have other investors speculating about the potential for replicating these types of results. For instance, earlier this week, Stockholm-based asset manager East Capital announced it would target this arena and launch a private equity vehicle – with a fundraising goal of €300 million to €350 million – to invest in the banking sector of Russia and the CIS.

“What we have seen so far is a bit of a mixed picture,” says Kestutis Sasnauskas, a founder of East Capital, referring to the private equity industry’s past experience in Russia and the CIS. But in spite of the spotted track record after private equity firms entered the region in the early 1990s, there is now renewed interest in the local private equity industry, says Sasnauskas, who is also managing director of East Capital’s private equity arm.

“Generally, we see a growing demand for private equity instruments among our investors. There is also a shift in understanding of the requirements and approach among companies seeking private equity backing,” says Sasnauskas.

However, a number of challenges continue to impede the entry of foreign capital into Russia’s banking industry, says Sasnauskas, such as ongoing issues with regulatory bureaucracy, existing restrictions and transparency.

“Overall, Russia has been moving towards positive changes [in its legislative environment]; however, the fast evolving environment creates higher uncertainty and makes it more difficult for businesses and investors to operate,” says Sasnauskas.

Despite these obstacles, “there is a strong political willingness to develop [Russia’s] financial sector,” says Sasnauskas. “Authorities are in favour of attracting foreign investors, but they just want to know who they are. Strict transparency and disclosure requirements are positive given the premature state of the banking sector and the need to improve the confidence of private individuals.”

The success of East Capital and other firms in the Russian banking and finance industry – a traditionally difficult-to-access industry – will hinge on the ability of management teams to navigate existing regulatory hurdles. Given the central role that this industry plays in overall economic development, it seems likely that the interests of private equity investors and the Russian government will continue to converge on this front.