Delta Capital, the Russian private equity firm which manages the US government-backed US Russia Investment Fund, is to launch its first private equity fund targeting private investors. Delta Russia Fund LP will look to raise around $100m with a first close scheduled for the end of 2002.
Following Delta’s original strategy, the new fund will focus on early-stage and start-up investments in financial services, telecommunications media and technology (TMT) and consumer products and logistics. Since 1995 Delta has invested around $200m in these sectors, typically making investments of between $5m and $10m. Investments by the firm include backing the Spar supermarket chain’s move into the Russian market and the creation of retail and consumer bank Delta, part of the firm’s broad financial services investment programme.
Delta CEO and president David Jones believes that the time is right to be launching a new Russian fund despite a degree of apprehension among investors. “Although Russia has a certain image problem to overcome, it is a fact that the country has a far greater upside than any of its Eastern European peers, given the size of the market and the depth of its natural resources.” Almost by way of laying down the gauntlet to those uncertain of Russia’s potential, the firm is targeting an IRR of around 30 per cent, ten per cent above the global average.
The primary reason for Jones’ optimism stems from the Russia’s improved economic performance since the economic crisis of 1998. “The early years (1995-1998) proved quite difficult for the fund. It was a time when resilience counted for more than quality,” says Jones. “Since 1999, our role has been to transform our portfolio companies into quality operations and we have achieved this in a growing Russian economy.”
Delta has already achieved a number of successful exits on its investments, most recently the sale to Nestlé of mineral water producer Saint Springs, into which it made an initial $3m investment. “The increased demand for product choice among consumers has brought in a lot of interest from multinationals looking to get a toehold in the Russian market. Rather than risk setting up their own operations, the larger companies are often inclined to acquire small, established companies.”
Jones also believes that there is a growing opportunity to exit investments through sales to Russian trade buyers.
A rising number of fund managers are targeting, and reaping the rewards of, investment in Russia. Baring Private Equity Partners is currently investing its second $205m Russian fund, with managers at BPEP describing it as one of their most successful funds. The firm plans to launch a new Russian fund within the next 18 months.
Delta says it has already received enquiries for its new fund from international institutions as well as high net worth individuals across Europe. The firm is planning to hold a final close for the fund some time in 2003.