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Foreign LBO investors appear to have a hard time entering the Russian market. Some observers even suggest that such a step is virtually impossible. Consider, for example, the opinion of Eugene Jaffe, founder and CEO of Russia and CIS investment firm Salford Capital Partners: “They can't compete,” he says, “because they don't understand the rules of the game and don't possess the required skills and resources.”

The rules are much better understood, says Jaffe, by the large financial and industrial groups that tend to be run by Russia's most powerful oligarchs. These entities, proclaims Jaffe, “have tremendous experience, and are well capitalised”. And he should know. Prior to launching Salford Capital in 2001, Jaffe was a managing director at Alfa Group, one of the largest financial/industrial concerns in Russia, which is chaired by multi-billionaire Mikhail Fridman. Jaffe says he has competed for deals with foreign private equity firms on occasion, but always found the most serious competition came from local rivals.

So what exactly are the rules that make things so difficult for outsiders? The ability to compete aggressively for available assets is perhaps one of them, but that's not a test you'd expect buyout houses to fail. Political connections may be of more significance. But whatever your interpretation of the rules, the fact is that where the likes of Alfa Group, MDM and Renova have become established names withing the Russian investment landscape, foreign buyout groups have thus far failed to gain a lasting foothold.

Not all observers believe that the lack of international GPs can be attributed to fears regarding the competitive environment. Michael Calvey, founder and co-managing partner of Moscow-based growth capital investor Baring Vostok Capital Partners, believes that the oligarchs have become a little less bullish in recent times. He says: “The oligarchs are still active but they're not as acquisitive as they were four or five years ago. After Yukos, they became more restrained because they could see the risk profile increasing for them.”

To recap, the Yukos affair, which ended in the oil giant's bankruptcy in August 2006, represented something of a nadir in the relationship between the Russian government and business worlds. Prima facie an uncovering of tax and fraud on a grand scale, it was also seen by some as a politically motivated attack on the oligarchs. In light of the arrest and imprisonment of top Yukos officials, including CEO and billionaire Mikhail Khodorkovsky, it's perhaps small wonder that the money men have sought a lower profile since.

Despite this, a continuing absence of LBO firms suggests that they do not view this as an opportunity to attempt a land grab. It could be argued that there is one exception to this in the form of US investment firm Texas Pacific Group, which recently announced plans to open a Moscow office. However, the firm was at pains to point out that the office would be “small” and an “annex to the London office”.

Meanwhile, a couple of attempts to settle in Russia were made by global private equity giant The Carlyle Group, which closed a Moscow office in 2001 after just two years on the ground that had resulted in a solitary investment in pharmaceutical company Apteka. (The business was sold to Alliance Unichem in February this year).

Carlyle subsequently attempted to refocus on Russia with a dedicated fund, which was pulled in May 2005 when international investor interest fell short of the level anticipated. However, with a target of just $300 million, it is clear that Carlyle was enticed more by the porspect of competing in the mid-market than taking on Russia's industrial heavy-weights.

Calvey's view is that LBO groups are dissuaded from laying down roots in Russia's major cities not by the oligarchs so much as the lack of suitable deal flow. He says: “There are not a lot of companies auctioned in transparent, understandable processes. You're also competing with the public markets which are hot at the moment and provide companies with good valuations.” Lack of sources of leverage is undoubtedly another concern, although market insiders say both local and international lenders are present in greater numbers than previously.

For the time being though, it's the mid-market – particularly in relation to the provision of growth capital – that remains centre stage in Russia. Here, long-established domestic private equity firms appear to have been making a healthy living over the years. Although Russia-specific data is hard to come by, recent EMPEA statistics showed that a sample of Russian and Central and Eastern European funds delivered a 42.6 percent pooled end-to-end return over three years and 14.4 percent over ten years – easily outperforming all other emerging private equity regions over the same timeframes.

Prominent among the domestic GP groups are the likes of Baring Vostok Capital Partners, Delta Private Equity Partners, Mint Capital, Russia Partners, Salford Capital Partners and Troika Capital Partners.

Jaffe says one reason why such groups are able to prosper in Russia's rapid growth and increasing affluence. While the larger financial and industrial groups tend to acquire “old economy” assets in sectors such as energy, natural resources and telecommunications, domestic private equity firms are more likely to pursue growth investments in “new economy” businesses in sectors such as consumer goods, retail, logistics and real estate.

These fast-growth companies have emerged in tandem with a wave of Russian entrepreneurialism, the flavour of which is captured in the publicity material for a book produced by Delta Private Equity Partners called Taming the Wild East: “In Russia today, one hears much about mega-companies and their owners and managers, the so-called oligarchs. But while the oligarchs dominate the headlines, a new breed of entrepreneurs is hard at work – growing companies, taking risks, innovating, and in many cases reaping remarkable rewards for their efforts.”

And, in a happy coincidence, it seems that these entrepreneurs are increasingly keen to work with private equity firms. Giedrius Pukas, director at Troika Capital Partners: “Entrepreneurs value our advice on how to build their businesses and, sometimes, how to prepare for flotation. We put in place the things that are often missing such as information management, financial processes and risk systems.”

Not all the pieces of the jigsaw in Russia have yet fallen into place, and this is reflected by the difficulty that many funds have in raising capital from blue-chip international investors who see the market as high-risk and relatively unproven. Nonetheless, for domestic mid-market GPs, the outlook is more promising than for the larger, foreign investors wondering if their turn will ever come.

A selection of leading industrial/financial groups active in Russia:

Alfa Group: Financial/industrial conglomerate with interests in oil and gas, commercial and investment banking, asses management, insurance, retail, telecommunications and technology. Founded in 1989 as commodities trader Alfa-Eco. Alfa Bank, Russia's largest private bank, is the group's flagship company. Also has a private equity and real estate arm known as Alfa Capital Partners. Alfa Group is chaired by Mikhail Fridman, who co-founded the company and is reputed to be worth around $10 billion.

Interros: Private investment group with stakes in companies worth $15 billion according to its website. Owns assets in industries including mining, power plants, finance and real estate. Founded in 1990 as a metal trading business by Vladimir Potanin, its chairman.

MDM: Russian banking and industrial empire founded in 1993 and co-owned by Sergei Popov and Andrey Melnichenko, both 30-something multi-billionaires. Made their fortunes from buying up steel mills, chemicals companies and coal mines.

Millhouse Capital: Established in 2001 as the investment vehicle of Roman Abramovich, the 40 year-old 11th-richest man in the world (with a fortune of around $18 billion) and owner of Chelsca football club. Abramovich acquired his wealth through state privatisations in the mid-1990s. In September 2005, Abramovich sold 73 percent of oil company Sibneft to Gazprom for $13 billion. In May this year, he acquired a 40 percent stake in Evraz, the Russian steel producer, for €3 billion.

Renov: Asset management company with shareholdings in leading mining and industrial entities such as TNK-BP, Russia's third-largest oil company, and SUAL, one of the world's top ten aluminium companies. Formed in 1990 by Russian-born US citizen Leonard Blavatnik and old school friend Viktor Vekselberg Vekselberg is chairman of the firm.