On a mission in Moscow

In Russia, one group has come from relative obscurity to dominate the world of investment banking. State-owned VTB Group was ranked No.1 bookrunner for both equity and debt capital markets by volume in 2010, surpassing established names like Barclays Capital, Goldman Sachs, Citi and JPMorgan by some margin, according to data provider Dealogic. “They are clearly the No.1 investment bank in any sector,” says the head of one Moscow-based private equity fund.

VTB’s rapid rise to prominence must in part be put down to the fact that it is 85.5 percent owned by the Russian government. “There is a lot of cash and a lot of political will there,” says another Russian GP.

Toby Mitchenall

To date, the franchise’s private equity team has kept a relatively low profile. Probably its most prominent work has been as a partner for Western firms wanting to access Russian deal flow and local expertise. In 2009 the private equity group partnered with global private equity giant TPG to acquire a stake in Russian hypermarket chain Lenta for a reported $115 million. Clearly TPG, itself no stranger to the Russian market, recognises the value of a partner with government ties and a massive local presence. Ongoing talks for TPG to acquire a minority stake in the banking group itself as part of a privatisation programme are testament to that.

The private equity unit’s low-key approach is confirmed by sources on the ground in Moscow, who all associate the VTB brand more with investment banking prowess and less with private equity investment. But this may be set to change in 2011.

Led by Tim Demchenko, the former head of Deutsche Bank’s private equity activities in Moscow, the 16 members of the private equity group are preparing a five-pronged assault on the Russian private equity market.

The first prong of the attack is to extend the private equity real estate activity it commenced in 2010. In April the group sealed its first deal from a $150 million real estate pledge fund, which it raised from a Middle Eastern sovereign wealth fund. With most of this capital deployed via the first transaction, VTB is in discussions to raise a further £350 million from three new investors.

As for straight private equity activity, the plan is to raise a traditional blind pool fund to invest in mid-market Russian businesses. The team has held back on raising a fund to date, because quite simply the fundraising market has been too tough, Demchenko said in January when we met at the group’s London office. Now, he says, he has slated a first close – assuming everything goes to plan – on something in the region of $200 million to $250 million in third quarter of the year, with an ultimate target fund size of up to $500 million: “a good-sized fund for the Russian market,” he says.

This strategy will put VTB in direct competition with some of the more established fund managers in Russia, such as Russia Partners and Baring Vostok Private Equity.

Demchenko’s team is also planning its first foray into a sector generally avoided by private equity investors due to the political risk: metals and mining. There are a number of smaller regional operators, beneath the radar of the large oligarch groups, which would be keen to partner with a trusted, Russian brand like VTB, Demchenko says. While he hopes to close VTB’s first investment in the sector in the first quarter of 2010, he does not envisage regular enough deal flow for a traditionally structured metals and mining fund.

Demchenko is looking closely at two other areas in which he feels VTB could effectively plant flags: infrastructure and agriculture. In the former of these two areas, he can point to previous experience; VTB Capital was both adviser and a major shareholder in the historic public-private partnership Pulkovo Airport reconstruction project in St Petersburg. The team is currently looking at three fairly advanced infrastructure opportunities with the ultimate goal of building up a track record and raising an infrastructure fund.

In terms of agriculture, Demchenko says the group is likely to have raised an agriculture-focused fund together with a major international partner by the end of the year.

What to make of these grand plans? Russian GPs do not seem to be perturbed by the thought of the powerhouse that is VTB Group expanding its private equity franchise. There is, after all, plenty of room in the country’s underserved private equity market. One thing is for certain: if Demchenko’s team can replicate the rise of its investment banking counterparts, there will be a powerful new name in the world of Russian private equity.