Russian resolve

In the ongoing search for the next high-growth market, the BRIC countries (Brazil, Russia, India and China) have garnered the lion’s share of attention from private equity firms. But of that quartet, one country is conspicuous in failing to capitalise on its strong economic fundamentals by attracting foreign investment. Russia remains a challenge for private equity investors and fund managers; widely perceived as being too politically risky, buyout firms have barely scratched the surface in two decades of trying.

Last year, there were just eight buyouts in Russia worth a combined $124 million, according to data provider Dealogic. The market peaked in 2008 with 26 deals totalling $1.58 billion, still a relatively small amount compared to markets like Central and Eastern Europe, which recorded 56 deals worth $4.25 billion in the same period. 

Oleg Jelezko, managing partner of Russian private equity firm Da Vinci Capital, says the local private equity market is narrow and fragmented from an institutional perspective.  “Most fund managers have short track records. Russian managers also raised no new money last year.”

Jelezko says GPs on the ground are now seeing “the light at the end of the tunnel”, however, with several exits expected. This will of course please potential investors and demonstrate to other fund managers that the market is not impenetrable for private equity firms. But moves are afoot in Moscow to further open what could be a lucrative market to foreign investors.

Russia’s government has plans for a $10 billion fund which will co-invest in Russian companies alongside leading global private equity firms. The fund is understood to have been seeded with a $2 billion state commitment to reassure international institutional investors that it will be immune to the perceived risks of corruption and bureaucracy.

“Private equity people view Russia as a place where it’s very hard to find deals, and the best deals tend to go to the oligarchs,” David Rubenstein, co-founder of US alternatives manager The Carlyle Group, told the Financial Times last month. “I have no bias against Russia, and we look at everything, but we have not decided whether to put any resources into [the state-backed fund].”

Still, Rubenstein told Berlin conference delegates in March that Russia was “relatively less attractive than the other BRIC countries”. (Perhaps this is why Carlyle has twice opened offices in Moscow, in 1998 and again in 2004, only to close them later.)

James Cook, co-founder of Russia-focused private equity firm Aurora Investment Advisors, acknowledges Russia is competing against other BRIC countries for investors’ attention. It must take “concrete measures to make investors choose Russia over other BRIC opportunities” he says, adding that Russian private equity deals needed to demonstrate superior returns to compensate for risk.

Investors viewed Russia and the CIS as the least attractive emerging market over the next 12 months, a survey published in April by the Emerging Markets Private Equity Association and secondaries firm Coller Capital found. Respondents said the factors most likely to deter them from investing in Russia were political risk, a challenging regulatory environment and a limited number of established GPs.

Zbigniew Rekusz, a partner at CEE-focused buyout firm Mid Europa, echoed that latter point during a round-table discussion in May (see p. 36). “Notwithstanding the huge opportunity and the huge risks, I struggle to name more than one successful private equity player there – Baring Vostok. Yes, there are deals done from time to time, but I just don’t see a success story for private equity in Russia,” Rekusz said.

His view was countered by Petr Rojicek, chief investment officer of Switzerland-based fund of funds manager Alpha Associates, which invests in the CEE region including Russia. “The GP universe in Russia is limited, but there is more than one successful player. The returns have actually been quite good,” Rojicek said.

Russia’s president, Dmitry Medvedev, has made clear he believes the key to unlocking Russia’s potential lies in attracting foreign capital. Together with the state-backed fund, he has reportedly appointed a panel of experts to advise on turning Moscow into an international financial centre. And his recent manifesto contained promises to tackle corruption, improve regulation, cut red tape and give greater rights to minority shareholders.

Private equity investors and managers will be watching to see if those promises are made good, and if so, may finally start ranking Russia alongside the rest of the BRICs.