Russia returns

Russia’s two biggest exchanges have been in the news lately – Micex and RTS are on the verge of completing their long-awaited tie-up, which will effectively see Micex take over its smaller rival. But what’s less widely known is that this is in part a private equity-engineered deal: the largest shareholder in RTS is an investor group led by Russian group Da Vinci Capital, which has spent the last few years building up the derivatives-focused platform.

Back in 2007 RTS was an insignificant beast, by exchange standards – a commercial partnership of brokers, owned and run by the brokers on a fairly non-commercial basis. When Da Vinci started to accumulate a stake by buying out some of the smaller shareholders, the brokers viewed them with considerable suspicion. “We got a very cool reception,” admits Evgeny Fetisov, a managing director at the firm. “They were worried we’d just make some good money and then go. Plus we were perceived as outsiders to Russian broking, so they didn’t see how we’d add value and improve the company.”

Demonstrable results were the key to winning them round, according to Fetisov. “We provided a dedicated management resource for the first time. We introduced proper business planning and budgeting. We set up strategy and remuneration committees. We made sales and marketing a priority. We brought in new clients. And we looked at the fee structure in order to generate higher revenues. So we started delivering results and finding profits – they could see that we were not just talking, but doing something.”

The impact of the financial crisis in 2008 clearly made life much more difficult for RTS; as Fetisov says, “changes are hard to address when everything’s going haywire”. But there was an upside for Da Vinci: RTS shares got cheaper, so it was able to build up its stake.

Exchanges are never an easy sector in which to operate, since they’re so bound by political and regulatory pressure – particularly in Russia, where the central bank is the biggest shareholder in Micex. But Fetisov insists that the rationale was entirely commercial – “the competition is global, so there’s no point competing locally, particularly when there’s very little overlap [between the two]” – and that the impetus came directly from Micex, not the Kremlin. That said, it presumably helps that the enlarged exchange will bolster Moscow’s credentials as an international financial centre. So the government was always likely to be obliging.

One awkward hurdle appears to have been overcome: shareholders on both sides have rejected an attempt to block the deal by activist investor Eurofinance Capital, which had argued that it undervalued Micex and served only to enrich RTS shareholders (like Da Vinci). 

But the greatest challenges for the investor groups may be yet to come: in creating this single entity, which is slated to itself list in about two years’ time, they now have to combine two separate companies with two separate management teams, and about 1,800 staff. What’s more, since Russia’s domestic investor base is so small, it will need to convince international investors that Moscow is now a risk-free place to do business – and that won’t be easy, given past experiences.

Nonetheless, the transformation of RTS does show that it is possible for private equity to buy into private Russian enterprises and build them up through tangible operational improvements. And hopefully, the combined exchange will provide a better exit route for investments in the country. So while the jury’s still out on Moscow as a financial centre, this deal is certainly a step in the right direction.