RCIF pulls off first major Russian IPO since crisis

An IRR of 90% on children’s retailer Detsky Mir sends a 'strong message' to global PE firms, said co-CEO Kirill Dmitriev.

The Russia-China Investment Fund (RCIF) has made its first partial exit, selling a portion of its stake in Russian children’s goods retailer Detsky Mir through a listing on the Moscow Exchange.

The listing priced the company’s shares at 85 roubles ($1.44; €1.34), implying a market capitalisation of around 62.8 billion roubles.

RCIF has sold less than half the 23.1 percent share it acquired from fellow shareholder Sistema in January 2016, and reaped an internal rate of return of more than 90 percent in US dollar terms, RCIF co-CEO Kirill Dmitriev told journalists on a conference call.

More than 90 percent of the demand came from outside of Russia, with US investors accounting for more than 25 percent of interest. The majority of investors were long-only funds, alongside hedge funds, and sovereign wealth funds, which accounted for 10 percent.

The book was “very diversified”, with no single investor particularly dominant, Dmitriev said.

“That was the idea, to really create a big opportunity for good liquidity in the market.”

This is the first major IPO in Russia since 2014, when the combination of plummeting oil prices and sanctions from the West over Russia’s annexation of Crimea pushed Russia into recession.

“We believe that this IPO opens a window for other IPOs and public placements in Russia,” Dmitriev said, adding that the Russian economy is expected to grow 2 percent in GDP terms in 2017.

“It really is a message that [the] Russian IPO market is open, functioning, and foreign investors are participating.”

In 2016, Detsky Mir’s revenues grew by 30 percent and its EBITDA grew by more than 56 percent, RCIF said.

RCIF intends to keep hold of its remaining stake in Detsky Mir for the next three to five years, Dmitriev said, adding that the fund expects the capitalisation of the company to increase “quite significantly” over that period. Thus far the company has focused on aggressive regional expansion, but it is considering different options for international expansion in Asia.

Dmitriev said there are not many markets where managers can generate a 90 percent IRR in US dollar terms, and that the Detsky Mir listing sends a “strong message” to the international private equity community.

“Frankly for leading PE firms in the world it’s easy to have good returns in Russia because lots of Russian companies can increase their efficiency, and the industry expertise the PE funds bring can really drive returns to a very high level in Russia,” he said.

“We believe this is a really strong message to the private equity community and GPs to start contemplating Russian opportunities and to use their industrial skillset to add value and create good returns in the Russian market.”

Dmitriev said the new Trump administration’s willingness to engage with Russia had a significant positive effect on US investors’ interest in the listing.

“We believe the fact that the US has shown much better interest and relationship to Russia in the last couple of months led to this major interest among US [investors],” Dmitriev said.

“The approach of the Trump administration has been very positively received in Russia. It’s not an approach to agree with Russia, but it’s an approach to have dialogue with Russia, and of course you can solve problems in dialogue only.”

Set up in 2014, RCIF is a $2 billion fund established by the Russian Direct Investment Fund (RDIF) and the China Investment Corporation (CIC) to develop bilateral economic, trade and investment relations between Russia and China.