Sovereign funds: Russia and rupees

Russia’s massive state-backed co-investment fund has sealed a second big tie-up with a big Asian investor – this time in India – and is already planning a third.

The Russian Direct Investment Fund (RDIF) has agreed yet another partnership with a formidable Asian investment group. On Christmas Eve, the $10 billion Russian government-promoted fund signed a memorandum of understanding with the State Bank of India (SBI): both parties will commit up to $1 billion for investments with a Russia-India angle. 

This is not a well-ploughed furrow: bilateral trade between India and Russia totalled just $8.9 billion in 2011, according to the Russian Federation. However, ministers reportedly hope this figure will rise to $15 billion by 2015. And RDIF chief executive Kirill Dmitriev believes India’s $6.5 billion of investment in Russia could grow by five times in the next five years.

The deal follows RDIF’s 2011 agreement with Chinese sovereign wealth fund China Investment Corporation to launch a $2 billion Russia-China Investment Fund. This fund had a very set investment strategy: deals would be 70 percent Russian and 30 percent Chinese, all with cross-border angles (it announced its first deal in September, though it’s still awaiting regulatory approval).

“The Russia-China fund was the first platform we created, and that was received very well by investors and press because it was seen as an innovative solution – sovereign wealth funds co-investing together,” Dmitriev says.

The RDIF-SBI vehicle has a much less defined strategy, and unlike the China fund, will not operate as a GP in its own right. Dmitriev says it will focus on co-investment opportunities – especially with private equity – and let investments define the strategy over the next two years.

How useful this new consortium will be to India depends on what emerges from this process, according to Sanjeev Krishan, executive director of PricewaterhouseCoopers India. Given the current low levels of trade, everyone will be watching to see which sectors the new partners pick, he says.

The consumer and financial sectors remain popular in India, while domestic funds also favour oil and gas. However, Krishan believes the greatest need lies in India’s coal and infrastructure sectors. 

Dmitriev, on the other hand, suggests the consortium will look at a variety of manufacturing, healthcare, and energy platforms.

With recent returns being mixed at best, Krishan believes that Indian private equity is in desperate need of this kind of new blood. “There aren’t really a lot of players willing to put money into India at this point,” Krishan says. “Just saying that I have $1 billion to invest [solely] in India would be a huge boost to investor confidence.”

But will there be enough deals to back with a Russia-India cross-border angle? Dmitriev does not believe this will be a problem.

“Maybe existing private equity investors have portfolio companies that they want to expand overseas, including to Russia, but do not know how to go about it,” he says. “And for them to have a strong partner and platform can be helpful to them in both Russia and India.” 

Dmitriev says the tie-up is generating much interest among GPs in both countries: it is already looking at five to six projects, and expects to close its first investment sometime this year.

One thing is certain: this is clearly a model the RDIF likes. Although he couldn’t disclose details, Dmitriev reveals that the fund is in talks with another Asian SWF about a third partnership. Watch this space.