Monday, 25 February 2008

Russia's Renaissance to sign deal with South Korea's Hanwha

Business New Europe

Jason Corcoran in Moscow

February 22, 2008

Russian investment bank Renaissance Capital is to sign a partnership agreement with South Korea's Hanwha Securities to explore ties in asset management and brokerage. A formal agreement between the two is expected to be signed at the end of February.

Renaissance already has investment banking joint ventures with the UK's Royal Bank of Scotland, and Australia's Macquarie, along with an informal mergers and acquisitions tie-up with US bank Lehman Brothers.

Stephen Jennings, Renaissance's founder, last year said the bank could only do a limited number of partnerships. "You can't do a lot of alliances. How many best friends can you have? You can only have a small number," he said.

However, Alexander Kotchoubey, managing director of Renaissance Investment Management, stressed it was the first such arrangement for the group in funds.

The two banks have agreed a memorandum of understanding to work together initially in asset management with a view to developing the relationship further in brokerage activities and investment banking.

"There is a revolution happening in retail capital. People are looking for substitute markets and the Koreans have relaxed their laws allowing investors to look abroad. They have already been investing in Chinese bonds and are now looking for other markets like Russia," Kotchoubey told bne.

The two banks will shortly launch a Russian mutual fund in South Korea and plan to develop hedge funds and wealth management services.

Hanwha, part of one the country's top-10 conglomerates Hanwha Group, was chosen as partner because it already has launched a fund investing in Kazakhstan. Hanwha also hopes to leverage Renaissance's strengths in the Russian market for its own ends. Renaissance is currently developing a full service investment bank located in Kazakhstan's financial capital Almaty.

"We are very bullish about the Central Asian marketplace as is Hanwha. Korean companies such as Samsung have car factories in Kazakhstan and are expanding in the region," Kotchoubey says. "At the moment, the relationship is about investment management but it will develop."

Top South Korean automaker Hyundai Motor is looking at setting up a plant in Uzbekistan. The world's fifth-largest car market already also announced in December it would begin work on a 100,000-unit plant costing $400m in St Petersburg within the year.

Other South Korean companies exploring expansion opportunities in Central Asia include telecommunication giants LG Telecom and SK Telecom, along with Daewoo.

As the largest shipbuilder in the world, Korea has also seen a rising number of orders from clients in the region.

Senior executives leave Deutsche Bank in Moscow

Financial News

Jason Corcoran in Moscow

25 February 2008

Deutsche Bank’s head of equity sales in Russia, Ian Colville, and his colleague Maxim Achkasov have joined the exodus of senior staff from its Moscow operation.

Deutsche, the leading foreign investment bank in Moscow, has been hit by departures since co-investment banking head Nicholas Jordan left last March for Lehman Brothers.

Colville, who joined the group in 2003, is moving to a private equity fund, New Path Ventures. He will join former Deutsche colleague Michael Stein in Kiev while director of equity sales Achkasov is leaving for a buyside job.

Claus Korner, head of wealth management in Russia, left last month for Icelandic banking group Glitnir. Jordan’s former co-head Ilya Sherbovich is leaving to start an investment boutique. Other leading bankers have resigned to join rivals Dresdner Kleinwort, Citigroup, Morgan Stanley, Renaissance and Macquarie.

Deutsche retained its status as Thomson Financial’s leading equities bookrunner last year in Russia from its involvement in 10 issues worth more than $5.3bn (€3.57bn). The bank has opted to promote from within in response to the war on talent.

A spokeswoman for Deutsche in Moscow was unavailable.

Wednesday, 20 February 2008

Renaissance readies partnership deal in Korea

Financial News

Jason Corcoran in Moscow

20 February 2008

Russian investment bank Renaissance Capital is to sign a partnership agreement with Korean bank Hanwha Securities to give Korean retail investors access to Russian asset management products.

Renaissance has investment banking joint ventures with the Royal Bank of Scotland and Australia’s Macquarie Bank, along with an informal mergers and acquisitions tie-up with US bank Lehman Brothers.

Stephen Jennings, Renaissance’s founder, last year told Financial News the bank could only do a limited number of partnerships. He said: “How many best friends can you have? You can only have a small number.”

Alexander Kotchoubey, managing director of Renaissance Investment Management, said the two banks had signed a memorandum of understanding to work together – initially in asset management and brokerage, with a view to developing the relationship further in investment banking.

Kotchoubey said: “There is a revolution happening in retail capital. People are looking for substitute markets and the Koreans have been investing in Chinese bonds and are now looking for substitute markets to invest in.”

The two banks will shortly launch a Russian mutual fund in Korea and plan to develop hedge funds and wealth management products.

Hanwha, a subsidiary of one of Korea’s top 10 conglomerates, was chosen as a partner because it has launched a fund investing in Kazakhstan. Renaissance is developing a full-service central Asian investment bank located in Kazakhstan’s financial capital Almaty. Staffing there is being doubled to more than 80 personnel.

Kotchoubey said: “We are very bullish about the central Asian marketplace, as is Hanwha. Korean companies such as Samsung have car factories in Kazakhstan and are expanding in the region. At the moment, the relationship is about investment management but it will develop.”

An agreement is expected to be signed by the end of the month.

Monday, 18 February 2008

New Geneva Team for Russian ultra wealthy

Wealth Briefing

February 18, 2008

Jason Corcoran in Moscow

JP Morgan Private Banking is setting up a new Geneva-based team to serve Russian ultra high-net worth clients.

Leonard Tsomik, head of JP Morgan Private Banking Russia & Eastern Europe, said he had identified a number of candidates to hire in Geneva to complement the bank's Russia team in London and 100-strong personnel already covering the county.

In an exclusive interview with WealthBriefing, he said: "We have a small team in London and we are about to establish a team in Geneva of considerable size. Russians are very active in Switzerland and some have made their homes there so it makes sense to compliment our London coverage. We have a small active pipeline of professionals worth hiring for Geneva."

JP Morgan targets Russian ultra high net worth individuals and families with investment portfolios of $30 million or more. The minimum benchmark to invest with the bank offshore is $10 million, which far exceeds the average $1.5 million portfolio of Troika Dialog's ultra high net worth clients.

"Some of our competitors will take $500,000 million or less to get market share and to reach our levels. They cast a wider net," he added.

Mr Tsomik has worked on the Russian market in private banking and private equity since 1994 although JP Morgan only entered the market recently.

"All of our clients continue to invest a predominant amount in Russia," he explained. "Some like discretionary approach or advisory approach. We can also do things other banks can't do. Our core business is asset management and we are also an investment bank to private clients."

JP Morgan's investment bank was one of the first foreign banks to open in Russia in 1973 and last year topped the league table for involvement in Russian M&A advisory work.

Mr Tsomik said the private bank would leverage off the investment bank's experience and contacts in the market.

"We work very closely with the investment bank without violating regulations, confidentiality or Chinese walls. It's key to have the introduction from the investment bank because cold calls are only so good in any market."

Mr Tsomik said the origins of Russia's wealth had transformed overwhelmingly from natural resources to relatively new consumer economy sectors such as retail, food processing and real estate over the past five years.

"The market is very young and the clients are very young and very active in their business. There are no second and third generation clients. These guys are very sophisticated and are very interested in managing their own money and only parting with a portion of it. "

Wednesday, 13 February 2008

2008 seen year that big private equity hits Russia

Business New Europe

Jason Corcoran in Moscow

February 13, 2008

The Russian private equity scene has been dominated by local investors who have been around for over a decade, but 2008 is being tipped as the year when the big-game international funds come knocking.

US private equity firm TPG is currently the only major fund in Moscow, having set up shop a year ago. But several other major houses such as Blackstone and Permira are rumoured to be scouting in Russia for investment opportunities.

TPG is understood to be closing in on two deals in the retail arena following the collapse of its $1.4bn acquisition of the supermarket chain Seventh Continent in November. The firm has yet to complete a deal, but has earmarked $1bn to spend on Russian equities a year.

At last month's Troika Dialog Russia forum, industry representatives from TPG and other firms discussed whether the asset class is finally taking root in Russia.

Ivan Vercoutere, a partner at LGT Capital Partners, regards Russia as one of the few growth areas left for private equity along with China, India and Latin America. LGT, which has €18bn in funds under management, is a fund of funds player on the lookout for local players to invest with.

Stephan Ilenberger, chief executive of AXA Private Equity, believes the market is at a inflexion point. "It's changing now and there is a place for private equity," he said.

Likewise, Richard Seewald, a partner at Alpha Associates, a spin-off from Swiss Life Private Equity Partners, has been investing in Central and Eastern Europe for 15 years and believes "the golden years of private equity in Russia" lie ahead.

Figures from industry groups seem to bear out the anecdotal evidence that private equity activity is accelerating. The volume of private equity in Russian M&A more than doubled to $5bn in 2007, according to accountancy firm KPMG. While its share of overall M&A is still quite low at 4.5%, KPGM predicts it could reach 8-10% over the next few years as the equity market runs out of steam. The average size of deals involving buyouts has also mushroomed to $26m in 2007, from $8m in 2005. The Russian Association of Venture Investment is forecasting that the size of the average transaction could reach $50m this year.

Hard targets

Stephen Peel, head of TPG's Moscow, told delegates why the US firm hadn't yet completed a deal since arriving in Russia over a year ago. "You have to kiss a lot of girls before you go out on a date," he said. "It took us two years to get going in Europe. We are much more positive about the market than we were a year ago and we expect to make our first announcement in a matter of weeks."

Mint Capital, a Scandinavian firm staffed mainly by Russians, has invested $260m in about 15 companies so far. Gleb Davidyuk, a partner at Mint, is hoping that the status quo in the market persists. "We have no competition at the moment and we like that," he said. "We invest between $5m-15m a year - anything more than $50m tends to be in the radar of the tax authorities."

Last year heralded Russia's first leverage buyout deal when UK firm Lion Capital acquired Russian fruit juice maker Nidan Soki in a deal valuing the company at $500m. Some of the speakers at the forum anticipate Russia becoming a leveraged buyout market in two to three years time. "In Central and Eastern Europe, leverage has become a trend for acquiring finance and the floodgates have opened in recent years. It will hopefully too for Russia," Vercoutere of LGT said.

Axa's Illenberger agreed that LBOs will be the next phase of growth, while TPG's Peel said his firm didn't need leverage.

Members of the panel cited a general lack of corporate transparency, corruption and negative investor perception as barriers to growth. "Most of our deal structuring here is spent avoiding the courts and doing tax diligence," said Peel.

Mint's Davidyuk agreed that transparency was expensive, but necessary to avoid a jail term. "It costs you more, but better that than to be one day in jail and asking yourself, 'why didn't I fill in that form?'"

Monday, 11 February 2008

Branson’s space race targets Troika clients

Financial News

Jason Corcoran in Moscow

11 February 2008

The strength of Troika Dialog Asset Management chairman Pavel Teplukhin’s client list has attracted the interest of a string of global entrepreneurs keen to do business with him, including Virgin Group chairman Sir Richard Branson.

The asset manager, the funds arm of the Russian investment bank Troika Dialog, which Teplukhin helped to establish, deals exclusively with Russia’s high net worth clients. Branson approached him at a Russian conference last month, seeking to lure them on to his Virgin Galactic space tourism programme.

Branson said: “I think we should meet and talk business. We have already signed up the first 100 passengers but Russia could be a great market for us.”

Teplukhin, one of the founders of Troika and president of asset management since 1991, can vouch for his clients’ wealth but not their love of space travel.

He said: “If you look at the Forbes rich list, I can tell you that 30% of the names are my clients. We only deal in the seriously rich. My revenues are more than the largest private bank in Monaco.”

The Russian edition of US magazine Forbes runs a special issue every year featuring Russia’s leading millionaires.

Troika’s asset management arm runs a full range of investment products, including sector funds, real estate investment trusts and hedge funds. It markets them to upper middle-class investors, whose portfolios average $25,000 (€17,063) and wealthy clients with average portfolios of $1.5m.

Overall funds under management stand at $5bn, although Teplukhin prefers to measure his business in terms of the fees it brings in. He said: “We earn higher fees than the other banks by focusing on higher margin business. We don’t count money deposits because it’s a low-margin business and we don’t do custody, which is outsourced to UBS at the cost of about three basis points.”

Teplukhin declined to say how much he charges clients, but industry sources suggested it was about three percentage points.

Teplukhin welcomed the arrival of wealth management banks UBS and Credit Suisse to Moscow, but added they would have to build brand awareness from scratch.

Both Swiss banks have set up onshore wealth management operations in Moscow in the past year to compete with Russian banks and Germany’s Deutsche Bank, which has £1bn (€1.3bn) in funds under management.

Teplukhin said investment houses were not willing to pay asset managers enough money. He said: “Talent is not that deep and juniors here with three to four years experience expect a seven-figure salary. There are one million millionaires in Russia and only 3,000 of those use private banking services."

Wednesday, 6 February 2008

Investors scramble for infrastructure

Financial News

Jason Corcoran

04 February 2008

Top 10 infrastructure firms since 2003

Private equity’s participation in infrastructure has broadened the attractiveness of the asset class but has increased competition. The credit squeeze has led to a cut in returns.

Private equity firms short on big buyout targets are challenging infrastructure specialists such as Australia’s Macquarie and Babcock and Brown and investment banks including Goldman Sachs, Morgan Stanley and Credit Suisse.

Buyout groups raised 19 infrastructure funds worth $29.9bn (€20.5bn) last year, almost double that raised in 2006, according to UK research boutique Private Equity Intelligence. Its research showed there were 42 infrastructure funds targeting about $46bn.

CVC Capital Partners is the latest private equity group to launch an infrastructure fund, joining the pool of money dedicated to the sector. The UK-headquartered firm announced plans in December to raise $2bn for an infrastructure fund to buy utilities and public services.

US group Carlyle raised $1.2bn in November for its first infrastructure fund focused on North America where it believes public-private partnerships are set to take off.

AIG Highstar, a New York-based private equity group, closed its latest infrastructure fund in October at $3.5bn. Accountancy firm Ernst & Young said smaller private equity funds were looking to fund infrastructure projects valued at between $300m and $500m, smaller than big funds expect to tackle.

Tom Leman, a partner specialising in private equity at law firm Pinsent Masons, said: “Returns are about managing expectations in the infrastructure matrix. Classic infrastructure funds seek 9%-10% returns over 25 years. If inflation rates are about 4%, this is a great result. If private equity succeeds one out of 10 times, they are rightly looking for 20% margins.”

Infrastructure specialists are paying more for assets because they are seeking more stable and longer-term returns. Buyout funds seek higher returns and flip the asset after two or three years.

Investment banks have piled into infrastructure and industry specialists say their approach sits between buyout funds and specialists. Leman said: “Banks invest off their balance sheet and they can be flexible because no investors are knocking on their door demanding their cash back. Some buy and flip but generally they are more long term than buyouts.”

Jane Welsh, consultant at investment consultancy Watson Wyatt, advises her clients about investment opportunities and returns on infrastructure’s risk scale.

She said: “Specialists are more modest with low double-digit targets. Private equity funds and banks are targeting higher margins and will do messier transactions and will look at business bolt-ons such as services. There are also funds specialising in greenfield projects, which take on bid risk and usage risk.”

Investors new to the asset class regard it as a natural successor to commercial real estate – physical, real, tangible assets generating cashflows. Others view mature infrastructure as a substitute for long-term bonds with a hedge against inflation. The remainder regard infrastructure as a private equity play, with the focus on refinancing and restructuring a business to make capital gains.

Asieh Mansour, chief economist at Deutsche Bank Rreef Alternatives, regards infrastructure as a hybrid asset class, which shares common characteristics with traditional and alternative assets.

He said: “The bond-like, equity-like or real estate-like feature of any infrastructure investment depends on the individual asset and the stage of the asset’s maturity. Depending on the specific sub-sector and stage of development, infrastructure investments may range from a low-risk fixed-income substitute to a higher-risk, more volatile private equity-type investment.”

Charles Berkeley, managing director, financial sponsors, at RBC Capital Markets, believes each type of investor has its advantage.

He said: “The direct investor has less fee drag, while investment banking-sponsored funds are sometimes better able to use their global networks to originate deals. As in any market, innovators have a natural advantage and competitive access to capital.”

Buyout firms such as Carlyle and UK-listed 3i are changing tack to take advantage of opportunities in public-private partnerships. 3i has the best-known private equity fund in the sector. Despite its lacklustre start, its float was the largest listed infrastructure fund launch in Europe, according to the group. A big backer was the BT Pension Fund, which took a £98m (€131m) stake.

Consultants suggested the fund’s concentration on PPP contracts might lead to slow and steady returns, which pension funds favour. Although the lines are blurring, Leman believes buyouts will not change by adopting all the characteristics of infrastructure specialists.

He said: “Valuations are getting closer between the different camps but private equity funds have an edge. If you are trying to get management to run the assets, buyouts have the advantage because staff can realise capital gains in an exit within two to three years.”

Danny Latham, head of European infrastructure investment at Australian investment manager Colonial First State, agrees and does not envisage buyout funds providing 10-year covenants to satisfy public utility regulators.

He said: “Infrastructure specialists have a buy-and-hold strategy, whereas private equity has a buy-and-clip strategy. The issue is to ask about the attitude of vendors, who typically are not overly enamoured with the private equity industry. There might be a push towards more hybrid deals, such as UK service station operator Welcome Break. United Utilities is also pulling back to core utilities and is to sell its service businesses.”

With the raising of new funds and competition intensifying, the traditional definition of infrastructure has been extended to assets that have similar characteristics and returns, such as waste management and car parks.

Leman said: “Now racier opportunities are scarcer, private equity funds are having to look at service stations and domiciliary care businesses. They much prefer services and don’t want to be left holding the baby.”

Consultants also expect infrastructure funds to look around the world for opportunities, including in non-Organisation for Economic Co-operation and Development countries. CVC is examining sub-Saharan Africa for a new fund and the infrastructure joint venture between Macquarie and Renaissance Capital is understood to be launching a Russia and Commonwealth of Independent States fund this month.

• The volume of infrastructure financing this year is likely to continue at last year’s pace, says a report by rating agency Standard & Poor’s.

Last year was another bumper year for global infrastructure finance, fuelled by record levels of M&A activity driven by asset-hungry funds.

Infrastructure-related deals worldwide last year were worth $322bn (€216bn), just shy of the $342bn spent in 2006, according to S&P.

However, the agency warned infrastructure might not be a safe haven in a global recession. In a volatile market, bankers and investors might have expected infrastructure to remain a safe asset class and offer stable returns with little risk. But S&P said bank lenders and institutional investors had traded favourable debt terms against the management of credit risk during the infrastructure finance boom.

With the cycle turning in global credit markets, these loosely structured and highly leveraged acquisition loans are looking less attractive.

S&P estimated that up to $34bn of leveraged infrastructure loans could be left paralysed under present market conditions.

It highlighted the combination of project finance structuring techniques with the slacker covenants prevalent in leveraged finance. This new form of acquisition hybrid lending has allowed sponsors to acquire assets at record-breaking debt multiples but has dragged down credit quality in the infrastructure sector.