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?'"