Alexei Chekunkov: Investors in unlisted Russian companies should consider non-resources plays
Russian private equity has made international headlines, but not always for the reasons that executives in the country would like.
Perhaps the most notable PE deal to date was TPG Capital’s investment in supermarket chain Lenta, which – owing to a dispute over the retailer’s strategy and appointed managers – reportedly led to a brawl at Lenta's headquarters in 2010 and a contentious courtroom battle.
However, Russian investment executives maintain there is more to the industry than sensational headlines would indicate.
Russian private equity has garnered some bad press, panellists acknowledged at the AsianInvestor and FinanceAsia Russia & CIS Investment Summit in Hong Kong last week. However, they contend that there have been numerous PE success cases that have remained out of the public eye.
“Newspapers like scary stories, because just writing that some private equity fund exited with a nice return is pretty dull,” says panellist Alexei Chekunkov, director of the $10 billion Russia Direct Investment Fund (RDIF), set up by the government last year to make equity investments chiefly in the domestic economy.
Others make a similar point. “The failure cases are often paraded and discussed in the public domain, almost promoted,” notes Victor Maslov of UBS Wealth Management in Geneva. “Whereas success cases are often less so.”
Other headlines, such as Russia’s ranking on Transparency International’s corruption index of 143 out of 182 countries, have made foreign investors wary.
A different perspective may help. RDIF’s Chekunkov points to the Lenta deal as a successful investment case – perhaps given the outcome. TPG and Russian bank VTB Capital (in which TPG is an investor) teamed up to enlarge their stake in the hypermarket chain to a 70% majority position in August last year.
Nonetheless, TPG is the only global PE firm with a presence in Russia after The Carlyle Group shuttered its Moscow office in 2005, citing high risks not commensurate with returns.
Chekunkov maintains that large PE firms need to justify the risks by generating returns of 30% on investment. “So because [of that], they’re chasing higher-risk deals, which sometimes ends up in tears. [This] fuels the negative perception issue, and it becomes a self-fulfilling prophecy.”
Deservedly or not, Russia’s PE sector is lacklustre. Only $135 million was raised by Russian buyout firms in 2011, according to the Emerging Markets Private Equity Association. The country saw 29 PE deals last year worth a combined $1.6 billion, an average of $55 million per transaction.
Despite the small sums, forum panellists contend that foreign interest in Russia is growing, with the best opportunities found outside Russia’s flourishing oil and mining sectors.
“I would suggest [that] any PE investor in unlisted companies should consider non-resource sectors as a priority,” says Chekunkov. The resources boom has led to greater personal wealth among the populace, making the consumer sector an attractive draw, note panellists.
Consumer goods, media, IT, healthcare, pharmaceuticals, high-tech and financial-services industries are of the most interest to PE firms, says Maxim Alekseyev, a senior partner at Russian law firm Alrud.
Furthermore, it’s not just PE firms looking to invest. Sovereign wealth funds (SWFs) are making strides where PE fears to tread, says RDIF’s Chekunkov. His firm last month announced a joint fund with China Investment Corporation (CIC) that will invest up to 70% of its capital in Russia.
RDIF and CIC will each commit $1 billion to the vehicle, with another $2 billion expected to come from external investors, bringing the total size to $4 billion, says Chekunkov. Up to 30% of the capital can be invested into China through deals with a Russian cross-border business angle, he adds.
Similarly, Kuwait Investment Authority last month inked a co-investment agreement with RDIF that will see the Middle Eastern SWF invest up to $500 million into Russia companies.
Sovereigns take a longer-term view on their investments in Russia than PE firms, with Asian investors in general being more cognisant of the realities of doing business in the country. “They understand that they need to forge partnerships,” says Chekunkov.
“Investors have to realise that Russia is a large, relatively developed economy," he adds. "We have historical institutions, infrastructure, large businesses [and] very strong local competition. We still have growth."
What it does not have, however, are returns on investment of 20% a year, says Chekunkov. “Once that’s realised, investors are going to be disappointed much less frequently.”