Russia: boosting private equity

By Ben Aris, FT.com, 17.06.2011
A state-backed fund promoting private equity investment won’t change Russia even with $10bn at its disposal and president Dmitry Medvedev’s personal backing.
 
But Kirill Dmitriev, the new CEO of the Russian Direct Investment Fund (RDIF)  launched this year, believes he can make a difference by co-investing with private investors, reducing country risk and making foreign institutions feel more comfortable.
 
Dmitriev says in an interview:
The fund will not a replace the other institutional reforms and both the president and prime minister have been very vocal about the need to improve the investment climate. But the idea of co-investment is to reduce the Russian risk and make foreign investors more comfortable.
 
If they come and invest $1 now with the RDIF and make money then these foreign investors will come back on their own and invest $10 down the road.
 
The goal of the RDIF is to show foreign investors from some of the world’s largest funds that Russia is not as risky as they think and that the president intends to prove it by making good returns for investors  co-investing in projects backed by the sovereign fund.
 
Dmitriev’s appointment to run the fund is a testament to the commercial nature of the project. One of Russia’s new generation of rising business leaders, Dmitriev cut his teeth working as a manager at Delta Private Equity Partners, a US-government backed investment fund designed to promote capitalism by financing the growth of independent business.
 
He then set up his own successful $1bn fund Icon Private Equity that invested in projects across the CIS. At the same time he founded the Russian Association for Venture Capitalists and advised the government on the creation of the Russian Venture Company, a state backed fund promoted by Prime Minister Vladimir Putin to kick start Russia’s venture capital business.
 
Sitting in a cafe on Red Square this week, just before the start of the Kremlin’s annual investment jamboree in St Petersburg, Dmitriev says:
I am not a politician. I am a fund manager and the primary goal of the RDIF is to earn returns for the investors. We thought long and hard about the best form for the fund, to make it as attractive as possible to investors.
 
The fund is limited to a minority roll of no more than 50% minus one share in any project. It means the co-investors don’t have to invest into anything they don’t believe will earn returns. I don’t see the RDIF as a political initiative, however the political goals of the government will be achieved from these investment – but as a by-product.
 
Dmitriev is currently hiring staff, most of whom will be Russian professionals. The first $2bn will be released this September and the first investment made before the end of this year, says Dmitriev.
After that, the state-owned debt agency and de-facto development bank Vnesheconombank (VEB) will release another $2bn every year over the next five years that the Kremlin hopes will attract another $90bn of private co-investment money.
 
Dmitriev says:
Russia is a very attractive investment destination and people have to some extent lost sight of what the country has to offer. It is the sixth largest economy in the world (even Russians forget this fact) and the number of people that are earning more than $10,000 a year has tripled in the last six years.
 
I am not saying that everything is good but the rising incomes have lead to an incredible amount of change in a remarkably short amount of time.
 
The structure of the fund is designed to ally foreign investors fears about investing into Russia. The Russian stock market has been the best performing significant market in the world over the last decade, but the average price to earnings ratio of under 7 at the moment stands in stark contract to those in the early teens for the other major emerging market. Russia performs way below emerging market peers in terms of incoming portfolio and direct investments.
 
The structure of the fund is designed so the fund can tap into the expertise of experienced global investors. The executive committee, meeting four times a year, will be made up of senior government figures and international advisors (the list of candidates has not been approved yet). However, once a year there will be a meeting of an international advisory committee composed of representatives from global funds.
 
Dmitriev wants to use this outside expertise:
For example we have talked to a private equity fund that is a global leader in health sector investments in the US and Europe. Very few private investors in Russia have invested into private sector health care but clearly there is need for them. So this is potentially a very profitable investment. The same is true for the pharmaceutical sector where Russia has the fastest growing pharma market in the world but 80% of the products are still imported.
 
Among the international investors that have already expressed an interest in joining the international advisory board are Goldman Sachs, Blackstone, Abu Dhabi Investment Authority, Kuwait Investment Authority, China Investment Authority, Permira and Caisses des Depots.
 
With all those experts, Dmitriev will have plenty of  international insight available. But Russia has never been short of foreign advice on its managing its economy. The problem has always been implementing it.