Russia fund reveals target sectors

FINANCIAL TIMES. By Catherine Belton and Courtney Weaver in St Petersburg, 24.06.2011
Some of the biggest names in private equity are considering investing with the $10bn direct investment fund Russia launched over the weekend as the country increases its efforts to boost foreign investment.

Russian officials are preparing to unveil the line-up of the fund’s international advisory board soon. In a sign of the scale of interest, the board’s members are set to include David Bonderman, co-founder of TPG, and Leon Black, founder of Apollo Global Management, as well as Lou Jiwei, the chairman of CIC, a Chinese sovereign wealth fund, and Chin Young-wook, the head of the Korean Investment Corporation, according to people close to the direct investment fund.

The fund’s mandate as a vehicle for co-investment with the state is the latest bid by President Dmitry Medvedev to quell investor fears about Russia’s murky business climate.

As private equity groups plough funds into other Bric nations, of $27,000bn in funds held globally by long-term investors only about $20bn is allocated for possible investment in private Russian companies, said the recently appointed head of the new fund, Kirill Dmitriev. “The question is: can we do better?” said Mr Dmitriev, a former Goldman Sachs banker who built up an impressive record heading one of the few private equity pioneers in Russia, Delta Capital.

Mr Dmitriev told the Financial Times that the fund hoped to raise $50bn in long-term foreign investment in the next five years on top of the $2bn to be provided annually by the Russian state, and aimed to encourage the likes of CIC and Blackstone, which have been wary of investing in Russia. 

“This is not a substitute for institutional change,” he said. “But it will help deal with issues of perceived risk. For lots of people, if the government is co-investing they are more comfortable.”

Mr Dmitriev added that the fund aimed to raise investments of between $50m and $500m from funds for each project and was eyeing returns of 10 to 15 per cent for sovereign wealth fund investors and 25 to 30 per cent for those with a greater risk appetite.

Two key areas for investment, he said, were, first, Russia’s healthcare and pharmaceutical industry, which he said presented a huge opportunity for growth, with Russians consuming one-seventh of the European drug market and importing 80 per cent of their needs. The other key area was to raise much-needed funds to update Russia’s creaking infrastructure.

But even though the heads of some of the world’s biggest funds said they welcomed the opportunity to invest with the state, some concerns remained about the investment targets.

“Of concern to us is that the fund does exactly what it says – to coinvest and be a partner of choice, and make commercial decisions, not political ones,” Mr Bonderman told a panel of investors at the St Petersburg economic forum over the weekend. “I worry about targeting sectors like infrastructure because this has historically been a low-return sector in most countries.”

But Mr Dmitriev insisted the fund was structured in a way to stem investor concerns about the state’s participation. He stressed the fund would be focused solely on returns, not on pet projects being promoted by the government, while there would be no limits on the sectors to invest in. It would not take a controlling stake in any of the projects selected for co-investment, and investors could choose which projects they wanted to co-invest in. It could also not force them to exit at the same time.

Others praised the opportunity the fund provided to those seeking to invest with a local partner effective at navigating the market risks.

Vikram Pandit, chief executive of Citigroup, told the St Petersburg panel the fund could provide investors with a key opportunity to access government decision makers at a time when Russia is preparing to launch a new privatisation drive. “Lots of prospects are going to come out of there. If there is transparency, we could be able to compete for these transactions,” he said.

Stephen Schwarzman, head of Blackstone, said his fund had refrained from investing in Russia because of concerns about “rule of law and corruption”. But he said the new fund and the increasing calls by Mr Medvedev for a rollback of the state and fundamental change in the economy presented investors with an opportunity to enter the market at a “point of inflection” when “you have a better chance of being lucky.