RUSSIA: New fund seeks foreign co-investors

Euromoney, Dominic O'Neill, 04.10.2011

Launched in June, the Russian Direct Investment Fund (RDIF) is an important part of the drive to modernize and diversify the Russian economy. It is another aspect of the government’s efforts to boost international investment in technology-intensive industries.

With $10 billion in pledged capital from the state, the fund is designed like a private-equity firm, but will focus on growth capital. RDIF will source buy-outs in Russia between $100 million and $1 billion. However, it will only participate if it can bring in at least one co-investor from abroad.

“The benefit to Russia will be financial returns [on the state’s equity investment] and the chance to bring in more foreign capital and know-how to key industries and sectors… It’s very important to have showcases of successful long-term foreign investment,” RDIF’s chief executive, Kirill Dmitriev, tells Euromoney.

He admits it is a problem that many of the biggest private equity firms have yet to make their first investment in Russia. Globally, less than 0.1% of long-term investors’ funds targets private-sector Russian firms. “There’s a gap between the perception of Russia that foreign long-term investors hold and the actual opportunities. Most of those who have invested have made good returns, and they have come back for more. It’s the first steps that are scary,” he says.

RDIF hopes to assist big long-term investors with their first endeavours in Russia and, as such, it will only contribute a maximum of 49% of each investment. Co-investors must be either foreign sovereign wealth funds or the larger global private-equity firms, or strategic investors with at least $1 billion in revenues.

The other rationale to bringing in experienced foreign capitalists is that the co-investors’ “extra set of eyes,” as Dmitriev puts it, will prevent the fund itself losing money. “There will be no obligation to invest,” he says, although he expects that about two-thirds of the deals will be sourced by RDIF.

Citigroup chief executive Vikram Pandit and Stephen Greeen, UK minister for trade and investment and a former chairman of HSBC, were among the bigwigs on a panel to discuss RDIF at the St. Petersburg International Economic Forum in June. Meanwhile, prospective members of RDIF’s supervisory board, which will meet once a year, are rumored to include the heads of Chinese and Korean sovereign wealth funds and the founders of US private-equity firms TPG and Apollo.

In terms of sectors, RDIF sees particular opportunities in aerospace, alternative energy, nuclear power, pharmaceuticals and healthcare, telecommunications and IT, advanced processing of natural resources, agriculture and food retailing, value-added mining, housing and construction materials, transport and logistics.

Dmitriev underlines in particular the opportunities in pharmaceuticals, given Russia’s rapidly growing consumer market and the fact that only about 20% of drugs consumed in Russia are manufactured domestically. He also highlights infrastructure – particularly electricity and ports – although he says convertible debt instruments might be more suited to funding infrastructure projects. He says RDIF could invest in the energy sector, but would prefer firms related to energy efficiency or clean power.

In the tech sector, RDIF will invest in larger, later-stage firms compared with other Russian state funds focused on the tech industry, such as Rusnano. Dmitriev says, however, that RDIF could invest, for example in one of Rusnano’s projects, if the firm in question has proven profitability. RDIF can furthermore invest up to 20% of its money outside Russia: either in the Commonwealth of Independent States, or in Companies that could somehow benefit Russia’s tech industry.

Investors hesitant

Long-term investors have so far hesitated to come to Russia, partly because of concerns about corrupt officials and biased courts – worries that might be allayed by investing alongside the state. Indeed, the fund has been championed by president Dmitri Medvedev. It further has approval from the supervisory board of state development bank VEB, which is chaired by prime minister Vladimir Putin (VEB will be the sole owner of the fund).

“The fund has access to influential circles. That makes it an attractive partner,” says Dmitriev. Co-investors will furthermore be able to structure their investments under UK or other international law, he says.

Dmitriev reckons the fund will conduct between 30 and 40 transactions over the next seven years. He has been building a team of investment directors over the summer. “The goal is to be the best private-equity team in Russia,” he says.

RDIF has already spoken to co-investors on specific deals and is likely to be able to undertake its first deal by the end of the year, he says. It will probably carry out between five and seven deals in 2012.

“Once we are able to show about five successful exits, it will be a major step. It will result in a major increase in investment in Russia by long-term investors,” says Dmitriev.