Russian state fund to announce three deals

Polya Lesova is chief of MarketWatch’s London bureau., 28.01.2012
DAVOS, Switzerland (MarketWatch) — The $10 billion Russia Direct Investment Fund plans to announce three deals in the next month, the chief executive of the Russian government’s private-equity vehicle told MarketWatch in an interview on the sidelines of the World Economic Forum’s annual meeting.

The deals will be the first for the fund, which was created in June 2011 and will be capitalized with $10 billion from the Russian government over the next five years. It’s mandated to co-invest with international investors in an effort to attract investment to Russia.

“The idea of a partner in Russia really resonated with” major investors in Davos last year, said Kirill Dmitriev, who left his job as president of Icon Private Equity to take the helm of the government fund.

“A lot of what we are doing is educating people on Russia’s tremendous growth opportunities, as opposed to the negative headlines people often read in the newspapers,” he said. “We are very realistic and pragmatic about Russia and the issues.”

While he was unable to discuss the specific deals he is working on, Dmitriev pointed to five Russian industries he finds attractive: financial services, logistics, healthcare, electrical utilities and agriculture. Russia’s economy, which is estimated by the International Monetary Fund to expand 3.3% this year, certainly presents big growth opportunities for investors, but the country is also notorious for rampant corruption and the weak rule of law, making some investors unwilling to take the risk.

“There are five sovereign wealth funds, seven private-equity firms and 10 strategic funds who are willing and interested [to co-invest] and that’s our focus for now,” Dmitriev said.

The fund is aiming to do 15 deals over the next three years. Under its co-investment model, for every dollar invested by the Russian fund, at least one dollar must be invested by a co-investor.

“Yes, it’s a government fund, but it’s run on a return-based principle,” Dmitriev said. “We believe we created a structure that got recognition by top investors.”

Some of the biggest names in private equity have joined the fund’s international advisory board, including Blackstone Group’s Stephen Schwarzman and Apollo Global Management’s Leon Black. The Russian fund got another big vote of confidence in October when it announced an agreement with China Investment Corporation, China’s sovereign wealth fund, to set up a $3 to $4 billion investment fund to make equity investments mainly in Russia.

“One of our missions is to be a sounding board for the government of what it needs to be competitive,” Dmitriev said. “Advisory board members have met with [Prime Minister Vladimir] Putin and he listens.”

In convincing investors, Dmitriev himself is a big asset. He’s well-versed in the language of the global private-equity industry and can point to his track record at Icon as well as at Delta Private Equity Partners. Dmitriev, who was educated at Stanford and Harvard, also has experience working in investment banking and consulting in the U.S.

“The fund will be focused on returns, because we want to showcase successful investment in Russia,” Dmitriev said. “It’s up to us to convince people that what I’m saying to you is a reality. What helps is my track record—for us, it’s easy to deliver this message. It helps us overcome scepticism.”

Corruption is certainly one concern that tends to make investors skeptical about Russia, and Dmitriev noted that the government is making big efforts to fight it. “Corruption is definitely an issue in Russia, in some sectors much more than in others,” he said. “If an industry is corrupt, you have a choice of not going to invest there.”