Pre-IPO Funds in Russia

THIS POST WAS ORIGINALLY PUBLISHED JULY 09, 2007

Pre-IPO Funds in Russia

Over the last year a couple of pre-IPO funds emerged in Russia that proved to be a good investment vehicle. Generally speaking pre-IPO financing is a hybrid instrument that combines features of both Private Equity and IPO financing. Over 90% of all companies that complete IPO experienced private placements, and pre-IPO financing is an extremely useful instrument to accelerate Initial Public Offering. The most acceptable candidates for such transactions are the ones that are considering IPO, but lacks expertise and/or resources for its preparation. Generally speaking, most of the pre-IPO funds have the following characteristics:

- Investment between 24 months and 12 months prior to IPO;

- Usual stake does not represent more than 2% - 20% of the equity;

- Investments are in cash, in return for equity, with an agreed security package as a fall-back plan, should the IPO fail;

- Control of the Company is not one of the Investor’s objectives

The most successful as to my knowledge is the Renaissance pre-IPO Fund. The Fund is seeking two types of investments:

•Acquisition of equity of unlisted companies with “private equity” type structuring and exiting in two–three years (higher upside)

•Acquisition of equity from RTS board, OTC or RTS B in case a formal IPO is upcoming on a Russian or overseas trade floor (lower upside)

•Free cash to be placed in deposits with maximum time/interest ratio and exposure both to USD and RUR

The Fund is listed on Bermuda’s stock exchange and with shares trading on the IOB at the LSE. The firms are aiming to list on public markets, mostly in Russia. 

According to Fund’s Director Natalia Ivanova “we prefer new-economy companies like technology, media and telecoms (TMT), where the return cannot fall so much as well as consumer companies and banks.” While the fund is investing in long-term holdings when compared to some hedge funds, its investors can buy and sell shares in the special structure with Renaissance Capital acting as market-maker. The fund with an independent administrator offers a daily NAV calculation and Ivanova strives to offer investors as much information on investee firms as possible.

The Fund was a proven success and you may see its major characteristics (as of March 2007) on the following graphs

Source: Renaissance Capital

Some other funds that operate in Russia:

- Zimmerman Adams International Ltd (London) and First Mercantile Capital (Moscow) pre-IPO fund to provide financing for Russian and CIS companies

- UFG Russia Alternative Fund launched 1 November 2006 to operate in Russian and CIS market

- Some time ago I wrote about PIO Global Asset Management is mulling establishing a pre-IPO Fund that would invest in SME shares that are preparing for IPOs. One of the options is to domicile the pre-IPO Fund in Russia and legally form it in a closed mutual fund scheme. According to Russian securities laws, it is not permitted to form a Fund’s portfolio exclusively with the low liquidity shares. Thus one of the solutions would be to include some blue chips in it

- Troika Dialog is establishing $ 300 million pre-IPO fund with proposal from EBRD to provide $ 150 credit for it.

With the continuing upstream of Russian IPOs (the latest update you may find at this Reuters news feed), I guess that in the next few months we will witness emergence of more and more funds of that type.

NOTE. In further experimenting with my blog, I shall try a new approach: instead of making weekly reviews I will publish from time to time random comments on what is going on.

And my best regards to my new Russian friend Maxim Lesine in Italy who randomly translates my posts in Italian and puts them on his blog. Although he does not mention the source, but WELCOME ON BOARD, Maxim !!!

Vivid Picture of Russian Finance Market – Where Are the Professionals?

THIS POST WAS ORIGINALLY PUBLISHED JUNE 28, 2007

Vivid Picture of Russian Finance Market – Where Are the Professionals?

Russian financial market is seeing a biggest ever change in its history. Recently PricewaterhouseCoopers released the data that within the next three years the volume of assets that are turned into private asset management shall increase 30-50% annually. National Association of Securities Market Participants (NAUFOR) reports that over the last six months the number of private investors in Russia increased from 350,000 to 500,000. This is a visible result of “people’s IPOs” in SBERBANK’s (RTC:SBER) case about 30,000 and VTB (RTD:VTBR) – over 130,000 private investors. NAUFOR further expects that by the end of 2007 there would be about 700,000 Russian private investors. Other stats data also show this trend: in Q1 2007 open mutual funds attracted about 15.8 billion RUR ($ 600 million) – 50% increase as compared to Q1 2006.

This stat data raises the inevitable question – who is going to manage all assets? I wrote earlier about the “War for Talent”, and the problem seems to be heating up every day. PricewaterhouseCoopers reports in its study that only 26% of 43 polled investment banks think that they will be able to fill their vacancies for the staff within the next three years. And more and more ‘white spots’ in the Russian financial market map are being filled up every day. When we look at the map we may notice that practically all major players are already here: JPMorgan (NYSE:JPM), Merrill Lynch (NYSE:MER), Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), HSBC (NYSE:HBC), Raiffeisen International (WBAG:RIBH), Societe Generale (OTC:SCGLY), ICICI Bank (NYSE:IBN), Intesa (BIT:ISP), UniCredit (BIT:UC), Nomura (NYSE:NMR), and many others. Just this week it was announced that Toyota (TYO:7203) Bank officially received its license in Russia; we awaiting for Barclays PLC (NYSE:BCS) and Industrial & Commercial Bank of China (ICBC) (SHA:601398). However, the share of foreign capital in the aggregate capital of Russian banks is 18.3% ; since the beginning of the year it has risen by another 2%; with 3-4% expected increase by the end of 2007. This week it was reported that VTB (RTD:VTBR) is seriously considering establishing their own investment banking division and this is not cheap – experts believe that the bank will spend at least $ 100 million. And German BayernLB Bank announced this week about opening its office in Moscow.

I mentioned earlier about good life of Western investment bankers in Moscow, and I guess this will continue for a while. Russian new business elite is still growing and the lack of qualified experts here in Moscow is evident. According to some experts the investment managers in Moscow are overpriced – in the last year the salaries saw 50% increase. And the “War for Talents” is in full swing. Almost every bank announced their intension to boost their staff in Moscow. Recent battle reports come from Renaissance Group that has some new people on board: Richard Bruens, Executive Vice President and Head of Investor Relations at ABN AMRO (NYSE:ABN), is now on the Group’s Executive Committee as Head of Strategy, Communications and Investor Relations; Petri Kivinen, the global head of debt capital markets at Dresdner Kleinwort, will join the RenCap’s emerging markets investment bank.

 

Vivid Picture - Update with Compensations

VEDOMOSTI DAILY released a report today “Investment banker – Sounds Expensive” which has some interesting numbers. It cites the manager of one of the headhunter companies: “ there are lots of publications that create excitement for the issue – many calls come from New York - the people want to go to Russia. They think that you get money for nothing. On the contrary, the selection is quite tough: there is a need for experience of working in Russia, understanding of clients and “international class”. The paper cites numbers for annual compensations in Top 10 investment banks:
- Managing directors/heads of investment banking divisions: $0.8-3.0 million
- Executive directors/ heads of back office: $250,000-500,000
- Heads of asset management divisions: $0.6-1.2 million
- Heads of securities trading divisions: $0.6-1.2 million
- Directors of corporate finance: $0.5-1.5 million
- Heads of analytics departments: $0.6-1.5 million 

Some other calculations reported by VEDOMOSTI:
For Renaissance Capital the average annual compensation of the Board members is over $ 2.0 million, while for an average employee the monthly compensation is $ 20,800. For Troika Dialog the average monthly compensation for the employees increased by 30% as compared with 2006, and is $ 16,400.

This situation, according to daily, greatly surprises headhunting agencies. As an example Ed Kaufman that joined Alfa Bank was guaranteed annual compensation of $7-8 million. And last year Goldman Sachs, (NYSE:GS) was stunned to hear suggestions of annual compensations of $ 2-3 million from securities salesmen (from URALSIB (RTC:USBN) and Alfa Bank) interviewed by them. Raiffeisen Bank (WBAG:RIBH) for the last 24 months fails to find a candidate for the head of brokerage division with compensation of $ 500,000 per annum.
VEDOMOSTI cites the manager of headhunting agency that there are banks that still are in the process of composing their teams (Lehman Brothers (NYSE:LEH) and Nomura (NYSE:NMR), just for example) – and this would further lead to more competition in compensations.

 

Russian Business Elite on the Rise

THIS POST WAS ORIGINALLY PUBLISHED MAY 22, 2007

Russian Business Elite on the Rise

The Russian government is actively developing the high-priority Education national project, and it seems that the Russian authorities are worried about the quality of new generation of businessmen. And it is true – according to the statistics data only three in every 100,000 Russians have an MBA, compared to 70 in the United States. Thus, as part of the Education national project two business schools had been commenced last year. Both projects are backed up by the government and the hopes are they will serve as the Russian equivalent of Insead and MIT.

The Skolkovo Moscow School of Management was launched September 21, 2006 and the Graduate School of Management of the Saint Petersburg State University on November 29, 2006. Both inauguration ceremonies (laying the ground bricks) were absolutely identical and attended by President Putin. It is easy to guess that each of the project is supported by the two (supposed to be) successors of the President – Dmitry Medvedyev and Sergey Ivanov.

Both schools seem to target the same goal, but the essential difference is that Skolkovo is built from scratch and is targeted to focus on developing markets, and the Graduate School of Management of the Saint Petersburg State University is based on the management department within the university. And of course the locations and sites are different – in Moscow the campus will be built from scratch in the suburb of the city, and in St.Petersburg at the restored Mikhailovskaya Dacha. The oligarchs that sponsor these two projects are different.

The other difference is that Skolkovo project is the product of deliberate planning by Ruben Vardanian, chairman and chief executive of Troika Dialog investment bank. Mr. Vardanian did an exceptionally tough job examining 18 world business schools and drafting the plan for his own effort. He has persuaded 12 Russian business oligarchs and two non-Russian investors each to stump up $5 million to finance the school, including Roman Abramovich. Aside from Abramovich, others include Rustam Tariko, the vodka and banking oligarch, steel magnate Alexei Mordashov, and Viktor Vekselberg. The list is really impressive, but equally impressive is the list of International Advisory Board that is headed by Dmitry Medvedev, the first Deputy Chairman of the Russian Government. And Patricia M. Cloherty, Chairman and CEO of Delta Private Equity Partners, LLC, manager of the U.S. Russia Investment Fund and Delta Russia Fund, L.P. is also there.

Here are the key highlights of Skolkovo Moscow School of Management:
- Construction of the school is expected to total $128 million, with another $100 million being spent into an endowment. An additional $32 million - miscellaneous costs, while the government has agreed to set aside 1.5 billion rubles for the school from its national projects budget. The campus will open in September 2009. The end of construction date is 2012.
- There would be four options: customized programs (oriented towards specific corporation); short-time open programs (for specific managers); full-time MBA and Еxecutive MBA. Full-time MBA is targeted towards managers aged 26-30 that already worked in business.
- There would be 10 Russian professors and 20 non-Russian professors along with 70-100 visiting faculty, largely from business schools in other emerging economies.
- The process will start with a small group of short-time program in 2007, and with a pilot 25- or 50 students enrolled on the 18-month full-time MBA in 2008.
- Being enrolled at Skolkovo will be the preserve of the few - it will take no more than 300 Russian and international students a year. On the average, the fee is supposed to be about $ 50,000
- A group of Russia's most famous oligarchs has agreed to lecture and teach a small number of classes drawing on their own life experience every year. Roman Abramovich is in the list.
- Students from other leading emerging markets such as India, China and Brazil will be encouraged to enroll, while the Russia-based students will take part in six-month exchange programs in these countries as part of the two-year MBA program.

Despite its infancy stage, the Skolkovo Moscow School had carried a number of events, the recent one being a meeting with Jack Welch, former CEO of General Electric with about 120 representatives of the Russian business elite in Moscow.

The St.Petersbug school of management is also active. However, they are still raising required $ 200 million.

These new developments are really encouraging and we all hope that very soon we will have a good and prestigious business schools rated worldwide.