Business for patient people
Talking about the Russian economy we can’t but mention that the volume of foreign investment together with GDP (gross domestic product) growth was always one of the key marks. Almost annually the government declared proudly the increasing of volume of foreign investment. But the 1998 economic crisis showed that serious danger to the stabilisation of the economic environment can exist behind the imposing figures infusing with hope and optimism. There are different kinds of investments. Speculative trading on the securities market is usually short–term and thus allows investors to leave the market quickly if necessary. Direct investment is quite another thing. Leading world companies have already established their enterprises in our country. Though direct investment as line of business can be actually described as a poor figure on the Russian market. Meanwhile the conditions necessary for its intensive development are gradually being formed in Russia. Above all such key macro economics trends as GDP intensive growth (according to Merit Capital Associates, Inc., 6,6% in 2003), external debt reduction, lowering of cost of internal debt service, lowering of crediting rate point at this process. Thus, in case the hopes of the government come true the Russian market may become one of the most attractive in reference to direct investment in the nearest future. Western finance analysts have already forecasted the inflow of USD 200 – 400 billion investment to Russia within the medium term period. We can’t forget about the internal reserves. They should be also used more effectively under lowering of profitability on the obligation market. There are several widely known schemes of direct investment. One of them is investing through specialized funds – private equity funds. Unifying institutional investors’ resources (as a rule, pension funds and insurance companies perform as institutional investors) such funds look forward to making a profit on certain projects in the so-called real segment of economy. At this, private equity funds not only finance them but also take an active role in management. Having a controlling interest (control packet of shares) or a significant share in a company, funds control investee company through their participation in board of directors. The final objective is to “grow” business and leave it with maximum profit for investor. In this sense investing through private equity fund is similar with venture investing. In both cases we can talk about quite a high degree of risk, high but not equal. Venture investor enters a start-up project, and, as a rule, their investment is much less than the volume of assets invested by private equity fund. Let us talk about return. The particularity of private equity funds makes their business profitable in case they deal with projects of certain capital intensity. Too “small” projects do not cover the expenditures connected with the provision of the required infrastructure (including the expenditures connected with having large staff of professionals such as managers, analysts, etc.). USD 1 mln project requires as much manage resources as USD 20 mln project does. On the other hand, the fact that the projects realized by private equity fund are comparatively long-term (6 – 8 years) makes it necessary to hedge the risks connected with them. It means that fund, for reasons of safety, cannot monitor the project the value of which can be compared with the value of all the projects realized by the fund or even exceed them. Talk about specific figures why every private equity fund define it on their own. Thus, according to Mr.Andrey Kostyashkin - Head of research of Baring Vostok Capital Partners (BVCP), one of the leading private equity firms in Russia, they try to evade participating in projects at a value of less than USD 5 mln. Of course, capital intensity of a certain project is not the only criteria private equity funds take into consideration while deciding to participate in it or not. As the majority of private equity funds in Russia operate on western investors’ assets, their approach to all the projects is based, first of all, on principles of transparency. As for many Russian enterprises, even this condition is not manageable. But there are some other requirements projects must meet. For example, BVCP consider applications for investment in case a company applying for investment satisfies such conditions as leading position on the market (company number one or two in sector or segment of market), breakeven basic activity (or its achievement within the nearest twelve months); internal rate of return should not be less than 40% a year, growth of value of enterprise - not less than thrice. In all, there are ten basic requirements. “Nevertheless,” Mr.Andrey Kostyashkin says, “the most important thing is that the owners of the companies applying for investment should be ready mentally to move on from “family” to corporate management. Because participation of private equity fund in management of company suggests a series of important operations in restructuring of their business. According to Mr.Andrey Kostyashkin, it takes BVCP three - six months to choose the proper project. Though generally this period depends on the company applying for investment itself. Since 1994 more than a thousand projects have been rejected. 35 projects have been invested. Such selectivity is dictated by quite concrete tasks the private equity fund set to themselves. One of them is to achieve not less than 30% IRR. Here the average period of BVCP’s staying in project is 4-5 years. By the way, exit is one of the most difficult stages of project realization. “As for the Russian market, any exit may be regarded as success. Its successfulness is defined by, first of all, finances of fund. Generally this information is not disclosed,” says Mr.Andrey Kostyashkin. As for branches of economy, private equity funds work in many of them: energy complex, telecommunications, mass media, food industry, retail trade (by the way, “Pyatyorochka” retail network can be considered one of successful projects realized by private equity fund), manufacturing. So, any enterprise working in the real sector of economy may pretend for investment. To Mr.Andrey Kostyashkin’s opinion, to talk about any branch priorities is not a proper thing in this case. “We deal with companies. It is important to find a company developing dynamically. In theory it may belongs to a stable branch. The successfulness of undertaking will depend on how investor understands the sources of growth of capitalization of the company.” Actually private equity funds as source of investment interest Russian companies. It is foreign capital mainly that forms these funds. Institutional investors (they are pension funds, insurance companies, the so-called “funds of funds”) are shareholders of private equity fund. In Europe they have rich experience, but developing in Russia. Besides, direct investment is business for patient people. Private equity funds do not form liquid assets. That is why not many in Russia find this business attractive. Though the situation may change. Even next year private pension funds will be admitted to the state pension security system and they will receive “long-term” money. Now it is not clear into what assets the government will let the money be invested. Most likely they will be allowed to invest money into highly liquid assets. But further liberalization can take place. Though the volume of assets invested by private equity funds in Russian projects is quite small (as for BVCP, the volume of investment is slightly larger than USD 100 mln in 2002 -2003), their activity is quite perspective in Russia. Private equity funds will enlarge their portfolio of investment in case of stabilisation of the political environment, economic growth and the consolidation of the legislative framework for business and investment. “Nevertheless Russia is not a banana republic. Foreign investment will not solve all the problems,” say BVCP.
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