Research

Views from Moscow on Private Equity in Russia

Industry leaders gathered in Moscow on 17 September 2014 at the VI Russian Private Equity Congress to celebrate 20 years of private equity (PE) investing in the country. Firms including EMPEA Members the European Bank for Reconstruction and Development, Baring Vostok Capital Partners and Siguler Guff (through its affiliate Russia Partners) celebrated the milestone and looked back on their accomplishments over the past two decades. However, the discussion focused mostly on the future. Drew Guff, Managing Director at Siguler Guff, quoted Nietzsche and summed up the sentiment towards investing in Russia as “what does not kill me makes me stronger,” a testament to the lessons investors have learned and will use as they turn the page to a new chapter.

While industry practitioners accepted the political challenges as “just another day” in the life of private equity investing, they expressed a realistic assessment of the current investment climate and a cautious approach for what may be a difficult fundraising period ahead. Panelists and speakers identified a number of activities to promote a more positive private equity fundraising and investment environment in Russia, including:

  1. Educating limited partners (LPs) on the PE opportunity in Russia, particularly through sharing information on funds’ strong historical performance;
  2. Attracting the attention of Asian LPs who are becoming more sophisticated in PE investing and tend to focus on political risk less than U.S.- and Western Europe-based LPs;
  3. Advocating for a more favorable legal and regulatory framework for private equity activity, including relaxing restrictions on local pension fund allocations to alternative assets; and
  4. Maintaining the long-term perspective on the market and continuing to invest in good businesses during a tough economic period.

EMPEA’s Head of Research, Maryam Haque, also had the opportunity to present on Russian private equity within the context of global emerging markets and to provide an insightful backdrop for understanding trends and challenges for investors raising and deploying capital in the country. Five takeaways from the presentation, which may be viewed in full below, include:

  • Private equity capital raised for Russia/CIS funds has accounted for 2% of capital raised for all emerging markets from 2008 to 1H 2014, and 4% of EM PE capital invested during that same time period has been deployed in Russia.
  • The technology and services sectors together have accounted for 35% of the number of deals in Russia since 2008, a higher percentage than these two sectors’ share of activity in Brazil, India or China.
  • According to IESE Business School’s 2013 Venture Capital and Private Equity Country Attractiveness Index, Russia ranked 40th out of 118 countries and received high marks for economic activity and entrepreneur tax incentives, in comparison to its peers. However, Russia lagged on the investor protection and corporate governance and human and social environment drivers.
  • EMPEA’s 2014 Global Limited Partners Survey found that LPs view political risk as the main deterrent to investing in the Russia/CIS region; however, LPs did not view the region as having high competition, a small scale of opportunity to invest or high entry valuations. LPs also ranked Russia/CIS the 9th most attractive emerging market, out of ten.
  • As of Cambridge Associates’ 31 March 2014 comparative end-to-end returns data, CEE and Russia private equity and venture capital funds over a 10-year period have outperformed Emerging Asia, Latin America, Africa, the U.S. and Western Europe, as well as the MSCI Emerging Markets index and S&P 500.

Additional coverage of the event and recent Russian private equity-related news:

Russian Private Equity Funds Predict Years of Hardship in Russia | The Moscow Times | 17 September 2014

Управляющие фондами прямых инвестиций обсудили кризис (Equity Fund Managers Discussed the Crisis) | Finparty | 18 September 2014

Ukraine Crisis: Fight or Flight for Private Equity? | Unquote.com | 15 September 2014

Russia Sanctions Bring Compliance Headaches for Private Equity Owners | Financial News | 18 September 2014

Private Equity in Russia Bests U.S., Asia and Other Markets | Barron’s | 14 August 2014