Views from the Field: Assessing Challenges and Opportunities for Private Equity in Russia and CIS

Private equity in Russia and the Commonwealth of Independent States (CIS) has been buffeted in recent months and years by successive political and economic crises, most notably currency depreciation, declining oil prices, economic estrangement from Europe and military conflict in Ukraine. Indeed, between 2014 and 2015 the Russian ruble depreciated significantly against the U.S. dollar, while crude oil prices fell from more than US$60 a barrel to less than US$40 a barrel (see Exhibit 1). In EMPEA’s 2015 Global Limited Partners Survey, Russia and the CIS was ranked as the least attractive emerging market region for investment in the coming years by limited partners. However, as many investors can attest, the best deals are often struck when markets are struggling rather than booming. During 2015, the consumer services and technology sectors showed particular promise, attracting the majority of both capital invested and the number of deals (see Exhibit 2). In this Views from the Field, veteran fund managers and investors in Russia and the CIS share their assessment of the state of private equity in the region and their outlook for the asset class going forward.





Opportunities for Private Equity in Russia amid Macroeconomic Turmoil
Michael Calvey, Senior Partner
Baring Vostok Capital Partners

Today, the operating environment for most companies in Russia remains challenging due to the combined impacts of a lower oil price, a weaker currency and ongoing political tension over Ukraine. By far the biggest factor contributing to Russia’s current economic crisis is the sharp decline in global oil prices, which led to a corresponding sharp decline in the rouble/U.S. dollar exchange rate and ripple effects throughout the banking system and underlying economy.

As a result, lower fixed investment has led to a decline in demand in cyclical sectors like construction, building materials and automobiles, as well as lower spending by businesses on advertising and other expenses. The banking sector is also experiencing a sharp rise in non-performing loans due to stress on borrowers—especially small and medium-sized enterprises and individuals—as well as the impact of reduced loan origination. However, these cyclical sectors are following a predictable pattern similar to the declines of 2008 and 2009, and we believe they will likewise experience a cyclical recovery in the next couple years as a result of deleveraging and inventory destocking. At the same time, several sectors, such as internet services, e-commerce, health care and others, continue to show rapid growth due to underlying structural changes in the economy.

Few market participants expect a V-shaped economic recovery, but the most agile have been quick to face reality and to adapt business plans based on a sober assessment of the medium-term macro outlook. Market-leading businesses with little or no debt remain, overall, well-positioned to weather the downturn and to take advantage of opportunities that it is likely to provide.

The competitive environment for private equity remains extremely favorable for those investors with capital. We continue to see attractive opportunities for expansion capital investments in fast-growing businesses, but we also expect more full or partial buyout investments to be available as revenue visibility in traditional sectors improves and owner expectations adjust to the new reality.



Reflecting on Over 20 Years of Investing in Private Equity Funds in Russia
Anne Fossemalle, Director, Equity Funds Team
European Bank for Reconstruction and Development (EBRD)

The EBRD and the Russian private equity industry share a rich and intertwined history of successes dating back as far as the industry itself. Over more than 20 years, we have been the largest investor in Russian private equity funds and have provided some of our best talent to many fund managers in Russia.

We signed our first Russian private equity fund in 1993, a hybrid fund that eventually became a fully-fledged private equity fund. The many lessons that we learned from that commitment went on to shape our view of how private equity should look in Russia and, indeed, in many of the other countries in which EBRD operates. Specifically, our early experience in Russia taught us four lessons about private equity that continue to form the bedrock of our investment activity in the asset class today:

  1. Look for strong fund managers with track records of private equity experience.
  2. Look for funds with a strategic focus and direction.
  3. Make sure the teams have local presence and are properly incentivised.
  4. Pray for luck and good timing!

Since EBRD’s founding, we have signed close to US$2 billion in commitments to funds in Russia and the Commonweath of Independent States (CIS), financing more than 50 funds and helping deliver on our institutional mandate. In this regard, we have channelled capital to more than 450 investments and seen strong commercial performance in this portfolio. Even in light of the difficult situation today, Russia and the CIS remains one of the best performing regions in our portfolio over the long term.

It takes a long time, and lots of extremely hard work and talent to establish a fully functioning and profitable private equity industry. Despite some setbacks, we remain confident that the industry has the potential to rebound and thrive. The Russian private equity industry has gone through many ups and downs in the past—always rebounding—and has left us with many notable achieved successes. We remain firm believers in the continuing potential of the industry in Russia.

Emerging Opportunities in Russia’s Retail, Telecom and Pharmaceutical Sectors
Dominic Reed, Senior Managing Partner
UFG Private Equity

Russia’s post-Soviet economy is 24 years old this year and, like every adolescent, is facing a fractious stage. The country is navigating several challenges: a structural slowdown as the economy searches for a new development model, a shakeup in the oil market and geopolitical headwinds. While it is unclear if any of these issues will experience a substantive resolution, the potential upside for private equity is significant.

The summer of 2015 brought turbulence in global financial markets, during which oil prices plunged from US$65 per barrel in June to a low of under US$30 by January 2016. Given lower export proceeds, the Russian economy has had to adjust. Interestingly, the rouble is behaving more resiliently than might have been anticipated in these circumstances. Based on these macroeconomic factors, as well as opportunities for value creation, UFG is considering private equity deals—or sees opportunities for current portfolio companies—in the retail, telecommunications and pharmaceutical sectors.

Russia remains a priority for companies in the Central and Eastern Europe (CEE) region, with 75% of executives ranking Russia as their most important market for development in the next three years. The consumer remains an important part of this story, as 74% of the population is urbanized and has 85% of the spending power. A reported 26% of all companies plan new investments in manufacturing, logistics and warehousing in 2016. UFG is now considering several deals in retail and consumer-oriented sectors operating in middle and low-middle segment that offer Russian consumers value for their money. Opportunities exist in local production and in companies that can use scale to take market share.

In telecommunications, the extended period of rouble weakness, limited access to foreign funding and expensive local funding are the primary concerns for Russian telecom companies, as they have to make the choice between capital investments or dividends. Opportunity, however, remains. Russia has the largest mobile and internet audience in Europe. Specifically, the key drivers of mobile tower infrastructure in Russia are increased data traffic, further network expansion and densification by mobile operators and intensifying competition among operators. Based on this, UFG sees significant potential for the development of its portfolio company Russian Towers, the leading independent mobile tower operator in Russia.

In pharmaceuticals, growth will be driven by demand for local generics and replacement brands in the retail segment and by price increases for non-Essential Drug List products. Pressure to allow general retail outlets to stock a full range of over the counter medicines could result in pharmacies losing a significant proportion of their revenues. Combined with the prospect of further price controls under a national reimbursement scheme, this will drive further consolidation in the retail-pharmacy sector. As a result, UFG sees significant potential for a consolidation play for its portfolio company OBL Pharm, a high growth Russian pharmaceuticals manufacturer building local production scale.

Russia’s metrics remain compelling for EM—US$370B Forex reserves, total public debt to GDP of 20% and a 2015 current account surplus of US$65B. Russia still has huge untapped potential to sustain another period of expansion. The ability to deliver is, however, contingent on economic policy decisions, many of which have been sidelined by politics since at least 2012. The answer to how efficiently Russia will be able to make the necessary reforms will define the script for the next phase of Russia’s modern history.


For additional data and reporting on private capital activity in Russia and the CIS, please contact EMPEA’s research team at or visit EMPEA’s Emerging Europe (CEE/CIS) landing page.