Russian renaissance

The appetite for Russian private equity has reached new heights with a maiden fund smashing its target by US$160m. Renaissance Private Equity, a division of Moscow-based investment bank the Renaissance Group, closed on US$660m, following months of speculation that began in August last year. At that time the group planned to raise up to US$500m, but according to Dmitry Kryukov, managing director of Renaissance Private Equity, the reaction of the potential investors was very positive, and being oversubscribed they decided to increase the target. For Russian funds, this has become something of a habit of late: last year Baring Vostok Capital Partners raised a US$1bn fund – as well as being significantly oversubscribed, it was also a record for Russia.

Renaissance said that the group itself has committed around US$264m, or 40%, to the fund, with the remainder coming from the likes of fund-of-funds, family offices, European pension funds and a US insurance group. The fund, which plans to focus on making investments in the countries of the former Soviet Union, has already made two investments, both in Russian media companies.

The group has some experience in private equity field. It has two direct investment funds for the Russian financial sector– RenFin1 and RenFin2 (US$200m and US$154m respectively) and both are virtually invested. Furthermore, it is currently managing a US$32.5m pre-IPO fund and is considering raising another.

This experience in private equity investment, albeit on a small scale, undoubtedly played a part in the positive reception the new fund received. Also, Renaissance is one of the most prominent financial groups in Russia. It was founded in 1996 by the group of private investors including its current CEO Stephen Jennings.

The group consists of investment banking, asset management, merchant banking and consumer credit divisions and operates on the territory of Russia and former Soviet Union, and in 2006 launched operations in Sub-Saharan Africa with offices in Lagos and Nairobi.

Renaissance Partners – the investment wing of the group – has a track record of big-scale operations in metal, telecommunications and other industries. The most striking deal of the group dates back to 2006 when it sold a 40% stake in the world’s leading titanium producer, VSMPO-AVISMA.

In the wake of the Renaissance success, other local private equity players are not wasting any time hopping on the fundraising wagon. According to Hans Christian Dall Nygard, managing director of Norum Private Equity Advisors, his firm is closing Norum Russia Fund III, following a first closing in July 2007 on €56m. The fund is expected to reach €90m by May, with a target size of €150m. Major investors in the fund include IFC, the EBRD and a number of large financial institutions from Holland, Norway and Finland. The company is building on the successes of its two previous funds Norum I (vintage 1995, with a size of US$63m) and Norum II (vintage 2002, US$25m) where the sole investor was the EBRD.

Furthermore, two of the most established players in the Russian private equity market, Delta Private Equity and Russia Partners, the Moscow office of US private equity outfit Siguler Guff, are also working on new fund raisings. In both cases the target amount is US$500m.

In comparison to US and Western European private equity, the industry in Russia is still playing catch up, but it is a market which is expected to develop quickly over the coming years. Regular private equity companies like Delta Capital or Barings Vostok Capital Partners compete (or sometimes co-invest) with local players like Nafta-Moskva or Renova, who mange the money of major Russian businessmen. Buyouts by large global funds have been almost non-existent with notable exception of a US$500m purchase of Nidan Soki, a juice drinks producer, by Lion Capital.

Carlyle group has twice opened and closed office in Russia and failed to raise US$300m Russia dedicated fund. Having made and successfully exited only one deal– Apoteka Holding, a pharmaceuticals distributor – the group won’t be returning for a while.

A recent notable exception to this trend is the US$800m investment of TPG Capital, the US LBO giant, into SIA International, a Russian pharmaceuticals distribution company. TPG is getting a 50% stake in the US$2.7bn revenue business.

All this shows an interesting trend emerging in the Russian market at a time when local mid-sized companies are finding it difficult to raise debt financing at reasonable terms due to the current credit crises, making private equity look a very attractive alternative.