East Capital: Fund plugs into power sector reforms

The market-led changes are designed to spur investment in a sector that outgoing president Vladimir Putin says will require Rb12 trillion ($13.21 billion) if the country is to keep up with surging demand and boost production by two-thirds by 2020. At the end of 2007, the Stockholm-based asset management group launched the €111 million East Capital Power Utilities Fund, which will target investment opportunities in the power utilities industry in Russia and other CIS countries such as Ukraine, Kazakhstan and Georgia. East Capital contributed €81 million to the new fund with the €31 million balance coming from Orkla Financial Investments, a subsidiary of Norwegian industrial conglomerate Orkla that boasts specialist knowledge related to power production, trading and renewable energy. The fund will invest in listed and unlisted companies across the various sub-sectors of the industry – including electricity generation, distribution and services. Aivars Abromavicius, a Moscow-based partner at East Capital, says that a sub-sector of the Russian power industry that is particularly attractive is repair and maintenance services, which is set to be a prime beneficiary of the massive capital expenditure programmes necessary to upgrade power stations to cope with increasing demand. "The volume of business they are contracting is increasing all the time," he says, adding that as well as representing a growth play option there is also a consolidation angle to the repair and maintenance services sub-sector given its hitherto fragmented nature. Under the power sector reforms enacted in 2003, which are largely likely to be completed by July this year, power holding company Unified Energy System (UES) and most of the country’s vertically integrated monopolies are being broken up into single-business companies covering generation, transmission, distribution and services. The principal aim of the reforms is to create a liberalized, market-driven environment that will enable companies to generate sufficient profits to part-finance capex through internal revenues, but which will also enable them to attract equity and debt capital internationally.