There may be plenty of doom and gloom among private equity practitioners in the US and western Europe as a result of the global credit crunch that has all but dried up their cheap financing. In Russia, though, the mood among their peers is almost euphoric. "I am amazed by how relatively easy it is to raise money for a private equity fund in Russia," says Florian Fenner, managing partner at UFG Asset Management in Moscow, which is fundraising for its second private equity vehicle. UFG is looking to raise at least $500 million and expects to make a first close at least half that figure in May.
The firm’s optimism about raising private equity capital provides further evidence of the bullish trend in the industry in Russia. In another example, Renaissance Group announced at the end of March that it had raised $660 million within six months for its first private equity vehicle, having initially only targeted a $500 million total.
Expansion capital
Fredrik Ekman, managing partner and co-founder of Mint Capital in Moscow, which is looking to raise its third private equity fund in the autumn, says that over the past three years the potential deal flow for a mid-cap specialist such as Mint has definitely improved. That’s because there are more medium-sized companies with strong financial track records and entrepreneurial management teams looking for expansion capital.
Fenner argues that private equity is the perfect way to play the Russia story at the moment. "Private equity allows you to access the fastest-growing sectors of the economy," he says, adding that many sectors are not represented in the public equity markets. Even where there are listed plays, their performance is being negatively influenced by global bear market sentiment. "The Russian economy is delinking from any slowdown in the rest of the world, but the country’s financial markets are still interlinked," he adds.
Another positive for the market is that the size and scope of investable opportunities is increasing in line with Russia’s strong economic growth, which has averaged more than 7% since 2000. One of the latest entrants to the Russian market is TPG Capital, which paid $800 million in April for a 50% stake in leading pharmaceutical distributor SIA. The deal is the largest private equity investment in Russia to date and will provide SIA with expansion capital to consolidate its market-leading position in the country. It accounts for about a quarter of the $12.7 billion pharmaceutical sales market, which is growing at an annual rate in the high teens. Stephen Peel, a partner at TPG Capital, who heads its Eurasia/India business, says: "Given strong secular growth, the right businesses in the right sectors in Russia are growing at a very fast rate." He adds: "We think that SIA is a very interesting play – in a very fragmented market it covers 12 time zones, serving more than 30,000 pharmacies and over 500 different suppliers."
Juice
TPG Capital is the global buyout arm of TPG (formerly Texas Pacific Group), which manages more than $50 billion of private equity assets worldwide. Other recent consumption plays in the private equity arena include the sale of a controlling stake in Nidan, Russia’s third-largest juice producer, for a reported $530 million. The purchaser in that case was Lion Capital, a London private equity firm that specializes in consumer sector investments.