Every cloud has a silver lining. With the international debt markets only now open to a select few Russian corporates, and with many Russian banks strapped for cash, there are plenty off opportunities for asset managers to lend to strong corporate credits at distressed debt-type margins.
That’s the rationale behind the Florin FSU Credit Opportunities Fund, launched in February by Florin Investment Management, which has generated a 10% year-to-date performance. Having started with an initial $100 million of seed capital from joint venture partner Trust Bank, one of the leading private banks in Russia, the fund has already attracted an additional $250 million of capital from a mix of institutional and private clients. Furthermore a number of hedge funds are also expected to invest in the fund to secure co-investment rights.
The team at Florin is led by Neil Smith, formerly head of alternative investments at Morley Fund Management, and Aidan Freyne, an emerging market debt market veteran with more than 25 years’ experience as a managing director at Salomon Brothers, Citi and, most recently, Trust Bank.
Smith says that the fund is designed to offer investors access to low-risk, high-yield returns allied with the best international standards. "We are targeting 20%-plus returns with volatility of 5%. As such the portfolio managers and analysts are based in Moscow, while risk management, compliance, legal and control operations are based in London."
About 75% of the fund is invested in Russia, the balance being allocated to other former Soviet Union countries, principally Kazakhstan and Ukraine.
Some 25% of the fund is invested in publicly traded securities, mainly denominated in euros and dollars. The fund also invests in rouble-denominated securities on an opportunistic basis. This element is designed to act as a liquidity buffer for the rest of the portfolio. Some 65% of the fund is invested in private principal finance transactions – essentially self-originated loans to small and medium-sized enterprises, backed by hard assets and significantly overcollateralized. Denominated in dollars, euros or roubles, these investments will have an average duration of one to three years. Another element of the fund comprises proxy credit trades, which involves providing multinational firms with residential and commercial property solutions.
In terms of risk management, up to 5% of the fund will be invested in a variety of hedges. Put options on government credit default swaps are used to hedge political risk and put options on oil prices to hedge the main commodity risk in the region. The publicly traded securities element of the fund will be hedged through a variety of interest rate, foreign exchange, asset and credit default swaps. Overall, the portfolio will have an average credit rating of BB–/B+, although up to 35% of the fund can be invested in non-rated issuers. "There is nothing to stop this from becoming a multi-billion dollar strategy because the volume of potential business out there is huge in a Russian economy which is now as big as that of the UK," says Freyne. "Russia is definitely a lender’s market right now."
He adds that the FSU Credit Opportunities fund is merely the first in a series of funds that Florin is seeking to launch, with a real estate development lending fund already in the works.