Russian fund buyers are interested in private equity funds for the stable long-term returns they can offer. Most of the money flowing into this industry comes from local institutional channels such as pension funds, due to their long-term investment outlook.
Russian fund buyers are interested in private equity funds for the stable long-term returns they can offer. Most of the money flowing into this industry comes from local institutional channels such as pension funds, due to their long-term investment outlook.
But foreign institutions continue to steer clear of Russia's private equity market, spooked by the perceived riskiness of the market environment, the complicated legal framework and the lack of government support.
Nikolay Molchanov (pictured), director for strategy and development at RWM Capital, a Moscow-based private equity firm, offers his views on what sectors and investment options are the most popular with Russian investors and why foreigners prefer to stay away from Russian private equity for now.
What kinds of funds are the most successful in terms of returns and investor appetite? Do you see any particular trends in the investment strategies of your clients?
Institutional investors, such as pension funds, which make up most of the assets held in Russian mutual funds, are focused on capital preservation at the moment, due to the unpredictable economic situation. Strategies focused on capital preservation are now much more popular than those focused on yield pick-up.
One of the winning strategies has been investing in funds which offer rental income on high quality properties. The safety of invested capital here is guaranteed by the property itself and the rights to own that property, while income is guaranteed by the long-term contract with tenants and the quality of these tenants. The rental business is relatively stable in Russia. Even in times of crisis companies need to place their staff somewhere, and changing office locations is something that is done rarely and without enthusiasm. Based on experience, I can say that yields on such rental property funds can be up to 10%-12% per year.
The other winning strategy has been investing in equities in unlisted companies. Economic uncertainty increases the risk of private equity investing, but it also provides more opportunities. The price of the company itself decreases, the position of competitors that did not receive financial support from new investors worsens, new opportunities arise to grow and take over new markets. The most important thing here is to pick the right company to invest in. There must be a strong management team, a very clear development plan for the business and investors must have a reason to expect their money back.
