Focus on Russia - Private equity funds struggle to attract foreign investment

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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.

Which sectors are the most interesting ones at the moment and why?

In terms of private equity, which is a long-term investment, the most attractive sectors in the past few years have been the fundamentally undervalued ones. The risk here is identifying the point at which these sectors will enter the active growth stage. In my view the optimal combination for Russia is “undervalued sector – infrastructure projects – basic needs.” This combination provides a number of substantial advantages that minimise the potential risks for investors even if the situation develops unfavourably.

If an asset belongs to a sector that satisfies one of the basic human needs, demand is guaranteed. The infrastructure element ensures government participation in the project, since its goal is to renovate some of the basic funds in the country. If the sector is undervalued, a future active growth phase can be expected, which will outstrip market growth and provide an opportunity to increase the capitalisation rate of the asset. Real estate investments, for example, offer these advantages.

The other option is investing in high-growth sectors of the Russian economy. But this strategy is subject to risks if the local or global economy experiences a period of stagnation. The cost of companies and investment size here depends on economic growth and consumer demand.

 

Does RWM have foreign investors in its funds and what kinds of products are particularly attractive to them? Do you plan to attract foreign money into your funds?

We are not involved in attracting foreign investors at the moment, although of course we do have such plans. The difficulty here, in my opinion, is that foreign funds either already have their own representatives or subsidiaries in Russia, or simply aren’t ready to invest money into our country just yet. Even with existing relationships and fruitful previous collaborations, the negotiation process with foreign investors can take one or two years. It’s a long-term undertaking and involves a serious business restructuring in order to completely satisfy the demands of foreign investors in terms of legal framework, reporting, company selection etc.

I do think our products would be attractive to foreign investors. But trying to talk them into investing in Russia and remove the perceived risks that they see in our country is difficult, and would not necessarily bring significant returns. The biggest problem is the negative attitude foreigners have to the investment climate in our country. I don’t agree with them myself, but it’s the job of the government and official development institutes to change their minds. For us, the most important thing ultimately is our own returns and the returns of our investors, not doing charity PR work for the country’s investment climate.