Sovereign, buyout funds take tentative steps in Russia

By Staff Reporter

Jun 21, 2012 03:28 PM EDT

Major private equity and sovereign wealth funds on Thursday took tentative first steps to invest in Russia, praising efforts to break the economy's fixation on energy and become a more diversified, open and less risky place to invest.

At a forum used by President Vladimir Putin to court foreign capital, sovereign wealth fund the Kuwait Investment Authority said it struck a $500 million deal to invest alongside the $10 billion state-backed Russian Direct Investment Fund (RDIF).

The RDIF fund, set up to partner with private equity and sovereign funds and give them comfort about committing money, also announced that it will launch a pre-IPO program with a consortium of investors - BlackRock, Goldman Sachs and Franklin Templeton. They will target Russian companies planning to IPO on the Moscow stock exchange MICEX-RTS.

"Russia is no longer addicted to oil resources. We see research developing and growing, science and industrial parks, which is very good for attracting investors," said Lou Jiwei, chairman and CEO of Chinese sovereign wealth fund China Investment Corp, which oversees $410 billion.

CIC has also set up a venture with Russia to invest in Russian and Chinese enterprises.

Putin, who had his first face-to-face meeting with major investors since his election to a six-year term in March, said the deals would "give fresh impetus to the Russian investment market."


Perceived as a corrupt country where the rule of law is lacking, Russia has been trying to improve its image and boost foreign investment.

Giant private equity funds such as TPG Capital and Apollo said they had seen noticeable differences in Russia and stated their interest in doing further business in the country.

"We at TPG have been the only major global firm that has done any deals in Russia in the last decade - they've all turned out well," said David Bonderman, the head of TPG.

"Doing business here is easier than you think from the press reports," said Bonderman, who has an undergraduate degree in Russian from the University of Washington and created a fellowship program to sponsor hard-up students keen to travel and expand their horizons.

TPG has invested in Russian bank VTB Capital and supermarket chain Lenta.

Foreign investors have been searching for growth in developing economies as the mature U.S. and European economies slow.

A recent Ernst & Young survey showed increased appetite among foreign private equity firms to invest in Russia. According to the survey of more than 150 investors, 48 percent of respondents said they expected to increase acquisition activity in Russia in the next year as opposed to 25 percent six months previously.

"We look at Russia with a list of real pluses but also negatives," said Leon Black, who heads up U.S. private equity fund Apollo. Black said Apollo had done one successful investment in the 1990s but since then has not done much in the country.

"On the plus, its blessed with unbelievable natural resources, also it has a low level of debt, low unemployment, nice growth (and) strong leadership. On the negative, there are areas of antiquated infrastructure, a certain amount of burocracy, and then there's the whole question of rule of law and the judicial process."

Sergei Ivanov, the head of Putin's presidential administration, said while there are some positives and negatives to the economy, "what is most important is we need a stable environment, predictable policy, and I'd like to assure you we're using this course."

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