Monday, 28 January 2008

Emerging markets: International firms march east

Financial News - Private Equity News

28 January 2008

Deal sizes have trebled in two years, whetting large firms’ appetite for Russia, writes Jason Corcoran in Moscow

Private equity in Russia and eastern Europe has long been dominated by local investors who have been around for more than a decade, but last year the big game international firms arrived.

US firm TPG Capital will be the first global buyout group to do a big deal in Russia if it can conclude its $1.4bn (€940m) bid for supermarket chain Seventh Continent.

TPG, which has recruited Goldman Sachs Private Equity to help with financing, is expected to improve its offer after being knocked back by the chain’s main shareholder in December. The deal is led by TPG partner Stephen Peel, previously vice-president in charge of German investments at Goldman Sachs.

CVC Capital Partners, Apax, 3i and Permira are also trying to line up direct investments in Russia, according to Moscow bankers.

Even Carlyle Group, which closed its Moscow operation in 2005 after several unsuccessful attempts to invest, is said to be weighing up a return.

The volume of Russian private equity in Russian mergers and acquisitions more than doubled to $5bn last year, according to consultancy KPMG. While the country’s share of overall M&A is low at 4.5%, KPGM believes it could reach between 8% and 10% over the next few years.

According to the Russian Association of Venture Investment, the average size of the transactions involving buyouts has trebled to $26m in 2007 from $8m in 2005. It forecast that the average-sized of deals could reach $50m this year.

Javier Ferrán, a partner at London-based Lion Capital, expects Russia’s consumer boom to attract more big buyouts. He said: “There is a lot of excitement in retail, with TPG and other big funds circling. Russian funds, such as Baring Vostok, are increasing their firepower and we are seeing wealthy oligarchs creating private equity-style funds to invest on a case-by-case basis.”

Last year heralded Russia’s first leverage buyout deal, when Lion Capital acquired fruit juice maker Nidan Soki in a deal valuing the company at $500m. Goldman Sachs, which is understood to have made several direct investments in Russia, advised Lion and provided financing.

Baring Vostok Capital Partners, Russia’s largest and most established private equity investor, set a record when it raised a $1bn fund in March. It also raised an additional sidecar fund with $450m in total capital commitments.

Mike Calvey, co-managing partner of Baring Vostok, said: “Russia and the Commonwealth of Independent States remain challenging markets in many respects, but the returns on investments are very attractive and compare favourably with most other countries or regions.”

Russian pioneer Delta Private is expected to start another Russia fund shortly while former investment bankers have also been active in private equity.

Ilya Sherbovich, head of Russian investment banking at Deutsche Bank, launched boutique United Capital Partners ahead of his departure later this year. Former Deutsche staff have been hired and investments have been made.

Marshall Capital Partners, headed by Konstantin Malofeev, has made three investments from its $500m fund in a baby food producer, a hotel developer and a wireless content provider.

Javier Ferran of Lion Capital has been travelling to Russia since 1993 and believes the climate has never been better for buyouts.

He said: “Consumer goods are the safest bet and the hottest sector.

“There are available managers who have 15 years’ experience in multinationals, there is political stability and the appearance of a middle class.”

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