Thursday 25 September 2008

Renaissance man says deal crucial for new investment banking era

Business New Europe

Jason Corcoran in Moscow

September 25, 2008



The experience of enduring Russia's last financial crisis in 1998 was burned into the psyche of Stephen Jennings when he opted on September 22 to sell half of his investment bank Renaissance Capital to billionaire oligarch Mikhail Prokhorov.

Forsaking the bank's treasured independence was a tough call for its chief executive, but better than facing the prospect of teetering towards extinction as it did in 1998 when the Russian government's default reduced Renaissance to a shell and forced Jennings to slash the headcount to 190 staff, from 650.

"We have a large shareholder base, a great team in place and 1,500 employees in the bank. We could have run the gauntlet and I think we would have made it, but we didn't know what was going to happen when we were looking at an environment where Goldman Sachs and Morgan Stanley couldn't make it as investment banks. I wasn't prepared to take the chance," Jennings told bne in an interview.

Renaissance's deal to sell a 50% stake for $500m to Prokhorov's investment vehicle Onexim comes as the capital markets landscape is being redrawn globally. Jennings watched the collapse of Lehman Brothers, the sale of Merrill Lynch and Dresdner Kleinwort, and the conversion of Goldman Sachs and Morgan Stanley into commercial banking entities, and knew he had to act fast. "If we had of gone into a reorganisation, you would have lost a huge amount of intrinsic value and you would have lost a huge amount of your team," he explained. "There would have been huge reputational issues and credibility damage too."

Lehman, Merrill, Dresdner, Goldman Sachs and Morgan Stanley all have substantial operations in Moscow and are competitors of Renaissance in equity capital markets and M&A advisory mandates. Jennings and his team have been raiding the bulge bracket banks for talent for two years and are expected to cherry pick their best staff now financing and credit lines have been secured from Prokhorov. "People here at Rencap are very excited," said Jennings. "The banking model we have designed is for a new world. We now have the biggest balance sheet of any investment bank in the world backed by an incredibly strong and powerful shareholder."

Few doubt that the domestic markets' spiral downward also played its part in the sale. The domestic brokerage sector has been reeling from the steepest declines in the markets seen since the 1998 crisis and led to the closure of Russia's main markets for two days last week. However, Jennings insists Renaissance didn't incur any losses due to other banks and brokerages failing to make their payments. He said the bank's exposure to Lehman was less than $2m, while its exposure to KIT Finance was zero. Mid-tier KIT is being sold to Leader Asset Management, energy giant Gazprom's pension fund manager, while another local outfit Antanta Capital said it's selling its investment arm and brokerage units.

More ominously, Renaissance's main Russian competitor, Troika Dialog, has been the subject of fevered speculation and issued a statement on September 25 denying it would be taken over by the country's giant savings bank Sberbank. Troika is run by Ruben Vardanian, who is believed to be on a business trip to China and Singapore, where the bank has close ties with Temasek, the sovereign wealth fund. "Sberbank was then and we moved on now to somewhere else," a source close to Troika told bne.

According to Jennings, suitors who ran the slide rule over Renaissance numbered 25. This number included oligarchs, western banks and state-controlled institutions, some of which have been eying Renaissance for sometime. The UK bank HSBC was said to have been close to taking a 10% stake a year ago for $300m, while state-controlled VTB, which has just recently launched its own investment banking division, is widely reported to have valued Renaissance at $3bn-$4bn.

However, Jennings, who worked for Credit Suisse First Boston in the 1980s advising the New Zealand and Australian governments on privatization and state enterprise restructuring, is sceptical of the state banks' ability to compete in investment banking. As well as VTB, Sberbank and Gazprombank are also reported to be plotting their own launches of investment banks. "State investment banks have never worked been successful in the past and I don't see a Russian one working," Jennings said. "Their culture and sentiment is not suited."

Jennings is full of admiration for Prokhorov's business aptitude and pointed out how he was the sole advisor on the sale of his own 25% stake in Norilsk Nickel to fellow oligarch Oleg Deripaska. "He [Prokhorov] is very bright and he's a very good partner for us. In today's market, you need a powerful Russian shareholder. We had two options to sell out to a state bank or to an oligarch. The state bank route would have been a complete mismatch for us and neither would the market have liked us," Jennings said.


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Russian oligarchs suffer $42bn losses

Wealth Bulletin

25 September 2008 - Jason Corcoran in Moscow

Russian oligarchs are nursing paper losses of $42bn (€28.6bn) from the dramatic sell-off in the Russian stock markets over the past two months.

US publication Forbes calculated the net worth of Russia's richest businessmen last week and compared it to the end of July when widespread market falls were triggered by Prime Minister Putin's accusations of price fixing at miner Mechel.

The Russian stock markets have since fallen 50% as the international banking crisis, falling commodity prices and the war with Georgia has taken its toll.

The greatest losses were suffered by Vladimir Lisin, the steel magnate owner Novolipetsk Steel, who saw his portfolio holdings drop by $11.2bn since the end of July.

The next biggest loser has been chairman of mineral fertiliser company Uralkali Dmitry Rybolovlev who has stacked up market losses of $7.3bn.

Vagit Alekperov, president and one of the biggest shareholders in oil major Lukoil, has seen $5.13bn come off his total net worth of $14.3bn.

Alexei Mordashov, chairman of steel giant Severstal, has shed $4.49bn from his net worth of $24.5bn over the past two months while Arsenal football club shareholder Alisher Usmanov has lost just $1.25bn of his $9.5bn net worth.

Kirill Pisarev and Yuri Zhukov, executives at listed property developer PIK have each lost over $2.2bn, according to Forbes.

Monday 22 September 2008

Rencap sells 50% stake to billionaire Prokhorov

Financial News Online

Jason Corcoran in Moscow

22 September 2008

Russian investment bank Renaissance Capital has given up its much vaunted independence after selling a 50% stake to billionaire client Mikhail Prokhorov for $500m (€342m) amid the worst market falls in Moscow since the 1998 financial crisis.

Renaissance and the Onexim investment vehicle owned by Prokhorov, who made his money from metals and banking, will buy new equity amounting to 50% of the brokerage for $500m, with the old shareholders retaining a one-share voting majority.

The deal follows a week when market turmoil drove domestic indices down by 25% in just three days and forced another brokerage KIT Finance to agree to sell a controlling stake Leader Asset Management, the pension fund manager of energy giant Gazprom.

A Moscow spokesman for Renaissance said the deal had been in the pipeline for months but had been accelerated due to recent market conditions. "Events in the market moved the negotiations along."

A hastily arranged press conference featuring Prokhorov and Renaissance founder Stephen Jennings was organised at the Ritz hotel in Central Moscow.

Prokhorov said at the press conference: "We've been negotiating for several months. The problems of the global economy sped up the talks... Together with our partners we are ready for major expansion," including in Western markets.

Renaissance said it had not suffered any writedowns or losses due to the markets.

One Russian financier expressed surprise that Renaissance had sold so cheaply. "The market has hit everyone but I thought Rencap would fetch more. Bankers were putting the value of the investment bank at $3-4bn a year ago," the financier said.

Jennings, who set up Rencap in 1995 with a Credit Suisse colleague Boris Jordan, had previously rebuffed interest in the business from western banks and state-controlled VTB Bank.

In an interview with Financial News a year ago, he said selling out, as rival brokerages Brunswick and UFG have, would ruin Rencap's reputation for providing clients with impartial and independent services.

He said: "It would be very damaging and what you sold would be slightly damaged by the time you sold it. By virtue of the sale process, you would lose something. We have seen that has happened in the market here."

In a statement today, Jennings said: "The partnership with Onexim creates a financial powerhouse with the resources, skills and ambition to be the clear leader in all its markets. At a time when many of our competitors are weakened, our unique franchise, solid capital platform and highly motivated staff will enable the firm to aggressively pursue growth opportunities."

Renaissance Group's other asset management, private equity and consumer finance arms are not part of the sale.

Onexim is one of Russia's largest private investment funds, with a focus on mining industry, innovative projects in energy and nanotechnology, real estate and other industries. It has more than $25bn in assets.

Prokhorov was joint owner of mining giant Norilsk Nickel alongside Vladimir Potanin until a very public business divorce led him to sold most of this stake to tycoon Oleg Deripasksa earlier this year.

Renaissance advised Onexim last year on the exchange of its 25% stake in Norlisk Nickel with Deripaska.

A Rencap source said the bank's independence would not be damaged by selling to Prokhorov's group. "Onexim is not Gazprom or the Kremlin. It's an independent investment vehicle."

Onexim will contribute to the strategic direction of the investment bank and will be able to nominate three of the seven board members of Renaissance Capital.

Renaissance Capital was created in 1995 by New Zealander Jennings and American Boris Jordan, who left top positions at the Russian division of Credit Suisse First Boston to establish their own business. Jennings is believed to own an 80% stake in the business.

Following Russian default on its sovereign debt and the economic crisis in 1998, Jennings bought out three other shareholders, Leonid Rozhetskin, Richard Ditz, and Anton Kudryashov, and took sole charge when Jordan left.

In the past two years, Jennings had led the bank's rapid expansion to set up in new frontier markets in Sub-Saharan Africa and Central Asia.

www.efinancialnews.com

Thursday 18 September 2008

Gazprom steps in to save KIT Finance

Financial News Online

Jason Corcoran in Moscow

18 September 2008

Energy giant Gazprom's pension fund manager Leader is close to buying up troubled Russian brokerage KIT Finance as the government drew up a "red list" of 15 banks requiring urgent capital injections.

In a statement late on Wednesday night, KIT said it was in the final stages of selling a controlling stake to Leader Asset Management with credit support from state-controlled banks Gazprombank and VTB.

The rescue of KIT comes as Moscow's stock markets were suspended for the second day in a row and as the state pledged $60bn (€41.9bn) to save banks as a spreading liquidity crisis threatened to push the sector into insolvency.

Minister for Finance Alexei Kudrin told Russian media several banks were have difficulties with meeting their obligations and were now holding talks with strategic investors.

KIT, a second tier investment bank, was forced to look for a buyer or investors after defaulting on its debt as analysts suggested a number of small to medium-sized bank are facing similar difficulties refinancing on the repo market.

A statement from KIT said: "These timely measures to support the Russian financial system were taken by the Government and the Central Bank of the Russian Federation in order to provide stability to KIT Finance s operations as an important participant in the market."

Following an emergency Government meeting yesterday, the Finance Ministry promised 1.5 trillion roubles ($60bn) would be made available to bail out local banks.

According to a report in today's Kommersant, the Russian Central Bank has drawn up "red list" of the 15 banks that are experiencing the most serious problems with obligations to counter parties and are in need of urgent financial assistance.

The Central Bank responded to the crisis by cutting its reserve requirements by 400 basis points, which is expected to inject 300bn roubles ($12bn) into the banking system as of today. Deputy chairman Konstantin Korishenko put the total amount that the bank could make available through repo auctions and the auctions of unspent government funds at $118bn.

Analysts said KIT's problems were contagious and the state would have to intervene quickly to restore liquidity and confidence in the market.

David Nangle, director of financial research at Renaissance Capital, said: "There are other banks and boutiques with exposure to repos whereby their clients are not repaying back their debt in time. There is a risk that there are more KITs in the system unless this can be contained."

Under repo agreements, KIT advances credit to clients with stock being offered collateral. A number of clients failed to meet their liabilities which resulted in KIT not meeting their own liabilities with some of their counteragents.

Discussions over KIT's future came as Russia RTS and MICEX stock exchanges both halted trading at about 12:10 yesterday as the Ministry of Finance rushed to provide loans to the country's banking system.

Trading was stopped on the dollar-denominated RTS on the orders of a government agency after sliding 6.39% in the first two hours. The index has shorn 57% since May, while the Micex was also halted after falling 3%.

Financial stocks were worst hit with VTB spiralling down by 28% while most blue chips, such as Rosneft, Novatek, Gazprom, AFI, Surgutneftegaz, fell by about 20%.

Traders said rumours of banking bankruptcies were rife and they were trying to reassure international investors.

One Moscow trader: "Investors are ringing us and we are trying to keep them calm. All we can do now is focus on the GDR prices of Russian stocks in New York and London until the local markets get running again."

Ivan Ivanchenko, head of investment strategic at VTB, dismissed reports in the Russian press that the state-controlled back was stepping in to acquire KIT.

He said: "We are holding a lot of cash on our balance sheet and we feel comfortable in this position. That's not to say we are buying KIT but we don't exclude an acquisition at a later stage.

Ivanchenko said confidence in the market had evaporated yesterday and small brokers had unwound all their positions.

Analysts agreed that the leading state banks and top-tier investment banks such as Troika Dialog and Renaissance were well capitalised and would not be affected.

With KIT Finance in trouble, and liquidity drying up, Finance Minister Kudrin is depending on VTB and its fellow state banks Sberbank Gazprombank to shore up the system.

Kudrin says Russia's three biggest banks, of which Sberbank and VTB are state-controlled, should be able to support the country's medium and smaller banks by virtue of their broader access to budget funds.

In a statement to state press agency Intefax, Kudrin said: "Essentially we're counting on them as core banks to be able to lend to small and medium banks."

To strengthen the three largest banks, the Finance Ministry said it was allowing them to hold federal budget funds on deposit for terms of three months and more.

A government press release described the banks as "linchpins able to provide liquidity in the banking system," said budget funds available to the banks has been increased to 754.2bn rubles (€20bn) for Sberbank, 268.5bn rubles for VTB and 103.9bn rubles for Gazprombank, totalling 1.1266 trillion rubles.

KIT has grown rapidly in the past 18 months due to success of its mergers and acquisitions team in the utility sector.

The bank, which has its origins in St Petersburg, was previously a top fiver mortgage lender and also has a joint asset management venture with Beneleux bank Fortis. It was planning an IPO at the end of this year, or the start of next year.

www.efinancialnews.com

Wednesday 17 September 2008

Analysts fear contagion as first Russian broker fails

Financial News Online

Jason Corcorcan in Moscow

17 September 2008

Russian brokerage KIT is holding talks with strategic investors after defaulting on its debt as analysts suggested a number of small to medium-sized bank are facing similar difficulties refinancing on the repo market.

KIT, a second tier investment bank, was forced to look for a buyer after it defaulted on a repo deal. Investment banking sources said a buyer had been found and announcement would be made by close of play today.

A KIT spokeswoman declined to comment and said a statement would be made at 5pm Moscow time.

Analysts said KIT's problems were contagious and the state would have to intervene quickly to restore liquidity and confidence in the market.

David Nangle, director of financial research at Renaissance Capita, said: "There are other banks and boutiques with exposure to repos whereby their clients are not repaying back their debt in time. There is a risk that there are more KITs in the system unless this can be contained."

Under repo agreements, KIT advances credit to clients with stock being offered collateral. A number of clients failed to meet their liabilities which resulted in KIT not meeting its own liabilities with some of its counteragents.

Discussions over KIT's future came as Russia RTS and MICEX stock exchanges both halted trading at about 12.10 in Russia as the Ministry of Finance rushed to provide loans to the country's banking system. It was the second time in two days the exchanges had halted trading.

Trading was stopped on the dollar-denominated RTS on the orders of a government agency after sliding 6.39% in the first two hours. The index has shorn 57% since May, while the Micex was also halted after falling 3%.

The financial sector was the worst hit, led by state-run savings bank Sberbank which plummeted 17%.

Moscow traders said rumours of banking bankruptacies were rife and they were trying to reassure international investors by telephone.

One trader: "Investors are ringing us and we are trying to keep them calm. All we can do now is focus on where GDR prices in New York and London are going."

Ivan Ivanchenko, head of investment strategic at VTB, dismissed reports in the Russian press that the state-controlled back was stepping in to acquire KIT.

He said: "We are holding a lot of cash on our balance sheet and we feel comfortable in this position. That's not to say we are buying KIT but we don't exclude an acquisition at a later stage.

Ivanchenko said confidence in the market had evaporated yesterday and small brokers had unwound all their positions.

Analysts agreed that the leading state banks and top-tier investment banks like Troika Dialog and Renaissance were well capitalised and would not be affected.

With KIT Finance in trouble, and liquidity drying up, Finance Minister Kudrin is depending on VTB and its fellow state banks Sberbank Gazprombank to shore up the system.

Kudrin says Russia's three biggest banks, of which Sberbank and VTB are state-controlled, should be able to support the country's medium and smaller banks by virtue of their broader access to budget funds.

In a statement to state press agency Intefax, Kudrin said: "Essentially we're counting on them as core banks to be able to lend to small and medium banks."

To strengthen the three largest banks, the Finance Ministry said today it was allowing them to hold federal budget funds on deposit for terms of three months and more.

A government press release today described the banks "linchpins able to provide liquidity in the banking system." Budget funds available to the banks has been increased to 754.2bn rubles (€20bn) for Sberbank, 268.5bn rubles for VTB and 103.9bn rubles for Gazprombank, totaling 1.1266 trillion rubles.

KIT has grown rapidly in the past 18 months due to success of its mergers and acquisitions team in the utility sector.

The bank, which has its origins in St Petersburg, was previously a top five mortgage lender and also has a joint asset management venture with Beneleux bank Fortis. It was planning an initial public offering at the end of this year, or start of next year.

www.efinancialnews.com

Russia’s hopes of creating a global financial hub come back earth

Financial News at Sibos

September 16, 2008


A series of setbacks has raised questions over whether Moscow could rival other centres and whether the rouble could become a reserve currency, writes Jason Corcoran


The credibility of Moscow's ambition of becoming a global financial centre within five years has been called into question following a summer of systemic shocks to investor confidence and the arrested development of its market institutions.

Highly liquid domestic markets, strong economic growth and a position at the heart of a booming region have contributed to the rapid growth of Russia's capital markets over the past decade.

The dual government of President Dmitry Medvedev and Prime Minister Vladimir Putin have a blueprint in place for building Moscow's position as a financial hub. Some institutions, especially the Federal Anti-Monopoly (FAS) commission, have grown in stature due to its recent high profile investigations into price fixing. The
administration is now adding to the institutional pillars brick by brick but some of the foundations appear shaky.

Russia's five-day war with Georgia over Southern Ossetia, along with a selling spree sparked by allegations of price fixing at miner Mechel, left domestic stock markets nursing 35% losses and two year lows at the end of August.

Analysts at French bank BNP Paribas estimated the conflict with Georgia could have triggered capital flight worth $25bn of outflows, while Russia's gold and foreign currency reserves fell by $16.4bn since the beginning of military operations on August 7.

Alexander Kotchoubey, head of international development for Russia and Eastern Europe at Swiss private bank Lombard Odier Darier Hentsch, believes Moscow's goal of becoming a financial centre had been pushed back to 2015-2020.

"The credibility of making Moscow a financial hub and transforming the rouble into a reserve currency has been hit," explained Kotchoubey, who was until recently a managing director at Moscow-based Renaissance Investment Management, an emerging markets fund manager with $7bn under management. "Investor confidence and the perception of stability in Russia depends on what people are thinking in London and
Frankfurt and neither one is present at the moment."

Foreign investors have highlighted the lack of corporate governance, the respect for the rule of law, uneven property rights and an abused taxation regime, as obstacles towards the development of domestic markets. Recent cases cited by investors include the price fixing probe of miner Mechel, allegations of tax evasion by fund manager
Hermitage Capital and the separate shareholder wrangles at the
Anglo-Russian TNK-BP and mobile group Telenor.

Yet Alexei Fedotov, head of securities and fund services at Citigroup's global transaction arm in Russia, believes the market reform process kick-started in 2005 is irreversible.

He said: "Russia is a unique BRIC market created as a result of mass privatisation of huge number of companies within extremely short period of time. Since 2005 the speculative growth of the market has been gradually replaced by growth caused by serious changes implemented by the government."

"Changes included liberalisation of banking stocks, Gazprom shares, liberalisation of Russian currency and huge unprecedented IPO growth. As a result the growth has attracted to the market investors and market players of a higher calibre."

Market makers have mixed views about the prospects of the rouble becoming a reserve currency, which is one of the central planks of President's Medvedev's plans to develop Moscow into a global financial centre.

One senior Western banker in Moscow said: "People have been slow to adapt to the Euro currency as a reserve. It's a good goal to have the rouble as a reserve currency but there needs to be much more done to achieve it."

Maxim Baklunov, head of equity sales at Russian investment bank KIT, fees the rouble could be a credible alternative to the dollar.

He said: "The plans of the Russian government to turn Moscow into an international financial centre and the rouble into a major regional reserve currency will make the Russian financial system more competitive. Taking into account the government policy seeking to increase the significance of the Russian currency and to reduce the
risks associated with fluctuations of the US dollar's exchange rate, we think that rouble has a good chance of becoming a major regional reserve currency."

A deepening liquidity, with volumes on domestic bourses recorded of up to $7bn a day, has lured leading US and UK investment banks to set up local brokerage subsidiaries over the past three years.

Citigroup has been a pioneer in Russian wholesale and retail banking and Fedotov argues the Russian growth story remain intact in spite of the recent volatility.

He added: "The volatility is not able to change improvements in the market and did not create reasons for a serious capital outflow or did it make the market fundamentally unattractive or risky. In view of that, there is a certain optimism that the market will continue to develop in coming years and foreign investment will grow.

"This, however, does not stop us from focusing on market improvements and working closely with local market participants and regulators to introduce such important changes as a central depository, foreign nominee concept, RUB RTGS settlement, which in our view will be able to further support market growth and make it irrevocable."

Citigroup is one of the few foreign brokers to be involved in the reform process with other bulge bracket rivals complaining of being left out in the cold.

The Russian government's plans to create an international financial centre in Moscow are based on a competitive taxation system, simplified registration and more permissive procedures for issuers and investors.

The Federal Financial Markets Service (FFMS), the main Russian market regulator, submitted a draft strategy to the government in March for the development of domestic capital over the next four years.

The report, entitled "Measures to Improve the Regulation and Development of the Securities Market in 2008-2012 and a Long-Term Horizon," is a blueprint for the development of the domestic capital market and outlines measures to revamp laws tax law, improve corporate governance, lower administrative barriers and simplify procedures, prevent manipulative practises and the use of insider information.

The domestic capital market plays a vital role in the government's plans for Russia's continuing economic revival. The new administration intends to tap domestic capital for the investment needed to revive Soviet-era industrial assets rather than rely on foreign capital.

Among some of the provisions proposed in the report are radical changes to the tax rules. Under discussion is the possibility of cutting the capital gains tax and a reduction in the tax on income from securities to zero.

One aim of these proposed changes is to make Russia a more attractive place to list shares than the offshore havens companies currently use. The FFMS is worried about losing capital market functions to foreign exchanges and has already introduced administrative controls to encourage companies to list onshore.

Its success has been only partial, as Russian companies that float IPOs now almost always list simultaneously in Russia and abroad.

Additional measures introduced by the FFMS in July restrict companies engaged in oil exploration or mining from selling no more than 5% of their shares abroad, a cut from the previous blanket level of 35% for all companies listing abroad.

The regulations limit foreign stakeholding in industries related to national security and defence to no more than 25%, while those making public offerings in other sectors may sell a maximum of 30% of their stock abroad.

After a slow start to the year for Russian equity issuance, some analysts argued that these rules could hamper Russian equity issuance and liquidity. "In the short term it will have no effect, but in the medium term it could slow down the pace of the IPO pipeline, says Chris Weafer, chief analyst at the Moscow-headquartered UralSib bank.

There were just 13 IPOs in the first half of this year - about half the volume over the same period last year - according to Russian data provider Offerings.ru.

The report, which is being debated in government circles, also suggests developing a futures market and a pooled investments market.

The regulator has drawn up a proposal for increasing the free float. The free float in Russia is currently about 20-30% percent of total outstanding shares. "The free float of securities in Russia should be increased to not less than 40- 50% in the nearest two three years," the document says.

There are currently no foreign securities listed on Russian bourses due to a lack of legislation and appropriate regulation. This could change later this year, however, because a draft law is already in the Duma, the lower house of the Russian parliament. Once new laws are passed, Russian investors will be able to invest via a domestic exchange in foreign companies' shares and depositary receipts.

Key figures within the government and the regulator are actively pushing for the creation of a central depository and a merger of two the main stock exchanges, the rouble denominated MICEX and the dollar-denominated RTS. Some market participants, who are shareholder and members of both exchanges, have privately complained of the pace of the integration of the two platforms.

After all these amendments are made, the regulator estimates the capitalisation of the Russian financial market will increase by $40-50bnm and Moscow will have a chance of evolving into a pan-CIS and Central European hub for capital markets.

However, Lombard Odier's Alexander Kotchoubey feels legislative reforms and institutional change will not mean much without the "intangible concept of investor confidence and market stability."

He said: "Russia was on the cusp. It had entered the top ten in market capitalisation and it had become essential to have Russian equity allocation in global portfolios. It is now facing a tremendous headwind from the war with Georgia and the blow-up at TNK-BP with investors now being very cautious about making any sort of allocation to Russia."

Tuesday 16 September 2008

Partners make millions on sale of fund management stake

Dow Jones 'Wealth Bulletin'

Jason Corcoran in Moscow - 16 September 2008


Partners make millions on sale of fund management stake


Charlie Ryan and Boris Fedorov, co-founders of UFG Invest, will share about $65m with the Russian fund manager's managing partner following the sale last Thursday of a 40% stake to Deutsche Bank.

Former Russian finance minister Fedorov, Deutsche Bank Russia chairman Ryan, and UFG Invest managing partner Florian Fenner, together own 95% of UFG Invest. The remaining 5% of UFG Invest is owned by fund managers and staff.

Financial terms of the sale were not disclosed but a source close to UFG said the German bank had paid about $65 for the minority stake. UFG Invest and Deutsche Bank declined to comment on the price of the sale.

The deal comes just five years after Deutsche first looked at buying the operation for a fraction of that price during its approach for UFG Investment Bank.

Ryan and Fedorov also masterminded the 40% sale of UFG investment bank for $70m to Deutsche in 2004, and the remaining 60% for a reported $600m in 2006.

A source close to UFG told Wealth Bulletin: "Deutsche looked at buying UFG Invest at the same time as the investment banking deal. They decided the assets under management of $30m were too low to make an impact and they launched DWS instead. The outcome in today's equity markets makes Charlie Ryan look like a genius."

Deutsche is to combine UFG Invest with the Russian unit of its DWS Investments division. Artem Beresnev, acting chief executive of DWS Investments in Russia, is to relinquish his role following completion of the merger.

Beresnev had been acting head for a year following the departure of Elena Loginova to take charge of Pioneer Investments in Russia. A Deutsche Bank spokewoman said Beresnev would pursue other opportunities and it was too early to discuss other potential layoffs.

German national Fenner, who joined as managing partner in 2002, is to become chief executive of the combined Deutsche UFG Capital Management business.

DWS said it was unlikely the two fund ranges would be merged. Its investors will probably be asked to redeem and reinvest with UFG.

DWS manages $53m in four mutual funds while UFG runs $630m under management on behalf of 30,000 private investors, as well as pension and insurance funds.

As part of the deal, Deutsche has an option to purchase a 20% stake in UFG's offshore hedge fund business UFG Advisors.

The Russian retail fund management market has struggled to take off and redemptions have been high with stock markets tumbling 50% since May.

http://www.wealth-bulletin.com

Sunday 7 September 2008

Renaissance Investment looks to riches of the CIS

Business New Europe


Jason Corcoran in Moscow

September 1, 2008


Andrei Movchan, founding chief executive and co-head of Renaissance Investment Management (RIM), is banking on his bulging Rolodex of rich clients to help his firm emerge from the long shadow cast by its investment banking stable-mate, Renaissance Capital.



RIM, the emerging markets fund arm of the Moscow-based financial group, has racked up $7bn in assets under management since its inception of 2003, with $5bn in assets being generated by its wealth management business, where individual accounts range from $3m-5m.

This significant proportion of high net worth clients is in contrast to the more modest growth in mutual funds, where RIM manages just $200m. Conversely, rival Troika Dialog Asset Management has a total of $10bn in assets under management in retail, institutional and private banking, but just $2bn of their total is generated by high net worth clients.

Having analysed the market and crunched the numbers, RIM's management team have decided to freeze development of retail and institutional funds in Russia and adhere to the dictum: follow the money.

"We now manage about $7bn in total and $5bn from CIS high net worth individuals," says Movchan. "This high net worth market in CIS is represented by just under 90,000 individuals with bankable wealth in excess of $3m. A 20% market share gives us over $50bn which, provided a successful strategy execution, will make us grow 10 times in three to five years." Part of the strategy to grow its Russian and CIS wealth business involves recruiting an additional 120 client advisors over the next two to three years.

Mining wealth

RIM can expect fierce competition in the high net worth bracket. Mid-size Swiss private banks such as Union Bancaire Privée, Julius Baer and Vontobel are beginning to target Russia's rich, while larger rivals Credit Suisse and UBS have been investing in their Russian wealth operations for the past two to three years.

The interest has been sparked by the commodities boom, which has spawned more mega-rich. The number of Russians with more than $1m to invest, not counting the value of their homes, grew by 14% last year to 136,000, according to Merrill Lynch's 12th annual wealth report launched in Moscow in June. "Russian wealth is not inherited, it is newly created so it requires a different logic and different approach," says Movchan. "When we sell leveraged African shares, people buy; but trying to sell American diversified market would fail."

It's this mentality that has led Movchan to conclude that Russia's noveau riche will be happier to invest their money onshore than stuff it in a Swiss bank account. "Switzerland is a safe harbour for people who do not want high returns, but who want their money to be 100% safe," he says. "In Russia, where we have inflation of 15%, returns of 3-5% are not sufficient. I suppose Swiss banks will lose Russian money unless they work like Pictet [& Cie private bankers] who propose active Russian- and frontier-market allocations."

Movchan hopes to serve Russian and CIS investors who are starting to look beyond cash deposits and real estate investment to more sophisticated products such as hedge funds. Russian mutual funds, or personal investment funds (PIFs), are too restrictive to satisfy the needs of wealthy investors, says Movchan, and while there are hopes the government will eventually introduce hedge funds for qualified investors, RIM isn't banking on it. The firm is gradually converting its equity and balanced products into alpha funds, which generate higher out-peformance. "You can no longer satisfy clients' needs by giving them index-related returns," says Movchan. "You need to do something else and we started the alternative products programme three years ago and we now have about $2bn invested in absolute-return Russian products.

With inflation running at about 15%, Movchan says double-digit returns have become an absolute minimum requirement, not a target. In fixed income, RIM's dynamic fixed income fund is posting a return of 18%. "It's not luck or talent, but bottom-up understanding of credit quality, leveraging and exploiting the opportunity of high inflation in Russia," says Movchan. "Double-digit returns are a given, but the question is whether you can do 25% and with alternative products we can do 25%. Certainty grows once you get off index tracking, while the index goes back and forth according to what Putin says."

Starting out

RIM began life with five employees and $4m in assets, and has grown to about $7bn in assets, with approximately 220 employees. Movchan, 39, has played a key leadership role in establishing RIM, but is keen to push the firm to the next level where it can be recognised as a world beater like its investment banking brother.

A key lieutenant within the Renaissance Group, he added a leadership role at the consumer finance arm for a spell last year. Movchan, who holds an MBA from the University of Chicago Graduate School of Business, joined Renaissance in 1997 from Troika Dialog, where he was an executive director with responsibility for corporate finance and special client operations. Before that, he worked for the commercial bank Rossiysky Credit as department head for financial services and analysis.

Rod Barker joined RIM as Movchan's co-chief executive from the hedge fund RAB Capital earlier this year as part of RIM's expansion into new markets and push for distribution. London-based Barker is responsible for RIM's growing international business in Africa, Central Asia, the Middle East and its distribution hubs in London, New York, Singapore and Geneva.

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