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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