Financial News: Focus on Russia
Jason Corcoran in Moscow
30 July 2007
Stephen Jennings, founder of Russian investment bank Renaissance Capital keeps the faith in his new country
It’s clear Moscow is going to be a major capital market
Stephen Jennings, founder of Russia’s Renaissance Capital, may spend as much time in Nairobi expanding the bank’s sub-Saharan operations as in Moscow but he is not betting against the domestic market just yet.
The billionaire, one of two foreign oligarchs in Russia, made his fortune by keeping faith in the country and his investment banking business, which both came close to collapse after the financial crisis of 1998.
Having seen that out, the New Zealander is unlikely to pack his bags for home soon. Nor is he sitting on his laurels, having seen Renaissance break into the top 10 global underwriters of initial public offerings for the first time last month.
Jennings envisages Moscow becoming Europe’s second financial capital behind London, overhauling Frankfurt, Paris and Milan within 15 years.
He said: “It’s clear Moscow is going to be a major capital market. It already is in new issuance and overall market capitalisation. Imagine what’s going to happen with another 10 years of capital accumulation, and how big the domestic capital markets will be.
“Mortgage markets, securitisations markets and derivative markets will be very big. It sounds strange but when you think about it, it’s totally logical.”
Russia has the biggest and most liquid stock market in the region by far, with a market capitalisation of more than a $1 trillion (€723bn). It turns over billions of dollars every day. Its companies were third in the world in terms of fundraising through IPOs in the first half of the year, outpacing the UK and Brazil, according to auditor Ernst & Young.
Jennings admitted that beyond equity issuance, Russia lags its rivals. In terms of foreign exchange trading, commodities, debt and derivatives, Moscow is not on the global radar, he said. But this is changing. Derivatives are now the fastest growing area of Russia’s financial sector as the scale and diversity of Russia’s asset base and securities markets drives its development.
Jennings said Moscow could become the focus of an emerging regional capital market, although it would have to compete with Warsaw, which has attracted several Ukrainian IPOs.
He added: “We will start to see elements of a pan-CIS capital market and it’s more likely than not to be centred on Moscow. When markets get to a certain size, political pressure for that harmonisation will get to be a lot greater. We will see pan-CIS investment banks, we will see pan-CIS commercial banks and that’s starting to happen now.”
Moscow forms a natural bridge between Asian and European markets. For it to develop as a financial hub, Jennings said more widespread equity ownership and growth in domestic pension funds, mutual funds and insurance funds would be needed. Renaissance’s own fund arm, Renaissance Investment Management, is Russia’s market leader and has grown rapidly to $4.5bn in assets under management.
Some signs are encouraging, such as May’s IPO by state-controlled bank VTB. It was the first meaningful allocation of shares to retail investors. More than 131,000 of them applied for stock valued at approximately $1.6bn.
Institutional reform is vital to developing Russian capital markets and Jennings noted its pace has slackened recently, compared to the rate of change in Kazakhstan and Ukraine.
He said: “Russia has been quite good at cutting tax rates or streamlining and simplifying but it hasn’t been very good, so far, at building strong institutions. There will be another phase of reform and then Russia will go through a phase of modernising its institutions. Some aspects of capital market development will have to wait for that phase.”
Jennings said lack of banking reform has hampered financial intermediation and efficiency in financial systems, but has not affected the participation of foreign banks in Russia.
Foreign banks, including France’s Société Générale and Belgium’s KBC Group, were snapping up Russian lenders to gain a foothold in the booming consumer credit market, he said. Deutsche Bank, Barclays and HSBC have all recently outlined plans to enter the retail market.
“The market is substantively quite liberal in terms of foreign banks’ participation,” said Jennings.
“The global banks have not had the strategic commitment until now. They underestimated the opportunity and now they are paying for it.”
Investment banking was the most developed industry in Moscow, he said, with 37 companies, at the last count, scrabbling for clients.
A war for talent has been under way for a year and Renaissance has played its part. Recent hires include Petri Kivinen, global head of debt capital markets at Dresdner Kleinwort in London, Gordon McCulloch, co-head of Goldman Sachs’ Moscow office, and Richard Bruens, head of investor relations at ABN Amro.
“There are a lot of open cheque books out there and I don’t think paying a lot is enough to retain people in any environment – and certainly not in a really hot environment,” said Jennings.
Renaissance’s investment bank has more than 1,000 employees in Moscow and Jennings claims to have lost only one director to a rival over the past two years.
Renaissance is a private partnership and more than 100 employees own a stake in it. Employees who leave receive the book value of their stock which, while significant (it is valued at $1bn), does not represent its likely market value. Jennings owns 80% of the business, a stake that has been valued by bankers at between $3bn and $4bn.
Jennings is not concerned that forthcoming elections will affect his business adversely and, like many of Moscow’s leading bankers, he diplomatically refuses to be drawn into backing a successor to President Putin.
He said: “Putin brought a much-needed degree of stability when we had a large measure of anarchy. The name of the game now is going to be continuity: continuity politically and a high degree of continuity in terms of how the economy is developing.”
• Rencap’s strategy presents a strong case for joint venture
Rencap’s growth strategy is based on exporting its Russian business model to other emerging markets and developing alliances with leaders in other fields.
Jennings said Renaissance plans to increase the investment banking services it offers in frontier markets, having set up in sub-Saharan Africa and CIS countries including Kazakhstan and Ukraine. The bank is also expected to announce details of an infrastructure joint venture with Australian banking group Macquarie.
Jennings said going it alone was not an option for Renaissance. He said: “Unlike equity capital markets where we can create scale to have the best sales and best capital market professionals, it is very questionable that a go-it-alone model is efficient if you want to be strong in infrastructure. There is a strong case for us to team up with somebody – I think infrastructure is going to be one of the next big developments in Russia.”
The bank has an investment banking joint venture with the Royal Bank of Scotland and an informal M&A tie-up with Lehman Brothers. The latter is strengthening its Moscow operation and has recruited leading rainmaker Nick Jordan from Deutsche Bank to spearhead its push,
Denying this would jeopardise the alliance, Jennings said: “When Nick was running Deutsche, Renaissance used to do a lot of business with them. We would see Nick joining Lehman as a positive and certainly not a negative. There is some overlap but in terms of resources on the ground and critical mass, there is not much overlap.”
Rencap will limit the number of alliances it entered into, according to Jennings. He said: “You can’t do a lot of alliances. How many best friends can you have? You can only have a small number. The RBS joint venture in derivatives gives us a leading position in a market that we would otherwise be a two-bit player in.”
Jennings said the bank has a billion dollars invested in its sub-Saharan projects focused on Nigeria and Kenya. “We have a big challenge in Africa over the next 12 months but we don’t rule out looking at other markets.” Renaissance has no plans to sell to a rival or to float the company, despite its successes floating other Russian businesses.
Jennings, who set up Rencap in 1995 with a Credit Suisse colleague Boris Jordan, has rebuffed interest in the business from western banks and state-owned VTB. He said selling, 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.”
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