Russian economy entices new investors

Financial News

Jason Corcoran in Moscow

06 April 2009

After the sell-off, hopes of good returns are rising

Like heroes inspired by the firebird of Russian folklore to undertake the most dangerous of quests, investors are returning to a resurgent Russian stock market in the hope of riches.

Norway’s $330bn (€249bn) state pension fund, one of the world’s largest sovereign wealth funds, last month awarded Prosperity Capital, the largest foreign fund manager operating in Russia, its largest mandate.

G2 Group, a Swiss family office, has taken large equity stakes in two Moscow investment firms, Da Vinci Capital and Diamond Age Advisors.

Swedish fund manager East Capital has increased its Russia weighting in its largest fund, the $500m east European fund, from 40% to 57%, the highest level in its seven-year life.

Karine Hirn, co-founder of East Capital, said: “Russia is extremely cheap now. It was by far the most oversold of the stock markets last year. In fact, the region of eastern Europe had 10 out of 20 of the most oversold markets in the world.”

Investor enthusiasm has pushed the RTS Index of leading Russian shares up 46% since its low point in late January. Higher oil prices, a stronger rouble and hopes that the international credit markets could soon be prised open for domestic issuers have helped improve investor sentiment.

But investors should bear in mind that, according to Russian folklore, while good fortune lies in store for whoever catches the firebird, trouble is normally close behind.

The Russian equities market has ruined investors twice in little more than a decade, with the RTS dropping 85% in 1998 and 75% last year, spurring investors to pull $290bn from the country between August and January this year, according to French bank BNP Paribas.

It was the combination of collapsing share prices and client withdrawals that forced Da Vinci Capital and Diamond Age Advisors to restructure themselves in the first place.

Alfa Bank co-founder Petr Aven last week warned that bad debts could reach 20% of total loans by the end of year, while finance minister Alexei Kudrin expects 10% in defaults.

Chris Weafer, chief strategist at banking group Uralsib, said: “The economy is still in decline and will need both a sustained rally in the demand for, and price of, commodities – plus a resumption of bank lending – to create new growth. These are more likely in the fourth quarter than in the second quarter, if they happen at all in 2009.”

East Capital’s asset managers said they are focusing on companies with low levels of debt, a strong market position and opportunities to benefit from sector consolidation.

Hirn said: “We are looking more at the balance sheets these days because there are financing issues that need to be resolved for many companies. We are happy to avoid real estate because the debt burden is heavy.”

Hirn said the firm’s east European funds had suffered a sharp fall in valuations since September but only suffered 10% in client redemptions. “We lost a huge amount in valuation in recent months but it was less brutal than 1998,” she said.

East Capital said Russia was still the strongest economy in eastern Europe with exposure to a large domestic market. It said countries dependent on exports such as Hungary and the Czech Republic are more vulnerable. Turkey and Romania also benefit from a strong domestic economy.

The manager last month launched a special opportunities fund to target assets in Russia and the Commonwealth of Independent States where valuations have declined sharply. The board of East Capital has agreed to put $50m in the fund when it launches during the second quarter of this year.

Moscow investment firm Da Vinci Capital also hopes to exploit cut-price opportunities in Russia through its new partnership with G2 Group, which manages $1bn in alternative assets.

Oleg Jelezko, managing partner and chief executive of Da Vinci Capital, said “Our strategy will be different now we are in recovery mode so we won’t need to pursue derivatives. It’s about using different asset classes such as bonds and special situations.”

Mattias Westman, chief executive of Prosperity Capital Management, said his firm’s Russian funds had received more interest from institutions in recent weeks.

He said: “Nothing very big, but it’s more constructive. We have endowments, pension funds and family offices considering further investment. Hopefully the Norwegians will help make Russia something that other major institutions feel more comfortable with.”

Flows into Russian equity funds hit a 19-month high in March, according to EPFR Global, a data provider that tracks funds. It said capital flows into Russian-dedicated funds rose from $7m in the week ending March 18 to $50m the following week.

However, inflows remain modest, as many investors are sitting on the sidelines waiting to see whether the rebound is just a bear market rally.

Angelika Millendorfer, head of emerging market equities at Austria’s Raiffeisen Capital Management, said: “So far our institutional and private investors are not returning to emerging markets. The relative performance of emerging markets has improved but investors are not yet making any substantial moves.”

Millendorfer said the big emerging markets funds and institutions continued to have low allocations to equities and to markets like Russia. She said: “I would be surprised if investors moved into emerging markets if the case for the developed markets does not return first. We need to have confidence that western banks will not collapse Lehman-style.”

Greater rouble stability and recent higher oil prices have been a major reason for domestic equity recovery but questions remain over the banking system, external corporate debt and the high level of inflation.

The biggest risk, partly because it cannot be quantified, relates to the level of non-performing loans in the banking sector and the future ability of big Russian corporates to pay or refinance the amounts they owe.

Swiss manager G2 snaps up weakened Russian rivals

Financial News

Jason Corcoran in Moscow
24 March 2009

Swiss family office G2 Group has taken large equity stakes in two rival Russian investment firms which were forced to restructure following the equity market’s collapse and client withdrawals.

G2, which manages $1bn (€735m) in alternative assets, has become a shareholder and partner in Da Vinci Capital and Diamond Age Capital Advisors, two firms whose offices face one another across Moscow’s Moskva river.

Russian hedge funds are attempting to restructure and restart with new investors as the economy stabilises. Russia’s Micex index hit a 18-week high on Friday, rising above 800 points as energy and metal stocks were boosted by strong global commodity prices.

Oleg Jelezko, managing partner and chief executive of Da Vinci Capital, said: “G2 offers investment as well as partnership. We have put our hedge fund on their platform and they have hired some great people for us. They have also extended their investment from the holding company to our private equity operation.”

Da Vinci, which had $250m of assets under management in mid-2008, was set up in 2007 by former Renaissance Capital executives as a joint venture with international fund group BSG.

G2, which replaces BSG as a partner, is investing $10m (€7.4m) into Da Vinci’s hedge fund and $10m into its private equity fund, which has a fundraising target of $300m.

The Swiss group, which is headed by financier Gualtiero Giori, also recently became a partner and equity investor in hedge fund business Diamond Age Capital Advisors.

Slava Rabinovich, managing partner of Diamond Age, told investors that current valuations represent a “once in a lifetime” opportunity. Rabinovich, former deputy portfolio manager to Bill Browder at Hermitage Capital, set up the firm in 2005.

Rabinovich finds diamonds in the CIS rough

Business New Europe


Jason Corcoran in Moscow

April 24, 2008



Befitting for a frontier markets investor, Slava Rabinovich was one of the early adventurers to set up office in the Russian capital's emerging business district of Moscow City.

Rabinovich, founder and managing partner of Diamond Age Capital Advisors, moved into Tower 2000 in August 2004, just before the fund's inception in February 2005. From his 22-storey perch on the right bank of the Moscow river, Rabinvoich can keep an eye on the spectacular rise of Moscow City, located on the Presnenskaya embankment, three kilometres west of the Kremlin.

Rabinovich's pioneering spirit has taken him a circuitous route to setting up his own hedge fund, which invests in Russia, Ukraine, Kazakhstan, Kyrgyzstan, Azerbaijan, Georgia, the Baltics, Uzbekistan, and over 27 countries globally whose principal focus is the former Soviet Union.

"I have been described as a pioneer because I was here at the inception of Russia's capital markets with Bill Browder at Hermitage," he tells bne in an interview. "Some people have been investing with me since 1996 and, at that time, we were the only investment firm in town."

A St Petersburg native, Rabinvoich emigrated to the US in 1988 and returned to Moscow eight years later after gaining an MBA from New York University.

Hired by Hermitage Capital in 1996, he helped its founder and principal Bill Browder build up the business from scratch to over $1bn in just four years. Rabinovich served as head trader and assistant portfolio manager to Browder, who established the fund's aggressive activist stance toward energy giant Gazprom and other Russian blue chips. "I was number two at Hermitage during the wild days of the mid-1990s capitalism," he recalls. "I was second in command, so I was in the spotlight and that carried a risk. I remember [US businessman] Paul Tatum was shot the weekend I arrived at Hermitage in November 1996."


Rabinovich opted to leave Hermitage because he realised Browder was never going to give up the reins. He helped kick-start Renaissance Capital's fund business in 2000 following the 1998 financial crisis, and in 2001 went on to set up an investment unit at MDM Bank.

All that glitters is not gold

His own fund Diamond Age has grown at a decent lick to $102m in assets under management today from $2m at inception. Diamond's clients already include four individuals from the "Russian Forbes 100 Rich list" and several foreign private banks. With a three-year track record just under his belt, Rabinovich is looking to hike assets under management by winning over more Swiss and UK fund of funds clients. The fund, which has a minimum investment of $100,000, posted a 30% annual return at the end of March and a cumulative return of 127% since its launch. "Larger financial institutions are considering us more investable now, that we have cleared $100m assets under management and posted strong three-year numbers," says Rabinovich.

The fund tracks over 500 stocks globally with the only proviso that they are tied to the economic expansion and integration of Russia and the former Soviet states into the global economy. "We don't buy Coca-Cola or Microsoft just because they sell their products in Russia," he says. "We only consider companies where Russia and the former Soviet region has a significant impact on their income levels."

Diamond had been bullish on metals and mining stocks, which has helped performance. The fund is also exposed heavily to financial stock: it has bought shares in state bank VTB as a consolidation play and invested in Austrian and Swedish banks, which have a strong presence in Russia and the CIS.

Rabinovich shorts funds on a case-by-case basis. "We do short on an enterprise specific basis, but I don't have a compelling investment case to be a net short or market neutral in a region which grows double digit and which has earnings per share growth of 18%," he says. "We would be net short if the markets were to boom in a bubble and appreciate by 150% in a short period of time without corresponding growth in fundamentals."

In the third quarter of 2006, Diamond dramatically reduced and sold all of the integrated Russian oil companies and even shorted some of them. "The Russian companies were not making money due to high taxation, but since we were bullish on oil we bought crude futures and shorted some of the Russian oil companies," says Rabinovich.

Diamond cut the fund's leverage from as high as 30% down to zero in mid-January. The decision was taken on the basis of pure risk management rather than the cost of leverage, according to Rabinovich.

Diamond was one of the first investors, along with the European Bank of Reconstruction and Development and New York-based fund Firebird, to cop onto the potential of the Bank of Georgia in 2005. Within two years of investing in the lari-denominated stock, its GDRs had flown by 1,000% in value. Rabinovich had only scaled the bank as 1% of the fund because of its risk profile, but still banked a tidy profit.

Diamond's fund managers use a network of counterparties and brokers throughout the region, and spend most of the long Russian public holidays on the road looking for new opportunities. New recruit Kim Iskyan, former co-head of research at UralSib, knows Armenia and Kyrgystan from his previous incarnation as a journalist. About 15% of the portfolio is invested in what Rabinovich terms "frontier-frontier," which includes punts in 16 Uzbek stocks.

The fund has about 25% allocated to the large caps listed on the Moscow index. In a recent note, Rabinovich wrote: "Since mid-2006, the RTS has corrected by 10% or more on seven occasions and each time bounced back stronger afterwards. This time, given the valuations combined with growth and the overall prospects of the region, we are of view that it will be no different, and Diamond Age is positioned to take advantage of the anticipated strong valuation expansion of multiples, adjusted for growth."