1. E A S T E R N E U R O P E A N D C E N T R A L A S I A
WORLD
TM
WORLD FINANCE REVIEW
FINANCE REVIEW May 2009
UKRAINE CENTRAL ASIA AND KAZAKHSTAN
Impact of the Economic Crisis on Crisis Brings Reversal of Fortune
Ukrainian Companies to Caucasus and Central Asia
Ukraine’s Default – How Probable Is It? Kazakhstan’s Financial
YOUR PARTNER FOR SUCCESSFUL GLOBAL INVESTMENT
Feasible Recapitalisation Strategies Stability Report
For Ukraine’s Banking Sector Private Equity Investments
in Kazakhstan
RUSSIA
Global Economic Downturn
Emphasises Russia Country Risk
Why Russia Should Recover Faster
MAY 2009
Future Prospects and Challenges
for Russia’s Financial Market
YOUR PARTNER FOR SUCCESSFUL GLOBAL INVESTMENT

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RUSSIA Investments
Direct Investment in Russia:
Latest Trends
By Vladimir Dorokhin, PhD, Managing Partner, and Aleksey Lukovenko, MBA, Chief Investment Officer,
ROEL Group
The myth that Russia is a “safe haven” being. However, there are signs of its more economical ways of consumption
for foreign investors was finally gradual revival. And that interest is to or those being unable to adapt to the
dispelled in October 2008. Capital flight be more sensible and balanced. It is clients’ moving to lower price niches.
from Russia hit record levels in the going to be characterised by sensitivity Such companies may catch up by
fourth quarter of 2008 as S&P, Fitch to not only sovereign or liquidity risks following the consumer conduct of
and other agencies deprived Russia of but also to operational and commercial their clients.
the investment-grade sovereign rating. ones. This means that competition for
Investing in home markets, less risky high-quality investment objects will be Several Western companies have
that BRIC, has become a reasonable tough. Today’s investors are closely already announced establishing PE
alternative for many participants. looking at trends in economy, analyse funds aimed at Russia-based assets.
Those few investors remaining in the current economic conditions, make Thus, it is high time the companies
Russia became extremely cautious. yield forecasts. It’ll be rather hard to with stable cash-flow and reasonable
forecast the rates of investment inflow debt limits which look for equity
At present PE firms with assets formed to Russia via PEF within a couple of financing initiated negotiations with
before the crisis, face natural years. The findings of a survey of investors.
difficulties brought about by a dramatic EMPEA and Coller Capital show that
slowdown in asset value increase. A lot Russia still remains among top 10 most As for fair valuation, we see mid-term
of funds write down assets and post attractive investment countries. The displacement of business valuation
losses, leverage buyout has been depreciation of Russian assets is leading indicators as one of the main
notably on the wane. On the whole, conducive to the position. The fall in obstacles to resuming investments.
cashing in remains virtually the only the assets’ price does not mean the First of all, how can one forecast
risk-free strategy. However, given the decrease of their long-term competitive increased proceeds at a time of the
current currency instability, cash, too, advantage, on the contrary, economic downturn? Secondly, how
is turning risky and low-yielding. In this expectations that their business value can prospects of asset appreciation,
regard purchase of attractive assets will skyrocket in future are high, with feasibility of a financial model and of a
remains topical. the low prices being a complement to business plan be proved? To say
their balance sheets. Naturally, all this nothing about feasibility of leading
There is growing evidence that Russia’s sparks increased attention and interest financial and operating indicators. Is it
alternative investment sector has been of global and European PE investors justifiable to approximate a trend or a
affected by the financial meltdown to a who are considering expansion to the formula to the whole forecast period?
lesser extent than the classic Russian market if risk landscape Can we justify the use of analogues, if
investment and public markets. Capital improves. Long-term interest of yes, what is the reduction degree for
flight hasn’t taken such a heavy toll on Western investors is obvious. Stable multiplicators traditionally used when
PE funds which are full-fledged industries catering to mass consumer appraising a company, etc?
participants of the alternative demand are in the focus of their
investment market as it had on public attention. Despite the crisis, investors Substantially increased requirements
markets. The value and cash-flow of still have the money and now they may for management operation and
portfolio companies are certain to leap on a chance of obtaining new management quality as well as altered
plunge, however, not all of them will assets by simply paying out the approach thereto have made another
face the prospect. They will be the first companies’ debts. obstacle. However, business
to resume activities thanks to their purchase/sale price is still formed on
flexibility and experience in picking Investors turn to undervalued assets the basis of fundamental indicators,
investment objects. Many PE firms which experience certain problems but rules and approaches. Most Russian
expect certain write-downs, losses and are able to generate a steady cash-flow. companies are significantly
bankruptcies of their portfolio Financial companies, developers and underestimated as per these indices.
companies, still those funds possessing construction enterprises, restaurants,
financial resources will be able to service sector and other industries From the perspective of investment,
make up for the losses by means of reliant on consumer demand have born say the analysts of the ROEL Group,
new successful investment. the brunt of the crisis. In this row we one of the most active mid-
may single out enterprises which capitalisation PE market participants,
In the context of the global downturn suffered from changing consumer the following sectors are of most
investors have lost much of their preferences to cheaper ones, those interest to private equity funds:
interest to Russia and CIS for the time who suffer from losing their clients to infrastructure (as the Russian
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Investments RUSSIA
government plans to invest heavily in such assets and pre-sale activities as will continue and risk management
deep modernisation of infrastructure in their key corporate competence, this is might play the leading part in the
various sectors), new media and why the market of these services will process. Investors’ selection field has
telecom, development, IT and online develop rapidly. considerably increased, this is why
projects. Food industry and retail they are becoming more demanding.
remain attractive as well, since they are There is a belief that there exists a They invest not in better-placed assets
able to generate a steady cash-flow and series of stimuli which make direct but in those offering greater returns.
alter pricing policy depending on the investments preferable to investments Sometimes very bad loans will be
character of demand. These very in PE funds. However, at present bought extremely cheap. The year
sectors have lately attracted most PE analysts expect an increased number 2009 will witness a surge in M&A
investments. of M&A deals related to acquisition of deals involving PE. Besides, the
problem assets and which will most relationship within “creditor-debtor-
On the whole, PE funds operating in probably be effected via direct investor” triangle will require special
Russia like in any other country tend to investment. This fact does not prevent effort and qualifications.
select industries for investment basing an ever-growing number of
on their own sectorial preferences, professional participants of the It is common knowledge that the
risk/return ratio, including possibilities alternative investment market from number of bankruptcies is at its highest
to reach planned sales levels. So far no setting up new PE and problem assets a year-year and a half after a recession
one has shifted the starts. In Russia the recession
investment horizons which has started relatively recently.
range from 2 to 5-7 years. Nevertheless, the absence of
At the moment investors are adequate sources of debt
studying various scenarios
ROEL Group considers that financing is growingly obvious,
and plan various investment
terms starting with 2-3 years
the most attractive sectors that is why shareholders’
financing and direct
and up to 5-7 years. The are biotech and power investments are already in
returns are expected to be demand. But even to a greater
high, but it is hard to provide engineering industry, waste extent will increase the number
the exact figure. of M&A deals, to be more
management, geological precise, of troubled assets
Each fund has its own sales. Competition between the
landmarks and investment exploration, innovative fast three segments of alternative
criteria, including sectorial markets—direct investments,
preferences. Today’s growing companies of M&A deals and PE firms
investment declarations of investing in Russia—will get
PE firms highlight not only second and third echelon. stronger and will much depend
selection of investment on how soon we will arrive at
objects or a standard set of the watershed of economic
investment criteria, but also revival. Local investors are to
an investment moment as it is These Target markets could focus on the first two segments
today that the investment while global and international
object is in trouble and has a
constitute the investment investors –on the third. In due
low value. This is why the course, when the recession at
group of troubled assets and
profile of the ROEL Fund’s developed markets starts
troubled debts is the most target companies, a abating, global investors will
attractive in each sector. turn more active in the M&A
possibility of establishing segment, too.
A lot of funds are ready to
cooperate with debtors, such a fund is being actively A well-balanced approach and
owners of troubled assets, a team of qualified managers
issues on the one side and discussed at present. with excellent market intuition
bankers-creditors, or other will provide a basis for
claim holders, on the other successful investment.
side. It is highly possible that Furthermore, Russia has
strategic as well as financial investors funds such as: New Russian Growth, something that more stable countries
and funds will show interest in Renaissance, Asset Capital Partners, lack: an undersaturated home market,
restructuring distressed assets, Alpha Capital MC. The declared yield which means that yields may be very
distressed debt, bankruptcy practices, spread of the funds in Russia ranges high. Unfortunately, for the time being,
of banks, private pension funds, from 25 to 30 percent. fears dominate, but investors’
insurance companies and the corporate Troika Dialog, one of the leading enterprise is sure to come to the fore.
sector. Many banks have lost ground investment companies in Russia,
having received mortgaged assets. As a believes that any PE fund is destressed.
rule banks, do not consider managing The segmentation of the asset market
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