Private Equity Funds Show a Growing Appetite for Russia

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Jun. 19 – Almost half of the private equity investors surveyed by Ernst & Young said they would expand their investment in the Russian economy over the next year, according to a report released last week.

A total of 48 percent of private equity investors surveyed by the consulting company between February and April said they would increase acquisition activities, up from 25 percent in October.

The poll of 150 international private equity funds showed respondents were most of all attracted by the prospects of the Russian market (75 percent), telecommunications infrastructure (69 percent), cheap labor (69 percent) and the high labor skills level (68 percent).

The least attractive feature for investors was the non-transparent political, legislative and administrative environment (64 percent), the unstable political environment (56 percent) and insufficient support measures from public authorities (56 percent).

This negative view is reinforced by a perceived lack of innovation and the dominant role of state-owned enterprises, the report said.

New investment is most likely to come from those foreign companies already operating in Russia – 64 percent of these investors are planning to increase their operations in Russia and another 31 percent are set to maintain operations in the country.

The number of deals by private equity funds in Russia totaled 55 last year, compared with 46 in 2010, with the average deal size growing from US$48 million to US$76 million, Alexei Ivanov, Ernst & Young’s head of transaction advisory services for the CIS, told a news conference at the company’s Moscow office.

However, Russia’s capital outflows reached US$46.5 billion in the first five months of the year, according to Central Bank data. That includes US$5.8 billion in May.

“Russia’s stable macroeconomic situation and high income per capita attract foreign investors, although they also understand the challenges investors are likely to face in the country, including red tape, high corruption levels, and the need to improve the work of courts,” Kirill Dmitriyev, chief executive of the US$10 billion Russian Direct Investment Fund (RDIF).

According to Dmitriyev, RDIF, jointly with a few private equity funds investing in Russia (such as UFG Private Equity and Mint Capital), plans to provide recommendations to President Vladimir Putin on possible measures to stimulate investment locally.

Among the steps are amending legislation to enable domestic pension funds to invest in Russia jointly with private equity funds, introducing international financial reporting standards in all Russian companies to make their financial statements more understandable for foreign investors, and providing comprehensive information on support for foreign investors in the regions.

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