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GROWTH FUNDS IN RUSSIA

GROWTH FUNDS IN RUSSIA. Alexander Aivazov Managing Partner Head of IB Department Nord Capital. The Frozen Financial Markets (1).

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GROWTH FUNDS IN RUSSIA

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  1. GROWTH FUNDS IN RUSSIA Alexander Aivazov Managing Partner Head of IB Department Nord Capital

  2. The Frozen Financial Markets (1) • The credit markets’ meltdown during 2008-2009 has left many small and middle market companies searching for finance to fund their growth as well as day-to-day operations • Collaterals are assessed with deep discount, many companies cannot apply for standard banking products • Russian credit facilities are not well-developed: loans to small and middle-sized entities account for only 13.8% of banking lending portfolio • Bank loan growth has slowed – for the last 18 months lending portfolio has grown by 0.4%

  3. The Frozen Financial Markets (2) • M&A market volume in Russia has dramatically declined by 65% during the last two years • Current domestic bond market is highly risk-averse: huge demand for top-quality securities comes along with low bond offerings activity in second and third tier • Barriers to Russian bond market entry for small businesses: the issuance amount should exceed $30m to meet the demand and liquidity

  4. Notional Amount Breakdown • Bonds with notional amount of the issue less than $50m account for 3.9% of market offerings in 2010

  5. Growth Funds – Perhaps the Only Game in Town • Russian Small&MidCap companies are looking for new capital sources while clear corporate strategy and growth potential are not sufficient criteria to access debt financing • Currently Growth Funds are not wide-spread in Russia, but, probably, this is the most appropriate option for those companies, which provide strong demand for: • Growth Equity capital • Mezzanine financing • Debt/Equity capital combination

  6. The Hidden Peak Investment Strategy Top-down analysis • Fast-evolving industries • Pre-IPO stage – transparent corporate structure and management strategy • Moderate total leverage • Lacking access to capital markets • Growth potential • Participation in industry cluster is strong advantage

  7. Industry Focus. Consumer Lending & Microfinance (1) • High growth potential • In Eastern Europe “Consumer lending/GDP” ratio varies within the range 13%-22%, while in Russia it equals only to 6,1% • Increasing personal incomes (+6,2% from the beginning of 2010) • Establishment of legal environment of microfinancingactivity: • Increasing market efficiency • Access to debt capital markets for microfinance organizations • Ministry of Finance expects microfinancial market to grow by 5-6 times in 3 years due to the law impact, therefore consumer microcredit segment will increase to $1,5-$2,5bn

  8. Industry Focus. Consumer lending & microfinance (2) • Low market penetration in provinces (compared to Moscow and Saint-Petersburg): from the beginning of 2009 consumer lending amount in Russia declined by 10%-15%

  9. Industry Focus. Pharmaceutical Manufacturing • Fast-growing industry, which has performed 2% growth especially during financial crisis (Russian GDP fell for 7.9% in 2009) • Government support to domestic manufacturers • Large amount of potential targets: profitable stand-alone businesses with revenue of $10m or much • Legislative initiatives on certification according to GMP standards • 9 emerging pharmaceutical clusters • Strong demand and high multiples for SmallCap Pharmaceutical and Life Science shares during and after IPOs

  10. Industry Focus.TMT (1) Triple-Play services, Broadband Internet & Wi-Max technologies • High growth momentum in Triple-Play services and broadband Internet access segments: • Triple-Play market more than +40% gain YoY in 2009 • Russian broadband Internet access segment amounts to $2bn and increased by 36% in previous year • Industry consolidation on the basis of government-owned Rostelecom – probable exit opportunity in 2-4 years

  11. Industry Focus.TMT (2) Mobile Virtual Network Operators (MVNO) • Strong competitive position against standard mobile operators due to low tariffs and flexible strategy development • High growth potential: in developed countries virtual operators provide services for 3.2% of total subscriber base, while in Russia MVNOs market share amounts only to 0.5% • Government support: Ministry of Communication legitimized virtual operators’ activity in 2009 • Russian virtual mobile market grew 2.6 times in 2009. Expected annual growth in 2010 equals to 65%

  12. Other Industries • IT and Internet projects • Software, social networks, online games development • Energy-saving technologies • Alternative energy • Advanced materials and substances

  13. Business Clusters • Modernization of Russian economy by industry clusters development • Government support: • $700m of government transfers to clusters are expected in 2010 • Low administrative, infrastructure and transaction costs • Tax remissions (property tax, custom duties, zero equipment VAT) • Skolkovo Innovation cluster • Largest and most ambitious Russian public-private partnership, financed by government and venture investors • Investment program till 2013-2015 amounts to $6-7bn • Pharmaceuticals • Hi-Tech • Engineering, new materials development, tourism, etc.

  14. Investment Preferences for Growth Funds • Acquisition of between “25%+1” to “50%-1” shares of target company • Cash-in type of investments in priority • Tailored approach to each company: combination of debt/ mezzanine/ equity capital • Active co-operation with top-management and participation in BoD of the company • Management strategy is based on significant market share capturing and rapid revenue multiplication • The invested money should be give a trigger for the sales acceleration and margin growth

  15. Planning and Decision-Making (1) • Industry and company selectionwith top-down analysis • Industries outlook • Diversification of investments • Company market share and growth ability (for existing entities: segment share should vary from 5% to 25% • Corporate structure and management strategy • Financial analysis and modeling (“Net Debt/EBITDA” ≤ 3, breakeven point: 12-30 months) • Investment duration: 3 to 5 years • IRR>65%

  16. Planning and Decision-Making (2) • Investment facility selection depends on company’s financial ratios and stage of development • Growth stage + high funding requirement → Equity investments for growth and CapEx, debt capital for operational costs • Financing is provided with 3-5 years tenor • Each investment has precise financial and structural covenants • The Fund obtains the put option with 15% annual yield at the end of negotiated investment period

  17. Planning and Decision-Making (3) • Exit opportunities • Strategic investors: many industries have not consolidated yet (financial services, pharmaceuticals, IT, Alternative Energy, etc) • Financial investors • IPO • In 1H2010 Russian companies raised more than $700m on domestic stock exchanges during initial offerings • Increasing activity in Small&MidCap IPO market segment, because private investors are interested in portfolios’ diversification • MBO

  18. Case Study (1) • Pharmaceutical manufacturer ABC • Owned by management • The company has stable industry position, but with strong government contracts and limited capacities to emerge • Revenue totals to $40m, EBITDA equals to $7m • Leverage is moderate, but ABC lacks tangible asset to provide them as a collateral • Corporate strategy is based on facility expansion, production diversification, R&D innovations and aggressive marketing • Participation in industry cluster • Capital requirements - $35m

  19. Case Study (2)

  20. THANKS FOR ATTENTION

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