20 January 2013
Guest comment: A Time of Opportunity in ‘unfashionable’ Russia

Having been involved in Russian private equity since 1999, it is difficult to remember a time when the sector has been anything other than ‘unfashionable’ compared to other emerging markets, irrespective of the underlying evidence.

Many investors have taken a sweeping negative view on Russia, either based on a limited understanding of the macro picture, or the media’s focus on perceived political or governance issues.

A number of years ago when I was studying at Harvard Business School, I had what became a very public disagreement with the well-known U.S. investor Jim Rogers over his views on Russia, which I felt were based on common misconceptions.

Since then, while Mr Rogers’ views seem to have moved on, the overall anti-Russian sentiment has remained steadfast. Bad PR for Russia, however, presents an opportunity in itself for thoughtful private equity investors.

Compared to other emerging markets, particularly Bric countries, the economic indicators are strong for Russia. GDP per capita has risen from $1,300 to over $13,000 in the last 12 years. GDP per capita is 1.4x, 2.0x and 4.6x larger than that of Brazil, China and India, respectively. Despite the global recessionary environment, Russian GDP continues to grow at a healthy 3.7% a year. What perhaps is most compelling is that in terms of stock market performance and private equity returns, the Russian market has significantly outperformed:

The RTS index returned 703% in the last 12 years, significantly beating the S&P, FTSE and other Bric indices: in the same period, the BSE 500 returned 479%, Bovespa 297%, S&P 500 2%, Chinese SSE Composite 0.4% and the FTSE 100 -8%.

According to the latest available statistics from Empea, covering a 10 year period to June-2011, Russia/CEE private equity delivered an IRR of 18.3%, significantly outperforming the IRRs of Chinese, U.S. and Brazilian firms (12.8%, 11.3% and 3.6%, respectively). These statistics, combined with a very low state debt/GDP ratio of 12%, (China 26%, Brazil 65%) and an unemployment rate of 6.5%, which McKinsey forecasts will fall to 5% by 2015, present a compelling macro case.

For a private equity investor, understanding the drivers behind this growth is fundamental. One key area continues to be the growth in the Russian middle class. Compared to other Bric countries, Russia experienced the highest growth in private consumption per capita between 2000-2010 over 21%, versus 10-13% in Brazil, India and China). One area where the middle class growth has clearly manifested itself has been in the internet sector, where I am a specialist investor.

In 2011, Russia became the largest European internet market with an estimated 70 million users. In addition, the prospects for growth in this market are compelling as there is currently only approximately 50% internet penetration in the region, compared to more than 80% in the U.S. The formidable growth in this particular sector has delivered some major Russian internet exits in recent times. was one of the major London IPOs of 2010 and Yandex’s IPO in New York raised over $1 billion just last year. The fact that the two largest European internet IPOs came from Russia is significantly under-appreciated by the market.

So while investors take the time to fully understand the Russian market, its growth prospects and the drivers for that growth, perhaps the only real stumbling block is in fact the bad PR story. This acts as an opportunity in itself. From experience, this means that you are in a much less crowded market compared to Brazil, China or India and you are therefore able to secure the most compelling deals and, in our case, enabling us to deliver attractive returns for our investors.