You recently made an investment in a gold mining company, a sector that private equity firms tend to avoid. Why is that?

There’s nothing wrong with the sector, it’s a question of processes. Most private equity funds aren’t equipped to make these sort of investments. They find it difficult to analyse the risks and manage the growth. It’s a very specialist area.

We’re in a fortunate position because we’re not just a private equity fund. We have a platform of sector-focused groups and spent years developing specialist skill sets, hiring experts and building relationships with key industry players without making any investments. I don’t think other buyout shops are willing to devote so much resources to building a requisite knowledge base to invest in mining.


Are there any sectors that you would avoid?

Our main areas of focus include agriculture, infrastructure, consumer services, as well as metals and mining. There are other industries that we would consider but those are the areas where we have specialist investors. To give an example, we recently secured a joint venture with Burger King to develop the brand across Russia and we’re working on a deal in the IT services space.

We predominantly operate in Russia, so we tend to avoid sectors that are politically sensitive or that favour large corporates – that includes oil and gas, defence and other segments of the economy that are in any way strategic.


Your firm is a captive of the Russian banking group VTB. How did VTB Capital come into existence and how closely does it work with the bank?

VTB Capital is a classic universal investment banking franchise. It was established in 2008 and most of the staff came from international investment banks, especially Deutsche Bank, but a number came from other US and European institutions. This background has influenced the processes and culture of the firm. It is not dissimilar to any other captive fund, the only difference is that we focus on the Russian market first and foremost, although we also work with our international offices across Europe and in emerging markets.

There is a lot of independence from the bank. That said, the role of the firm is becoming more important to the VTB group. We often create the groundwork for the group to leverage its other banking products. We’ve created a cross-selling platform – a model that Deutsche Bank has opted for, and other banks including JP Morgan are doing the same.


The Russian government has made efforts to encourage private equity in the country. Has it been successful?

It’s true there aren’t many private equity firms in Russia. At the moment there are three that can be considered active – Baring Vostok Capital Partners, Russia Partners Management and us – that’s far too few for the market. There are other, smaller firms that are raising funds, but their activities are dependent on the success of their fundraising efforts. It’s clear that private equity firms can do a lot more for the country.

The government has done a lot to encourage foreign private equity firms to invest, and so far it has been very positive. International firms are starting to look at opportunities in Russia – some are working on deals as we speak. Many international investors have objections about the quality of corporate governance and the investment climate in general, and justifiably so.

Senior members of the government are in dialogue with international investors. I know for a fact that the prime minister and the president have had personal meetings with heads of major US and European firms to listen to their concerns. That has definitely sent a message, and it has helped them to get more comfortable.

Of course, it will take time. Look at any private equity market in the world, even in the US, and it wasn’t created in a matter of weeks. It took years for the asset class to develop. Ultimately it’s a matter of returns, and they might take a while to come through.


The government is looking at changing regulations to make it easier for pension funds to invest in the asset class. How important is that for the industry?

Pension fund reform is ongoing. There is little to report on that front. It would enable a lot of money to flow into the asset class, but so far we’ve seen very little happening. A small allocation is allowed under the existing rules, and there will probably be a gradual conversion to international practices, but there is little visibility in terms of timing. It might take ten to 15 years. Eventually, I expect there will be more capital available for funds.

That’s not the main obstacle. I think the main challenge for private equity firms is to establish good track records given the lack of experience. Firms need to foster good relationships with LPs and that will take time.

At the moment there are pockets of the Russian economy that compete on a global stage. Other areas are less developed. Russia is in some ways not emerging but not quite developed either. It’s somewhere in the middle.


How are exit markets faring in the country?

There’s still strong M&A activity in Russia, and there have been some very strong IPOs. Most public offerings of Russian companies have been foreign rather than domestic – mostly concentrated in London, New York or Hong Kong. But that might be changing. Earlier this year, two regional stock markets merged to create MICEX-RTS. This unifies the market, makes it more efficient and will create more liquidity.