The money is here

Evgenia Obukhova, Special Correspondent of D` magazine, a magazine about personal finance
"Expert" No. 40 (629)

"It was very difficult for private equity funds to work earlier. Six months ago, companies were just snorting in our direction: why sell us a package when you can go for an IPO?! — says the manager of one of the offshore private equity funds. — But now they come to us and offer to buy a share in their business. We are sure that illiquid companies will be sold at a big discount. We just have to wait a little longer."

This is a typical example of the current mood among private equity fund managers (FPI). Let's make a reservation right away: by FPI here we will understand both Western private equity funds, and offshore funds formed from the money of Russian investors and managed by Russian managers, and, finally, captive direct investment funds existing with Russian financial and industrial groups - in short, all funds financing companies, usually non-public, with the aim of increasing the capitalization of these companies in a few years. A year ago, a large number of FPI emerging in Russia — both local, in the form of closed—end mutual funds, and foreign Western ones - were perceived by many financiers with irony. "Ten managers are chasing one project," the market joked. But now the situation has changed dramatically. The financial crisis has led to the fact that the number of companies in desperate need of money is growing every day. At the same time, the debt and bank financing markets are simply closed for the vast majority of them. "Companies offer rates of 30 percent on their debt securities, but even at such a yield they cannot find financing," says Sergey Markov, director of the Chiron Capital investment fund. In such a situation, FPI can act as — without exaggeration — saviors of business. "For many companies, the only way to finance their activities in modern conditions is to sell business shares to outside investors, and private equity funds can act as such investors," says Dmitry Khilov, Managing Director of UFG Private Equity. — The current market situation, when many potentially interesting assets have significantly fallen in price, is extremely favorable for investors. In this sense, the FPI, which have free cash, are really in a unique situation and have the right to count on a yield exceeding the market average." FPI managers like to talk about potential profitability even less than all other asset managers, but in private conversations they call 35-40% per annum as the lower bar of profitability.

Break the cup"Today, private equity is probably the only sector along with the state that has live money," agrees Kirill Dmitriev, managing Partner of Icon Private Equity.

What is the amount of this money? The private equity sector itself is rather opaque, in addition, as already noted, there are different types of funds, which also makes it difficult to assess the entire market. However, some estimates can be made. "At the moment, the market capacity is PE Rossi can be estimated at $ 50 billion, ten of which fall on western style (classic private equity funds for private investors who are free to make decisions), 40 billion on captive funds," believes Alexander Nikitin, Investment Director of the CapMan Russia investment fund. "In 2002-2008, about a hundred funds announced their intention to invest in the Russian economy," Kirill Dmitriev argues. — The total amount of the declared investment amounts to 70-75 billion dollars. According to our estimates, the FPI has already invested from 15 to 20 billion in the Russian economy. Accordingly, about 50 billion of the declared funds remain. In reality, funds ready to invest in Russia, have about a third of this amount."

In total, Russian companies can expect to invest up to $ 15 billion in their FPI business in the coming months. The amount is not that big, considering that domestic issuers will have to pay more than $11 billion for bond issues alone by the end of 2008. "FPI remain niche investors, and the amount of their funds in several billions does not compensate for the withdrawal from the market of hundreds of billions of dollars of loans and debt instruments of Russian and foreign banks and other financial institutions," Elena Ivashentseva, a partner at Baring Vostok Capital Partners, warns, adding that Western FPI are likely to be more cautious in the current conditions than usual. However, the managers note that today there are quite a large number of funds in the West that do not have investments in our country yet, but which have a mandate for Russia and are now looking at our assets.

In general, the growth in the number and volume of FPI, as well as the increasing interest in them from customers, is a global trend. Accordingly, their investments are becoming more and more widespread. "In recent years, we have seen several examples when very large companies, such as Chrysler, have changed their status from public to private," Dmitriev recalls. — This is partly due to the huge number of regulations governing the work of public companies in the US and the EU and imposing too strong restrictions on their development. In addition, private companies are much less dependent on fluctuations in financial markets. Managers of public companies are more likely to succumb to herd feeling, make short-term decisions in order to achieve an increase in the stock price at any cost, since their remuneration and the value of their options largely depend on this." However, the process of transition of public companies to private ones clearly does not threaten Russian business, because the total free-float of our companies does not exceed 25% anyway. Thus, Russia is particularly attractive for the FPI, since there are more than enough closed companies whose capitalization is not dispersed by exchange circulation.

But in any case, investment funds with free funds are not in a hurry to break the pot and buy cheaper companies. There are several reasons for this. Firstly, managers expect that assets will continue to fall in price for some time. "Now we see only the tip of the iceberg, I am sure that the process of reducing the cost of assets will continue, and the longer the FPI waits, the more favorable prices they will be able to make investments," Sergey Markov is sure. "We will see the peak of asset sales in two to three months; by that time, the discount from summer prices will be 30-50 percent."

Secondly, the situation on global financial markets and in the global economy is still completely vague, and in such conditions it is too risky to start investing actively. Elena Ivashentseva is categorical: "I expect that the situation on the market and in the economy will worsen. We are going through a very deep systemic financial crisis, it will definitely affect the economy, and the shocks will continue for a long period, at least 12-18 months. In this situation, there is a risk to invest in a company that has been successfully developing recently and has fallen sharply in price during the crisis, hoping to quickly resell with a large profit. But against the background of the continuation of the crisis, the situation in such a company may deteriorate sharply, and it will be necessary to invest new funds to save the business. In the conditions of a systemic crisis, we do not believe in speculation and look at all our investments as medium— and long-term. It is necessary to clearly predict how businesses will survive the next year or two in difficult conditions. Therefore, we are very cautious, although we actively communicate with new companies that need investments." As an illustrative example, the managers of Baring Vostok cite "CTC Media". "The company suffered a lot from the fall in advertising after the 1998 crisis," recalls Elena Ivashentseva. — Some private equity funds invested in the CTC in 1999 for less than the company was worth before the crisis. And we bought a large block of shares after September 11, 2001, when foreign funds were actively selling Russian assets after another financial crisis and the price was significantly lower than in 1999."

And thirdly, the low entry price for the FPI is not the only condition. "The selection of companies is very tough," says Alexander Nikitin. — We need a sane management in the company so that it has a good history, so out of a hundred projects that come to my desk, we invest in only two. Therefore, the fact that now the claims of asset owners for the price of these assets have decreased by 25-30 percent is important in itself, but far from decisive." In other words, it would be naive to expect that the FPI, due to lower prices, would immediately rush to buy everything in a row. Even if there are quite impressive available funds, they usually approach the choice of an object very carefully. Most likely, the FPI will slowly select attractive companies in order to slowly enter their capital in the next 6-12 months. By the way, the funny thing is that, according to the managers of the FPI, not all businessmen still understand what kind of trap they have fallen into. But very soon they will find themselves face to face with reality, and that's where the FPI will come to the rescue.

The latter will be the firstOften, FPI, regardless of their type, act as a strategic investor: they acquire a stake in the company (usually at least 25% to control management) and begin to increase the capitalization of the business in order to resell it at a profit in a few years.

However, other methods of financial participation of the FPI in the company's activities are not uncommon — various kinds of loans and borrowings. "FPI can carry out complex financing — equity financing together with the provision of credit lines and loans, as well as the provision of borrowed capital itself," says Sergey Markov. — Loans are often convertible, that is, if the management of the borrower company fails to meet certain conditions (for example, failure to achieve certain financial and operational indicators), loans are converted into shares. The conversion can also be agreed in advance with the company."

Such loans could be used if the funds decided to take on the task of replenishing the balance of companies currently experiencing liquidity problems. In addition, financing from the FPI can easily stimulate a wave of mergers and acquisitions, and these mergers will take place according to a scheme hitherto unseen in the Russian market: not industry leaders will acquire small players, but vice versa. The thing is that the aggressive growth of the current leaders in many sectors was provided by borrowed funds. But by actively borrowing and investing in business expansion, such giants have dug themselves a hole (if the expansion has not yet begun to bring adequate profits). "Companies with a very high share of borrowed funds will now have limited access to new financing, and those who are less dependent on borrowed funds than others will be in a better position compared to their competitors," Sergey Markov explains to the mechanic. "Therefore, with the financial support of private equity funds, companies will be able to absorb or acquire shares in competing companies with a turnover three to four times their own."

So far, FPI's efforts have focused mainly on financial and pharmaceutical companies (see chart). However, now the managers' priorities have changed: they are looking at retail and food production with great interest. But the purchase of developers, which, it would seem, can already be purchased at bargain prices, is almost not mentioned: apparently, the managers of the FPI are much more confident in the further growth of the food market than in the growth potential of domestic real estate. In addition, the range of interests of the FPI is quite clearly outlined by the framework of small and — mainly — medium-sized businesses.

Portal "Eternal youth" www.vechnayamolodost.ru13.10.2008