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Will the Russian Bear fall:How Protests and Rising middle class affect corruption and private equity landscape
Alexander Abolmasov Managing PartnerNRG www.nrgc.com
SuperReturn Emerging Markets 2011
25 - 28 June 2012, Geneva, Switzerland
American LPPartner
We planned to visit Russia in 2007, but then something happened. And now we would like to get update on what is going on in Russia
June 2012
I took a speed reading course and read 'War and Peace' in twenty minutes… It involves Russia.
Woody Allen
Middle class tripled in 5 years and wants more than money…
Annual nominal household's disposable income
# of people, m Changes in # of
people, 2005-10, %2005 2010
>$15,000 11,9 45,1 278%
$10,000 - $15,000 17,5 36,1 106%
$5,000 - $10,000 57,3 45,4 -21%
$3,000 - $5,000 33,7 16,4 -51%
<$3,000 21,0 <1 -99,9%
Total 142,8 142,9 0,1%
Source: McKinsey
10.12.2011 50K peopleBolotnaya square First big protest in 20 years Reaction to fraud in the Parliament elections (04.12.11) and announcement of Putin returning back to power
24.12.11 70K people
Sakharova StreetAfter Bolotnaya success
the movement grew
6.05.12 70K people Bolotnaya – 2One day before Putin inauguration, clashes with police
13.05.12 20K peopleGarden Ring “Control walking”To show that people could do protests without agreeing location with government
12.06.12 50K people Law passed limiting
demonstrations with fines up to $10-20K
Political pressure is rising, but revolution is not on the agenda…
Demography specifics of RussiaConcentration in Moscow and few big cities No protesting youth
Protesters are middle class and want Retain status quo Respect and security And better government services
Russian population density map
1983 YOB
1981-1982 extra state
support for
families with
children
2007 YOB
1941-45 YOB
World War II
1933-34 YOB
Famine 1932-1933
1937-39 YOB
1967-69 YOB
“Echoes of WWII”
1990-95 YOB
“Echoes of war”
Collapse of SU
Men Women
Thousand people
Age
Russian demography: protests as a conflict of generations
“Soviet” Generation: ruling class
“New Russia” Generation: middle class
Children of 1978-
1987 YOBGeneratio
n
Brasil Turkey China Russia-2011
Russia-2012
84
52
14
93
48
Q: Whether you think it applies, or does not apply, to your country/industry, or whether you don’t know?
Brasil Turkey China Russia-2011
Russia-2012
20
56
26
58
18
Corrupt practices happen widely% of applies
to
% of applies to
Corrupt practices
have increased because of economic downturn
One of protests’ results: corruption is going down
…if we’re not going to “blackball” China (more authoritarian and repressive than Russia), Brazil (arguably more corrupt than Russia) or India (corrupt, and also rather unhelpful on Iran), then there doesn’t seem to be any real reason to “blackball” Russia.
Mark AdomanisJournalist
My fellow Americans, I am pleased to tell you I just signed legislation which outlaws Russia forever… The bombing begins in five minutes.
Ronald ReaganSaid during a radio microphone test, 1984
Russian PE industry snapshot
EBRD Funds
Russia Partne
rs
NRG
Quadriga
Captive and semi-captive
New players
MintAuror
a
Da Vinci
Icon CP
Svarog
VTB
East CP
Wermuth
UralsibUCP
Alfa CP
Prometheus
Aton
Capman
Independent
Marshall
Quadro
Elbrus
BVCP
Rencap
Troika
Delta
Norum
RPEFUFG
Merged
Spin-off
Spin-off
Merged
Russian PE consistently outperforms
Source: Cambridge Associates, EVCA/Thomson Reuters, Bloomberg and EBRD
•EBRD tracked portfolio pooled end-to-end return, net of fees, expenses, donor grants and carried interest. Excludes property funds, and includes liquidated partnerships.
•** Pooled end-to-end return, net of fees, expenses, and carried interest. “The "Since Inception" figure represents the net pooled IRR since inception for funds formed between 1980 and 2009.
6,4%
8,3%
16,7%
25,0%
20,6%
32,3%
16,9%
15,0%
20,1%
EBRD PE Portfolio**
Cambridge EM VC&PE Index*
EBRD Russia/CIS PE Portfolio
Ten years Five years One year
Great prospects for next 20 years
#2 MCap growth10.2% forward 20-yr CAGR (#1 is China with 11.5%)
#2 Allocation growthFrom 1% to 3% in MSCI in 20 years
#6 GDPBigger than Germany and France in 20 years
#11 GDP growth But at least 30% GDP/capita higher than in countries with higher GDP growth
According to latest Goldman Sachs BRIC and N-11 economic research http://goo.gl/sx6Vb
Debt/GDP about 10% (#181 in world)
#5 Strategic investors targetAccording to UNCTAD survey after China, Brazil, India and US
46% of wannabe entrepreneursAmong people 20-29 years compared with only 29% for 30-47 years.
Russian economy is still very attractive
You should be not afraid of Russians, because they already started a lot of
companies in US
4 out of 10 USA largest companies listed on Fortune 500 rating were founded by immigrants or their children.
Did you know that these companies were started in Russia?
And there even more…
Biggest Infinity Dealer in the World and Nissan Dealer in Europe
12% of Nissan market in Russia
12 brands/24 dealerships in Moscow and in Central Russia
Current multiple 5X and 45% IRR on initial investment
21
NRG Portfolio Case Study: Genser
2007 2008 2009 2010 2011 2012E
803.0
1366.6
723.2999.0
1600.1
2177.4
26.7 65.2 44.6 56.1 62.7 73.6
Revenue, $m EBITDA, $m
NRG Portfolio Case Study: Begemot
#2 toy retailer in Russia
Mid/low prices
Growth in 2 years: 50 -> 200 retail outlets.
90% EBITDA growth
70% sales growth
22
Structured equity transaction summary
• Secured loan with equity kickers
• Board seat and veto rights
• Current return: 18%
• Exited IRR: 41%
Rising middle class drives the transformation of Russia
Russian PE consistently outperformed
Russia is #2 out of BRIC (poll on SuperReturn EM 2011)
Existing funds will be able to cherry pick projects
It takes time for LPs to change their attitude, but contrarians will be able to harvest good returns
Alexander Abolmasov aa@nrgc.comwww.nrgc.com
Summary
Come and visit “New Russia” to see the Growth yourself!
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