Mint Capital sees better prospects for minority stakes in Russian firms
Corporate governance in Russia has always been a concern among foreign investors, who as a result have traditionally shied away from taking minority stakes in firms. However, Scandinavian private equity firm Mint Capital believes strong minority stakes have always been possible if investors take care to do their homework and improving corporate governance in the country can only help this approach.
«Mint Capital has always invested in strong minority positions and we believe this approach works well as long as you do your homework and work with the right partners,» says Ulf Persson, a managing partner at Mint Capital.
Persson believes that improvements in corporate governance is being driven both by the Russian owners themselves, who increasingly understand that they can make more money this way, as well as private equity bringing in stricter business practices.
«Many Russian entrepreneurs are looking for more than a pure financial investment from funds. They want to see a business partner helping building the business. This is partly driven by the fact that many Russian entrepreneurs are actively looking to make their business more transparent with the aim to increase value. Private equity funds can and do play an important role here,» Persson says.
Much of this change in attitude by Russian entrepreneurs can be traced back to the stabilisation of the economy. «An extended period of economic and political stability allows [entrepreneurs] to take a longer-term view,» Persson says.
Ironically, private equity in Russia also benefits from this relatively undistinguished corporate governance.
«Much of the attraction of private equity for Russian owners is that Russian companies are very good operationally, but few of them are as good in terms of corporate governance — the way they are organized legally, financially, reporting wise, compliance with international accounting standards etc.,» says Persson.
«This all makes it harder to raise money in public markets or obtain long-term financing from banks. Believing in the management and the business outlook a PE investor can invest earlier in the development of the company. A PE investor has the experience and know-how to help making these changes internally to move the corporation to the same level of development as the business itself. Furthermore, working with a reputable and experienced PE investor for a few years can serve as a good step towards an IPO for the entrepreneurs. In addition, any business needs a ’fresh look’ from the side to understand better where internal improvements can be made and which development strategy to follow,» he says.
Persson believes, like many others in the business, that 2007 will be another good year for private equity in Russia.
«The local market is becoming more mature, meaning that entrepreneurs and managers are beginning to pay increased attention to such things as value and capitalization of their companies. This creates broader opportunities for long-term investors like private equity funds. The overall growth of trust among Russian entrepreneurs in the future of the local economy brings a longer investment horizon. In addition, while still viewed with suspicion, Russia is becoming more and more attractive for international institutional private equity investors,» he says.
The place where most opportunities are expected to be found will be in the industries that did not exist at all in Russia in Soviet times, such as retail, financial services, distribution, media and information technology, which are still relatively young and so growing very fast.
«Basically all kinds of consumer services are good examples. In many industries strong growth has attracted a lot of players and we are now seeing active consolidation. Both growth and consolidation offer good opportunities for PE investors,» says Persson.
Mint Capital’s first fund was raised in 2001 and was fully invested in 2005. There are seven investments in the Mint I portfolio and the firm is expecting the first exits from this fund in 2007. The first fund is primarily invested in software, media and technology. A second fund was raised in 2005 and Mint II is making expansion stage investments in rapidly growing companies that are generally in the $10m-100m revenue bracket in such industries as media, consumer goods and services, financial services, retail. The second fund has so far made two investments — a payment services company and a retail operator.