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Russia: Mint Capital takes a fresh approach to private equity

Guy Norton
May 2007

Ulf Persson, managing partner of Mint Capital, talks to Guy Norton about the challenges of the Russian private equity market.

«With both domestic and international appetite for Russian corporate assets growing all the time, the exit markets are now quite fluid, which is one of the most positive changes for private equity in Russia» Ulf Persson, Mint Capital.

IMAGINE IT'S 2000 again. Russia is still in the doghouse with investors after the August 1998 financial melt down, the tech bubble has burst spectacularly and venture capital-type investments are about as popular as a dose of bubonic plague. So what do you do? Set up a tech-focused Russian private equity fund, of course. And what happens next? Your first investment, a broadband buildout in the Moscow region, goes belly up after you have fallen out with the company's owner. Great.

Lesser mortals might have caught the first plane home after such a start but Ulf Persson, managing partner and co-founder of Mint Capital, is clearly made of sterner stuff. Some seven years later he's sitting in Mint Capital's plush Moscow offices — all blond wood and understated Scandinavian designer furniture — and if not exactly laughing about the dark days of 2000, then at least managing to summon up a wry smile. Then again he can afford to. He has already got his teeth stuck into his second fund and is beginning to think about the possibility of raising a third in the coming 18 months.

Although private equity investment in Russia has not exactly become a no-brainer, it's a lot easier than it was in 2000 when Persson raised $25 million for Mint Capital  I. «It was a venture into the unknown,» he says, conceding that at the time all the elements of the investment fund were viewed in a negative light — the country, the sector focus, the investment class. Thankfully, he'd garnered support from a number of investors who had already invested in Russia and so knew the potential pitfalls and rewards. Among those who had faith were the founders of Sweden's Oriflame, for whom Mint co-founder Fredrik Ekman had built a $100 million business in Russia and Ukraine. Mint Capital also received backing from Boeing's strategic venture financing arm, which has a specific technology focus and so was comfortable with the investment projects that Mint was weighing up.

Other backers included a mix of high-net-worth individuals and small institutions, principally from Scandinavia.

Persson says it took nine months to scramble together what in today's Russian private equity market looks like pocket change. At the time, though, Persson admits, it was an uphill struggle to convince potential investors of the merits of his project. As a long-time Moscow resident — he moved from Sweden to Russia in 1990 — Persson boasts a long track record of operating in the country, having worked from 1990 to 1995 for Swedish group Axel Johnson sourcing metals and raw materials throughout the former Soviet Union and then from 1996 to 2000 for the Brunswick Group, where he was latterly managing director of the $300 million AIG and Brunswick-sponsored Millennium private equity fund. His partner and fellow Swede, Fredrik Ekman, boasts an equally impressive track record in Russia. Having first come to Russia in 1989 to set up Tetra Pak's Moscow office, he then spent the 1990s establishing Oriflame as a leading cosmetics brand across the former Soviet Union.

As a result, nobody could possibly accuse the pair of being suitcase bankers. Given the relatively modest size of Mint I it's no surprise that the average investment in the firm's pioneer fund was just $2 million, with a focus on small and mid-sized companies, some little more than start-ups, with annual sales turnover of up to $20 million. Investments include Gameland, a multimedia company encompassing print media, internet and TV services for fans of sports, movies, business, computer gaming and cars that has grown to become one of Russia top-10 publishing houses; Abbyy, a world-leading developer of document recognition and natural language processing software; 2V Studio, a Russian TV producer of Russian language soap operas, serials and entertainment shows; ParallelGraphics, a developer of virtual manuals for equipment manufacturers such as Airbus and Boeing, and JnetX, a pioneer in standard-based telecom application server platforms.

«Almost all the companies in the first fund were built on intangible assets,» says Persson. «Gameland is a good example, for instance, of a strong brand name in a fast-growing market.»

Common goals

Persson says that there are three basic themes to the companies Mint invests in: first, they were founded by owners with a strong entrepreneurial streak; second, they are operating in industry sectors that are benefiting from domestic growth, whether consumer or corporate: third, there needs to be a strong alignment of interest between the fund and the owners. «As minority shareholders we need to have a common goal with the owners,» says Persson, adding that evaluating so-called partner risk is a major element of the investment equation. «We might talk to a company for a year before we sign a term sheet and it's only when you actually get to work with a company that you really get to know them.»

When it came to raising money for Mint II in 2005, Persson says that it was easier to sell in one sense — «Russia was back in vogue and we were looking at a broader focus sector-wise.» But while there were no problems selling the idea to high-net-worth individuals, it was a harder slog with institutions.

«Institutional money was still reluctant to commit to Russia in 2005,» says Persson. Encouragingly, though, he adds: «A very large proportion of the investors in the first fund are in the second one too.»

After seven or eight years of easy growth, Persson believes that the corporate environment in Russia is becoming much more competitive and that for companies to be successful they will have to be able to distinguish themselves through the quality of the products and services they offer. «We want to be part of that process,» he says, adding that increasingly the fund is looking to identify companies that are market leaders and have well-established brands. Companies in Mint II include Maratex, a holder of exclusive franchises for several international fashion brands in Russia, Kazakhstan and Ukraine, including Esprit and Peacocks; and electronic payments operator Elecsnet, which has a network of 1,500 terminals that enable users to top up mobile phones and debit cards or pay bills electronically.

While the financial rationale of Mint buying into fast-growing companies with strong brand identities makes sense from an investment perspective, what's in it for the target companies?

«Companies often realize they need an external shareholder to help them move on to the next stage of development,» says Persson. He adds that as a minority shareholder Mint can bring marketing know-how and other expertise, help to reorganize a company's finances and access to capital, and also advise on solving regulatory and legal issues. Although an IPO might not be a probable exit strategy, Mint generally tries to make its target investments as financially transparent and corporate-governance friendly as possible.

Mint boasts a team of 10 investment professionals and has a dedicated adviser who works with the chief financial officers of the companies it invests in.

Because of the time- and labour-intensive nature of the investments, Persson says that the vast majority of the companies are based in or around Moscow. «We meet with our companies at least once a fortnight if not once a week,» he says, adding that in terms of management time it wouldn't be practicable to spend hours travelling back and forth to visit a company in one of the far-flung regions of Russia. «Once you start to move outside Moscow you begin to add another layer of risk,» he says.

In terms of exit strategy there are strongly positive trends that are making trade sales in particular much easier, says Persson. «We're seeing consolidation across all industrial sectors, while at the same time we are seeing the emergence of a very strong domestic capital base, which is making domestic M&A easier.» He adds: «Russia is also becoming more and more interesting for international companies, and buying an existing company in Russia is a smart way to enter the country.» With both domestic and international appetite for Russian corporate assets growing all the time, Persson says, «the exit markets are now quite fluid, which is one of the most positive changes for private equity in Russia».

On the IPO front, Persson says that given the relatively small size of the companies that Mint invests in, an international flotation is highly unlikely, while the domestic IPO is still relatively undeveloped.

«For IPOs to be a common way of exiting will take another few years,» he says, adding: «But the more successful IPOs there are, the more role models there will be for entrepreneurs to look at. It makes sense for locally focused companies to list locally.»

Towards a third fund

Although Mint's primary focus at the moment is to fully invest the money from the company's second fund and to concentrate on managing its existing investments, Persson admits that during 2008 Mint will probably look to raise money for a third fund. Although he refuses to be drawn on how much money Mint would seek to raise, he points to the fact that Baring Vostok Capital Partners raised $1 billion for its latest fund as evidence of the growing investor interest in private equity investment in Russia.

As for the threat of competition from major US and European private equity houses, Persson says that given the lack of experienced private equity investors in Russia, it's unlikely that the global majors would commit capital without having the necessary local investment staff to invest it. So does that make Mint Capital a potential buyout target? Having spent six years setting up and now running his own outfit, Persson says it is unlikely that he or his partner would want to sell if one of the big US or western European private equity houses offered to buy them. «We value our independence very highly,» he says. «But we could imagine working with a large group to tap into their marketing network or portfolio.»

He also says that the firm intends to preserve its largely Russia-specific focus, in contrast to some of Mint's rivals, which are now adding sizeable numbers of companies in Kazakhstan and Ukraine to their portfolios. «We have just one investment in Ukraine. The problem when you add another country to the investment equation is that often you merely add another layer of complexity.»

Persson believes that increasingly there will be much more management buyout and buy-in activity, driven by young, entrepreneurial management teams looking to buy out founder-owners of companies who might be looking to cash out, having spent a decade working hard to build up a successful company.

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