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Trends, results and expectaions of private equity market development in Russia

Private Equity Russia & CIS
December 2010/January 2011

What are the major trends and results of Russian private equity market in 2010?
What are the expectations of market development in 2011?
Managers of private equity firms share their thoughts with readers of Private Equity Russia & CIS Journal.

Benjamin Wilkening
Partner, Mint Capital

First of all, the Russian PE market in Russia has not yet fully recovered from the financial crisis, and I expect deal volumes to remain substantially below peak levels of 2007/08. A number of players tried to raise first time funds before the crisis. Those who were lucky in their timing to raise/close new funds before the storm hit, are now in the enviable position to have dry powder in a down cycle. For the remaining, it will be difficult for the foreseeable future to raise a first-time fund. Established PE players with a track record have a better chance of raising funds into the recovery.

Strangely enough, the crisis has not had the effect of bringing a lot of cheap deals onto the market. At least not of good quality. Many of the weak companies simply died, whereas the ones most interesting for PE have probably come out of the crisis strengthened: a better balance sheet, lower cost base and better managed margins and – most important – a much stronger position vis-à-vis competition. The owners of these companies know they can still ask a good price for their business. So, in summary, I expect 2011 to be a year of still few, but higher quality deals – and one can hope at reasonable valuations.

Giedrius Pukas
Managing Partner, Quadro Capital Partners

If we are talking about Russia and CIS 2010 – it was still a very idle year, except for the players that have raised fresh funds before the crisis and were taking advantage (the ones who had guts) of the discounted market opportunities. 2011 should be much more active and Russia should return to international player’s monitors by the end of the year. Having said this, Russia’s PE markets remain very small and fragmented and I do not expect any fierce competition any time soon.

Maxim Nefyodov
Managing Director, ICON Private Equity

2010 was not the best year for private equity in Russia, however pessimistic scenarios didn’t come to life either. On the contrary, dynamics of investments into Russian non-financial sector moved upwards compared to 2009 as the result of both general recession exit and serious state efforts to counter negative effects of the downturn. Such efforts are planned to decrease economy dependence on raw materials exports by stimulating innovative sectors development – something that will offer significant challenges and opportunities for private equity community.

In my view we’ll see robust private equity activity in three key areas in 2011:

• Mining and oil&gas due to current high hydrocarbons prices that approach pre-crisis peak levels;
• Innovative import substitution businesses which can be the basis of ‘new Russian economy’;
• Agriculture sector which becomes a prominent investment recipient worldwide due to unprecedented agflation and scarcity of fertile land.

Demand for private equity capital should also be on the rise in 2011. Many companies overstretched themselves aiming for a large IPO that never happened and are currently in need not only of financial injection but restructuring and expansion expertise offered by private equity funds.

Nickolay Zubtsov
Vice President, New Russia Growth

Russian private equity market saw limited activity in 2010, both in terms of fund-raising and new transactions. No new funds were raised on the market (excluding those with the participation of the state capital) and few transactions were closed, however funds with dry powder made some remarkable investments closer to the end of the year. The main reason for this lack of activity was market uncertainty in the beginning of the year, but the closer was the end of the year, the more optimistic the market players became.

As concerns 2011, we are generally positive. We expect market to be more active and more deals to be closed as new funds come to the market, but nevertheless market uncertainty still remaining and future economic shocks and market downturns are still possible.

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