FUNDS: Verno pools its talents in Russian fund play

By bne IntelliNews August 31, 2010

Guy Norton in Moscow -

A breakaway group from Russian hedge fund Kazimir Partners led by Dmitri Kryukov has set up shop on its own as Verno Investment Management and is now drumming up money in Europe, the Middle East and the US.

Kryukov is a Russian markets veteran who co-founded Kazimir Partners in 2002 with Frank Mosier after the two had worked together in the 1990s at Moscow-based investment bank Renaissance Capital. But the two principals fell out over investment strategy and Kryukov left the firm in 2009. Following the elapse of a non-compete clause, Kryukov has now established the specialist fund manager Verno and brought on board a number of former colleagues who sided with him in the dispute with Mosier. Kryukov, as senior partner and chief investment officer, is joined by three partners – Karen Clarke as chief executive officer, Bruce Bower as head of portfolio management and Michelle Alifanz Carson as head of business development. Also joining from Kazimir are Anton Terentiev as director of research, Sergey Belyaev as deputy portfolio manager and Nataliya Nenarokomova as senior research analyst.

The new company boasts offices in Russia, Switzerland and the US, and has already launched its first investment vehicle, the Verno Russia Fund, which has been seeded by the founding partners to the tune of $15m. The fund has two share classes. Class A shares have a minimum investment of $10m with a management fee of 1.75% and a performance fee of 20% over a risk free rate hurdle with a claw-back option of up to 50% of the performance fee in every second year. Liquidity is quarterly. Class B shares have a minimum investment of $100,000 with a management fee of 2% and a performance fee of 20%. Both classes have an early redemption fee of 5% within the first 12 months of investment.

Track records

The senior members of the Verno can all point to long and impressive track records in the Russian markets, a fact which they believe will help to attract substantial commitments from private wealth managers across the globe over the coming months.

Kryukov, for example, started his involvement with the Russian markets back in 1992 as a junior member of the World Bank team that advised the Russian government on its privatisation programme. He then became the first Russia-dedicated research analyst at CSFB (now Credit Suisse), helping to build a research team which achieved the top ranking in Institutional Investor's All-Europe Research Team 1994. He left CSFB in August 1994 to help create Renaissance Capital, where he worked from 1997 to 2001 and rose to be head of equity trading. After a short sojourn as head of proprietary equity trading at MDM Bank, one of Russia's largest commercial banks, he co-founded Kazimir, where as portfolio manager of the Kazimir Russia Fund from 2002-2008 he generated returns of over 450% net of fees against the RTS index returns of 92% over the same period.

Clarke, meanwhile, who was CEO at Kazimir Partners, boasts an equally long track record, with over 27 years in the financial services sector in London. She has worked at a number of firms including fund heavyweights F&C Group and Brunswick Asset Management, as well as the investment banking arms of Citigroup and ING. Alifanz Carson, meanwhile, has worked in the fund management industry for over 25 years with the likes of Citicorp Investment Management, IBJ Schroder Asset Management, IXIS Capital Markets and Bear Stearns Asset Management. Finally, Bower, whose tenure at Kazimir Partners as portfolio manager of the Kazimir Russia Growth Fund from June 2006 to July 2009 generated returns of 19.5% versus the RTS Index's 31.9% fall, started his career as a proprietary trader at Citigroup in 2003.

Local knowledge

All the founding partners at Verno believe there is a niche in the asset management universe for funds that can capture the upside of the Russian markets, while at the same avoiding the downside of the periodic sharp sell-offs, which have historically plagued Russia. "Investing in Russia has always required a combination of fortitude and expert local knowledge, and our new fund has been designed to capture the upside in Russia whilst protecting against large draw-downs," says Kryukov.

Looking at the macro backdrop for Russia, Clarke says: "With a rebounding economy, resurgent commodity prices and a strengthening currency, foreign investors are seeing Russia as an attractive proposition. Compared to other emerging and developed economies, it has the least debt as a percentage of GDP and is not vulnerable to the kind of forced deleveraging suffered by other economies."

"Verno will have the benefit of detailed on-the-ground research, which is essential before investing," she says. "We will be identifying attractive growth opportunities with a focus on capital preservation. A key part of our investment process will be the control of volatility, mitigating risk and always aligning our interests with those of our clients."

Central to Verno's investment proposition is the potential it believes still lies in Russia and the former Soviet Union. The firm disputes the conventional wisdom that Russia is simply a high-beta, oil-and-gas play, citing the fact that while Russia has plenty of oil and gas, this accounts for only 25% of the economy and that share has been falling for the past several years. It contends that one of the main overall stock market drivers is the amount of excess liquidity in the banking system, which in recent years has been the primary way that petrodollar revenues have spread into the wider economy. Verno claims that with oil prices firm and liquidity abundant in the banking system, the macroeconomic environment in Russia remains supportive of the stock market. Furthermore, the firm maintains that the country has established a credible record of above average growth - with GDP expanding 5% per year throughout the noughties – even including 2009's 8% economic contraction.

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