Ben Aris in Moscow -
President Dmitry Medvedev has launched a drive to improve Russia's investment climate and is putting $10bn of the state's money where his mouth is: the Russian Direct Investment Fund (RDIF).
The new $10bn sovereign wealth vehicle aims to attract the world's leading funds to co-invest in major projects. The hope is that it will dramatically increase private equity investment by reducing the perceived risk of doing business in Russia.
The appointment of Kirill Dmitriev to run the fund is a testament to the commercial nature of the project. One of Russia's new generation of rising business leaders, Dmitriev cut his teeth working as a manager at Delta Private Equity Partners, a US-government backed investment fund designed to promote capitalism by financing the growth of independent business in Russia.
He then set up the highly-successful Icon Private Equity - a $1bn fund that invested in projects across the Commonwealth of Independent States. At the same time, he founded the Russian Association for Venture Capitalists and advised the government on the creation of the Russian Venture Company, a state-backed fund promoted by Prime Minister Vladimir Putin to kick start the country's venture capital industry. "I am not a politician, I am a fund manager, and the primary goal of the RDIF is to earn returns for the investors," says Dmitriev sitting in a cafÃ© on Red Square the day before the Kremlin's annual investment jamboree in St Petersburg began on June 16. "We thought long and hard about the best form for the fund, to make it as attractive as possible to investors. The state finance will be limited to a minority role of no more than 50% minus one share in any project. It means the co-investor doesn't have to invest into anything they don't believe will earn returns. I don't see the RDIF as a political initiative, however the political goals of the government will be achieved from these investments - but as a by-product."
Dmitriev is currently hiring staff, most of whom will be Russian professionals, whilst the first $2bn will be released by the state in September. The first investment is anticipated by the end of the year, says Dmitriev. After that, the state-owned debt agency and de facto development bank Vnesheconombank (VEB) will release another $2bn each year over the next four years. The Kremlin hopes that will attract $90bn from private co-investors. "Russia is a very attractive investment destination and people have to some extent lost sight of what the country has to offer," says Dmitriev. "It is the sixth largest economy in the world - even Russians forget this fact - and the number of people that are earning more than $10,000 a year has tripled in the last six years.
"I am not saying that everything is good," he adds, "but the rising incomes have led to an incredible amount of change in a remarkably short time."
The structure of the fund is designed to allay foreign investor fears about investing into Russia. Such worries are illustrated by the Russian stock market, which has been the best performing significant market in the world over the last decade, but is still stuck with an average price/earnings ratio below 7 - a stark contrast to the early teens enjoyed by other major emerging markets. Russia also performs way below emerging market peers in terms of both incoming portfolio and direct investment volumes.
A major focus for the RDIF then is to offer major investment firms some reassurance. With the state limited to a minority stake, investors will not only have the security of a controlling stake, but more importantly the state will share the risks and be subject to the same rule of law and corporate governance practices as its co-investors.
The structure of the fund is also designed to allow it to tap into the expertise of what are planned to be the best investors in the world. The investment committee, which will meet whenever needed, can approve deals up to $250m and will feature professional investors from both Russia and around the world.
The supervisory board, which will meet four times a year, will determine the strategy and also approve deals up to the $500m maximum. Government officials will join that board, but international institutional investors and professionals will make up the majority. The final level of supervision will be an international advisory committee composed of representatives from the leading global funds, which will get together once a year. "There will be some 'no-brainer' investments as the primary goal of the fund is to produce returns, but we also want to leverage the expertise of our partners," says Dmitriev. "For example, we have talked to a private equity fund that is a global leader in health sector investments in the US and Europe. Very few private investors in Russia have invested into private sector healthcare, but clearly there is need for them. So this is potentially a very profitable investment. The same is true for the pharmaceutical sector. Russia has the fastest growing market in the world, but 80% of the products are still imported."
Among the international investors that have already expressed an interest - and will probably end up on the international advisory board - are Goldman Sachs, Blackstone, the Abu Dhabi Investment Authority, Kuwait Investment Authority, China Investment Authority, Permira and Caisses des Depots.
The point of roping in all these big names is to create the same sort of creative discussion found at events like the World Economic Forum meet in Davos, with the difference that the funds can actually act on their insights. At the last Davos meeting, the main global themes that came out were the rise of the middle class, the rise in commodities and energy, and the importance of infrastructure, points out Dmitriev - all of which are key Russian stories and represented in the fund's target sectors.
The CEO says he is looking for investors willing to make a long-term commitment with an investment horizon of five to seven years, and where the RDIF would not own controlling stakes in businesses, but could do so alongside investment partners. "The fund will not a replace the other institutional reforms and both the president and prime minister have been very vocal about the need to improve the investment climate," says Dmitriev. "But the idea of co-investment is to reduce Russian risk and make foreign investors more comfortable. If they come and invest $1 now with the RDIF and make money, then these foreign investors will come back on their own and invest $10 down the road."
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