INTERVIEW: Russia's mortgage man builds financial supermarket

By bne IntelliNews September 1, 2008

Ben Aris in Moscow -

When Aurora Russia floated on London's Alternative Investment Market in March 2006 it was the first ever IPO of a Russia-dedicated private equity fund and overnight became the third largest in the country.

"We did it on the strength of a piece of paper - a proposal - and took it to the big UK investors that wanted some exposure to the fast growing Russian financial sector," says James Cook, Aurora's managing partner and co-founder.

Cooks' pleasant Californian lilt and the smart-casual style he shares with his fellow statesmen seem a little incongruous in the middle of Moscow. Talking to him, you keep getting the feeling there should be more sunshine. But few foreigners are more at home in Russia's chaotic banking business than Cook, who has a good claim on the title of "father of Russia's mortgage business." And he was recently voted the third most influential foreign banker in Russia (after MDM Bank CEO Michael Perhirin and Renaissance Capital founder Stephen Jennings).

As chairman of Delta Credit, he almost single-handedly launched the mortgage market in 1999, the year after Russia's financial crisis. Since raising $155m for Aurora, he has built up Russia's first (and obviously biggest) financial broker called Kreditmart in less than two years. The fund has been targeting businesses connected to the consumer but with a financial bias - both traits reflected in Cook's career. Aurora's first investment was into Unistream, the leading money transfer firm that has seen volumes grow by some 300% a year and was sending over $4bn a year across the counties of the Former Soviet Union as of the start of this year. Aurora also has stakes in SuperStroi, a DIY chain, and OSG, a document storage business.

These are all good businesses and growing fast, but Kreditmart is probably the most interesting and was set up as a green-field project by Cook and his partner a few years ago. The idea was the result of Cook's ironic failure to get a mortgage.

Already a well-known banker, an international bank operating in Moscow turned him down. The bank's rep shamefacedly admitted his rejection didn't make sense, but explained that as Cook already had a small loan, the bank rules precluded him from taking out a second. "I thought there must be a lot of people out there in the same position, and it took four weeks for them to give me an answer - far too long. So we set up Kreditmart to broker loans and speed up the process," says Cook.

Kreditmart is a financial supermarket. It doesn't offer loans of its own, but will find the best offer for a customer and offers a bridge loan so that customer can get access to the money in a matter of days rather than months - an important consideration in Moscow where the bulk of loans are for housing and with prices rising 10% a month, speed is of the essence.

Alpha Delta

It's a business Cook knows inside out. He was in right at the start of Delta Credit, which more or less created the mortgage business in Russia in 1998. At the time he was given the job as chairman of the bank, however, it was considered to be a dead end, as Russia was still reeling from the financial meltdown and the last thing anyone expected was for Russians to start buying homes. The only reason the US-backed Enterprise Fund, which owned Delta Credit, launched the business was because it was obligated to as part of its mandate. To everyone's surprise the business exploded. "It grew gangbusters, with credits more than doubling every year. No one expected it," says Cook. "I have found in Russia that the things being ignored are often the things that become the most successful."

The business soon became too big for the fund to handle, as it was sucking up capital to fund the growing volume of loans. The bank was sold for an enormous profit. Cook then was given another bum job: turning around the fund's struggling retail operation, Delta Bank, in 2002. Consumer loans were new, having been pioneered by Russky Standart in 2001, but the business was growing fast and Delta Bank was getting left behind. "I was appointed the chairman and spent the first days walking about to get to know the bank. Then I went into the basement and there was this huge machine. It turned out to be a brand new credit card embosser," says Cook. "We were issuing three credit cards a week."

Cook latched on the card machine as the way to scale up Delta Bank's business. Credit cards of a sort were already on the market, however the idea of true revolving credit had yet to appear. The few other cards on the market required their owners to pay off their entire balance within two months at the most. The problem was the Central Bank of Russia (CBR) had no experience with credit cards. "The idea of revolving credit boggled their mind. A debt that may never be paid off? They struggled with the concept," says Cook, who spent hours working with the CBR, which was part of the Enterprise Fund's brief.

Eventually the CBR was persuaded and Cook audaciously approached the recently opened IKEA store to see if he could strike a partnership deal to distribute cards. It was an audacious move, as Cook didn't actually have a card business yet, nor had he signed any deals with the major card companies like VISA. "I called IKEA and they said they had already accepted other bank proposals and were at the short-list stage of choosing a partner. But I sent our proposal anyway - by fax, email and courier. They must have liked it, as they called me back and we won the concession. That gave us 120 days to do a VISA deal and get the rest of the operation ready," says Cook.

As luck would have it, VISA had just introduced a new technology that allowed a credit card to be made up and issued at the point of sale in less than 15 minutes. The card was little more than a plastic strip with a photo of the new customer and could be instantly credited with spendable money. "I wanted to use this technology and it caused a huge row in the bank: 99% of the other staff were against it. The risk office wanted to limit the credit to $50. But it was launched on time in September 2002 with a much larger credit limit and it was a huge success.

Some 18 months later, Delta Bank was growing so fast that it was also sold to GE Capital for $100m in a landmark deal that marked the start of the frenetic banking M&A of the last few years.

GEt Capital

With Delta Bank well on the way, Cook was head hunted away to GE Capital, but quickly found himself back at his old desk at Delta after the Americans took it over, and went to work on it - California style.

Russian banks were still in fast catch-up mode. As the banking tradition is still young in Russia, most banks had gone for the stolid image of conservative banking that is the norm in the West. A few, like Alfa bank, had attempted something a bit more funky, but Alfa Bank's experience has shown doing something different is still hard to carry off.

Cook caused another (smaller) row in the bank by deciding to go for a funky orange colour scheme for the bank's branches and introduced things like "bring your dog day" to the bank - an unheard of invitation in Russia's typically uptight service culture. "We needed to make a statement. Too many banks were trying to copy each other. We needed to do something to stand out from the crowd," says Cook.

It was at this point that Cook tried to get a loan and hit on the Kreditmart idea. He offered it to GE Capital, which was interested but not ready, so Cook struck out on his own with his partner John McRoberts.

Aurora is now almost fully invested and Cook says he will spend the next few years building up the various businesses before considering an exit. The fund's most recent deal was the acquisition of VUB bank in Samara for about $4m that will support the Kreditmart business, as owning a bank makes it a lot easier to offer the fill-in loans customers want when applying for mortgages. "Now we can offer a loan in four days and then on-sell the loan to the banks would otherwise take up to four weeks to approve a loan," says Cook. "After this, who knows? Maybe an IPO, maybe sell to a strategic investor - the thing with Russia is, you never know what will come next."

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INTERVIEW: Russia's mortgage man builds financial supermarket

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