RenCap may face closure amidst an eleventh-hour MBO bid

RenCap may face closure amidst an eleventh-hour MBO bid
Renaissance Capital was set up by two young western bankers in the midst of the wild 90s and made money hand over fist at first / wiki
By Jason Corcoran in Dublin May 31, 2022

Renaissance Capital, the Moscow-based investment bank controlled by billionaire oligarch Mikhail Prokhorov, may close unless an eleventh-hour deal can be struck by managers to buy out the business, bne IntelliNews can reveal.

Sources close to Rencap, as it is known, said Prokhorov had set a deadline of this week for its closure if a management buyout (MBO) does not succeed.

A second source at Rencap told bne IntelliNews that the bank is actually restructuring and that it does not face immediate closure but intends to remake its ownership structure entirely, and some offices will be closed. 

bne IntelliNews sources said that the New York office will be closed and several employees have already left the company, as confirmed in comments to bne IntelliNews by staffers. Prokhorov also intends to close the London office and other hubs such as Johannesburg as well. A dozen people will be sacked in New York and some 60 people fired in London, according to people familiar with the decision who asked not to be identified. Only a skeleton crew will be left in London to winddown operations there. 

Regardless of which scenario is underway, other sources told bne IntelliNews that managers are working on a new ownership structure, which will see the closure of existing holdings and the potential opening of new companies in London, New York and Africa.

“The Moscow team are desperately trying to arrange an MBO so they can keep the structure intact,” a source close to the firm told bne IntelliNews. “Prokhorov is 100% out and has given all the management teams a few days to find either a buyer or a backer after which he pulls all life support.”

Even as negotiations moved towards the deadline, Rencap emailed its clients announcing it had terminated analyst coverage in all of its sectors and all its geographies, from Russia to Rwanda and from the United Arab Emirates to Uganda.

One senior RenCap banker told bne IntelliNews: "We all got fired. If there's a new structure, they can knock on my door like everyone else."

A Rencap spokeswoman in Moscow declined to immediately comment. A spokesman for Prokhorov’s Onexim vehicle did not immediately respond to a request for comment.

The Times of Israel reported on April 4 that Prokhorov had emigrated to Israel and received citizenship. Prokhorov’s maternal grandmother, Anna Belkina, a prominent Russian microbiologist, was Jewish, making him eligible for Israeli citizenship.

Prokhorov, who is listed by Bloomberg as Russia’s 12th richest individual, with a net worth of $13.8bn, has distanced himself from the Kremlin over the last decade since running against Vladimir Putin for the Russian presidency as a proxy opposition candidate in 2012.

Prokhorov has not been sanctioned by the US, EU or UK in the wake of the Russian invasion of Ukraine, nor has he expressed any public opposition to the war. Some of his oligarch contemporaries, notably Mikhail Fridman of Alfa Group and Rusal’s Oleg Deripaska, have publicly come out against the invasion.

Dubbed the "Great Gatsby oligarch" in a bne IntelliNews profile, Prokhorov fell foul of Putin following a series of investigative reports by his RBC media holding into individuals close to the Kremlin.

One source at Rencap insisted the bank was just undergoing "a restructuring" and is still operating as normal and was even running a client event in Moscow today. Staff still hope to retain their jobs in a potential reboot of the business, but any new owners may take a different view.

Rencap has survived many crises in the past, but the market is in unprecedented territory since the Kremlin made Russia into an investment pariah by invading Ukraine.

Mergers and bond sales have completely disappeared, while investment bankers say it may be decades before we see another Russian initial public offering (IPO). Many of the remaining financiers in the city are busy trying to wind down investment positions or offload loan books, but it is proving difficult due to the lack of buyers and the fact that the country’s financial plumbing has been disabled. Crippling sanctions against the Central Bank, capital controls and exclusion from the SWIFT payment system have combined to put much of the financial system into a deep freeze.

If Rencap survives in some form, it may have a future as a niche player offering a window into Russia via investment grey schemes. Unlike the state-controlled lenders Sberbank and VTB, Rencap has so far been untouched by sanctions.

The bank has already suffered from big changes in the market. Rencap made its money in the 1990s and early noughties by acting as an intermediary for international investors that wanted exposure to the Russian market, but after Russia’s capital markets were hooked up to the international system when it joined the Clearstream settlements and payments system, that business disappeared.

In what turned into Rencap’s last big investment conference then-CEO Stephen Jennings said that the market had become shaped like a “barbell”. Sberbank CIB and VTB Capital (VTBC), the investment arms of Russia’s two biggest state-owned banks, and niche players would form the two sets of weights at each end of the barbell. Jennings had assumed that Rencap was at the bulbous end of the barbell, but actually the bank was in the middle and its business rapidly atrophied. 

Rencap is the most legendary investment bank in Moscow. In its heyday, the firm paid the biggest salaries and the biggest bonuses and held the best investor conferences and the wildest parties.

It was set up in the 1990s by two young, Western pioneering investment bankers Boris Jordan and Stephen Jennings.

Jordan, an American scion of Czarist Russians, and New Zealander Jennings arrived in Moscow with Credit Suisse First Boston and made their name by persuading their bank to buy privatisation vouchers. These were later converted into shares in some of Russia's biggest companies and the bank made a $100mn profit on the deals, a third of its global total for that year. Jordan and Jennings took their bonuses, hired a room in the Penta hotel (now appropriately renamed the Renaissance Moscow Olympic Hotel) and set up the bank.

The pair quickly hooked up with Vladimir Potanin, owner of Norilsk Nickel, who funded their expansion and through him they met Prokhorov, who was the manager at the metal mine at the time.

The idea was to create a "Russian bank with a western face" that could bring capital in from outside by speaking the language of international finance, but thanks to its boots on the ground could ensure international investors were not ripped off in the rough and tumble of Russia in the 1990s. That included the launch of the highly successful Sputnik Funds at this time among the very first Russia-dedicated investment vehicles to target international investors.

Rencap shot to stardom. The bank's annual conference became a classic fixture on the calendar, held in those days in the Grecian Moscow Chamber of Commerce and Industry building just off Red Square where Stalin was laid in state in the first days after his death. It is a relatively small building and investors, oligarchs and journalists were packed shoulder to shoulder to listen to the likes of German Gref and Anatoly Chubais talk about reform and Russia's future.

One of the most memorable was held in 2000 just after President Vladimir Putin came to power, where oligarch Boris Berezovsky spoke and was harangued by investors who accused him of stealing their money. Media mogul Vladimir Gusinsky was also due to speak, but he was already fighting Putin and in the middle of the event the news broke that Gusinsky had fled the country, never to return. Berezovsky was gone a few weeks later.

The bank was also a key broker in the privatisation of a 25%-1 share stake in Russia's fixed-line operator Svyazinvest for over $1bn, working with international financier George Soros a deal that went sour and ended up as "the worst deal of my life," according to Soros.

Rencap only just survived the 1998 crisis. Jordan left, taking the Sputnik Funds with him to concentrate on things like insurance, selling his stake to Jennings, who became the majority owner.

In 2000, the economy started booming. The economy grew by 10% in that year alone a record yet to be bettered and by 2005 Russia was in a full-blooded boom. As the specialist broker focused on international investors, Rencap was making money hand over fist.

Jennings re-engineered the bank as a leading player, first in Russia, but rapidly moving into the other markets of the Commonwealth of Independent States (CIS). He also made the bank respectable, putting aside its cowboy image that some had associated with the bank under Jordan’s tenure. His aspiration was to create a “Goldman Sachs of Emerging Markets.”

Between 2005 and 2008, big offices were opened in Ukraine, Kazakhstan and a Hong Kong office added in 2010 as the bank spread its wings as far as Mongolia. Jennings also astutely bought a retail operation, Renaissance Credit, right at the beginning of the consumer-lending boom, which today is one of the three biggest retail lenders in the country.

But the biggest gamble was to branch out into Africa in 2006. Jennings told me at the time: "It is the last untouched emerging market. It looks a lot like Russia: a huge country with plentiful natural resources, but with all the problems that Russia had in the 1990s. We know how to do this sort of business." It was a ballsy move, but one that has since paid dividends, as Africa now accounts for a quarter of the bank's bottom line.

Jennings was on a roll. The bank launched a series of adverts on CNN describing itself as the leading emerging market investment bank that didn't mention the world "Russia" once.

Jennings told me that he turned down several offers from Russian banks, including one from state-controlled VTB to buy Rencap out at the top of the market for a reported $4bn.

Russia's second big crisis in 2008 nearly broke the bank again. The African adventure was a good idea, but the bank was spread very thin as a result. As the economy went into meltdown, legal counsel Stephen Konigsberg was on the phone trying to stave off another disaster.

Jennings eventually caved into the inevitable and agreed to sell a 49% stake to Prokhorov to stave off collapse. "It had to be done, and the bank is back in business," a Rencap vice president told me in the following days, "but the dream of becoming an international emerging markets investment bank is over. Now we are only an investment bank that wants to make a lot of money for its shareholders."

In November 2012, the Kiwi Oligarch was ousted after his billionaire partner Prokhorov rebuffed his requests for more cash for the operation, which was bleeding money, and threatened to withdraw millions he held on deposit with the bank that could have caused it to collapse.

Legend has it that Jennings lost the keys to the business after a showdown meeting with Prokhorov and Suleiman Kerimov, another tycoon who had substantial funds on account at Rencap. Jennings requested more funds to cover the firm's losses and the tycoons turned on him, demanding he hand over his 50% stake plus one share.

Rencap sources say Jennings, then 52, faked a heart attack to escape. An ambulance arrived and the driver was handsomely paid to divert to Sheremetyevo Airport so Jennings could escape to London. He hasn't been back since.

Neither Prokhorov, Kerimov nor Jennings have ever spoken about what went down. Jennings eventually signed the papers, surrendering control of the investment bank and the consumer lender RenCredit to Prokhorov while retaining ownership of the group's African assets.

Even before the invasion, Prokhorov has sought to exit the business and reportedly held protracted negotiations with the Chinese conglomerate Fosun about a potential sale in 2016.

Meanwhile, his former business partner Potanin has been acquiring banks on the cheap. His Interros group bought Rosbank after Société Générale, a French lender that bought the business from Potanin in 2008, opted for a quick exit from Russia. Potanin also snapped Oleg Tinkov's stake in Tinkoff Bank after the banker was forced to sell following his criticism of the war.

"It would be a bitter pill for Prokhorov if Potanin ended up taking Rencap too or whatever is left of it," said a former banker. "There is no love lost there."