19 October 2014

Private Equity in Russia: practical view

Alexander Lupachev

PE is a marginal asset class in Russia

PE/VC funds account for less than 1% of $500 bln. invested annually in Russia

2

Region # of

PE/VC

firms

NAV Dry powder New

investment/

year

# of deals/

year

# of portfolio

companies

US 3 300 $3 000 bln. $800 bln. $400 bln. 4 000 17 000

EU 1 800 $700 bln. $200 bln. $45 bln. 5 000 21 000

Russia 220 $30 bln. $10 bln. $3 bln. 300 1 500

Key players in the PE/VC market in Russia

Russia PE market was established in mid 1990-ies at the initiative of EBRD and other DFIs. Local capital is the main growth driver going forward.

3

Stage

Seed / Venture Growth capital Buy-out funds

Investors Angels and VC funds (series A,

B)

PE funds

(series В, C, …)

Family offices, FIGs

Local players

FRII

Runa

ABRT

Bright Capital

AddVenture

Finam

I2BF

Imi.vc

Klever

Phenomen Ventures

Prostor Capital

RVC sponsored funds

Qiwi ventures

iTech

Rusnano

Aton Capital

Svarog Capital

Wermuth

Ru-Net

NRG

VIYM

UCP

Da Vinci Capital

Renova

RDIF

AFK Systema

Gazprombank

Promsvyaz Capital

Alfa Capital

Onexim

Global players*

Almaz Capital

Mangrove

Direct Group

Ventech

Fastlane Ventures

eVenture

TMT Investments,

Intel Capital

Russia Partners

Baring Vostok

Accel

Bessemer Elbrus

CapMan

Vostok Nafta

Tiger Global

UFG

Kinnevik

MCI

Balderton

Insight Captial

GS PESS

TPG

Carlyle

KKR

Access Industries

Warburg Pincus

Blackrock

* - where > 50% of capital sourced from outside of Russia Government money in bold print

4

Deal Sourcing: scratching the surface

Russia is a potentially large market, still untapped

300 deals a year

10 000 hit PE/VC radar screens

100 000 new business every year

1 mln businesses

4 mln legal entities

5

Deal Sourcing: you eat what you kill

Russian VCs are where US VCs were in 1970-ies – small circle, limited market infrastructure. It takes 10 years and $10m to make a good VC.

40

20

40

40

20

40

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Junior VC Experienced VC

Middlemen Other funds Rolodex

US / EU

80

10

10

30

10

60

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Junior VC Experienced VC

Middlemen Other funds Rolodex

Russia

6

Deal Sourcing: you know a good deal when you see it

Typical filters are market, team, business model and deal. In the US good deal is where you have 2 out of 4. In Russia you need 3 out of 4.

1. Market: size, growth, fragmentation, liquidity

2. Team: experience, motivation, alignment

3. Business model: unit econ, competitive advantages

4. Deal: valuation, liquidity

Deal making: transactionally heavy environment

Takes x 3 time and x2 overheads to close the deal in Russia vs. US

07

Identify target investors

Prepare business plan, fin

reports and fin model

Circulate the teaser

Sign NDAs with interested

investors

Review financials and memo

Negotiate term sheet

Negotiate ISA

Homework: 1 – 12 mth Marketing: 1 – 12 мес Deal: 3 – 12 mth

Agree business plan

Due diligence

Consolidate ownership

Portfolio management: lessons learned

Flexibility is the key in long-term investment in Russia

08

Define value added: staffing, clients, deals (M&A, follow-ons, exits)

Put post-completion obligations on paper

Board process as a matter of discipline: require homework!

What happens between the Boards is more important

Four eye principle

Personal relationship vs. keeping entrepreneur challenged

Transparency is a must

Non-compete is a matter of principle: exit first

Exits: luck favors prepared mind

Investment is science, exit is art

09

Define exit plan before you invest: make the list of potential buyers, research multiples

Sync your plans with the founders: common vision, timing and motivation (careful with family

businesses!)

Build exit terms into the shareholders’ agreement (tag, drag, etc.)

Motivate the founders and management for the exit (bonuses for performance, transparency,

etc.)

Make sure the portfolio company is ALWAYS ready for a quick deal if the buyer shows up

(consolidated ownership, audited accounts, etc.)

IPO is an icing on the cake, not the cake. 80% exits globally and 90%+ exits in Russia are

through trade sale

Consider MBO (redemption, dividend out) options if neither IPO nor trade sale work within the

investment period.

10

Further reading

Free access Subscription based =

Local sources

rusbase.vc

i.rbc.ru

siliconrus.com

startuppoint.ru

rvca.ru

rusventure.ru

PwC MoneyTree

preqveca.ru

International sources

crunchbase.com

techcrunch.com

venturebeat.com

pehub.com

cambridgeassociates.com

evca.eu

nvca.com

bvca.com

fenwick.com

Preqin

Capital IQ

Bloomberg

Dow Jones

Thomson Reuters

Pitchbook

CB insights