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Changing gears: Russia fund seeks $50B from investors

Changing gears: Russia fund seeks $50B from investors

Russia is meeting with companies including Abu Dhabi Investment Authority and Kuwait Investment Authority as it seeks to change the perception that the country is a hostile foreign investment environment.

June 8, 2011 3:40 by



Russia will launch a state-backed fund next week that will seek up to $50 billion in matching investments from sovereign wealth and private equity funds which control a pool of global capital of more than $2 trillion.

The Russian Direct Investment Fund (RDIF), to be rolled out at the June 16-18 St Petersburg International Economic Forum, is Moscow’s most ambitious attempt to raise investment rates that fall far short of those in faster-growing China.

It also seeks to change perceptions that Russia is hostile to foreign investment by positioning the fund, which will receive $10 billion in state cash over the next five years, as a co-investor in businesses with high growth potential.

“There is a whole pool of people who would consider Russia if they have a strong partner,” the RDIF’s head, Kirill Dmitriev, told Reuters in his first media interview since he was appointed last month.

Extensive consultations with investors led by the head of state development bank VEB, Vladimir Dmitriev — who is not a relative — culminated in two days of meetings last month with top officials including Prime Minister Vladimir Putin.

Attending were representatives from sovereign wealth funds such as Lou Jiwei of the China Investment Corp., Hareb Al Darmaki of the Abu Dhabi Investment Authority and Bader Al-Saad of the Kuwait Investment Authority.

They were joined among others by Wall Street heavyweights Stephen Schwarzmann of Blackstone, Edward Eisler and Julian Salisbury of Goldman Sachs and Kurt Bjorklund of Permira.

“To get $2 trillion in one room for two days, it’s a first,” Dmitriev said of the talks with Putin. “There was a lot of back and forth and there were some tough questions. But the result is clear, and investors were very pleased with the meeting.”

CIC’s Lou went on record afterwards to say the fund “could be a flexible way to attract foreign investment”, while KIA’s Al-Saad said it would “give us the opportunity to increase our direct investment” in Russia.

Dmitriev, a 36-year-old alumnus of Stanford and Harvard, ran Delta Private Equity Partners from 2002-07 with Patricia Cloherty, the former co-chairman of Apax Capital Partners, where their team achieved annual returns of more than 100 percent.

He is stepping down as president of Icon Private Equity, which manages $1 billion, to head up the RDIF.

PRIVATE-EQUITY MODEL

The high level of interest, Dmitriev says, is down to the design of the RDIF, which will run on a private-equity model, investing in individual firms with a primary focus on returns.

The fund will focus on sectors such as IT, healthcare and infrastructure — playing on Russia’s emerging middle class — in alignment with President Dmitry Medvedev’s drive to modernise Russia’s $1.5 trillion economy.

“If we can show foreign investors that they can consistently make a reasonable return in Russia, they will put in a dollar now, and in three or four years they will put $10 on top of that dollar,” he said.

Co-investors will be required to at least match investments by the RDIF, dollar-for-dollar, but the fund’s goal would be for foreign partners to take the lead while it restricts itself to a minority role.

“We believe the ratio of foreign investment should be at least 1:1 — it can be 2:1, 3:1 or 4:1 — but it has to be 1:1 to do a transaction,” he said.

The structure is designed to minimise risks that the fund could face political pressure to do deals that, for example, focus on creating jobs but that might not make financial sense.

“It would be difficult for somebody to pressure us and say, ‘Hey guys, you are a government fund, do this deal’. Because we always have to go to foreign investors and ask them, ‘This is the deal, do you want to do it?'” he said.

“If they say no, we say no. So the amount of political pressure is dramatically reduced.”

The RDIF, which will also be open to strategic investments by large corporations, will be established as a wholly owned unit of VEB but have an independent board and investment review process.

The fund should be up and running by September, with a 30-strong team of investment professionals in place soon afterwards.

If all goes well, the fund could attract $50 billion in foreign investment over 5-7 years. First deals are possible this year, but are more likely in the first quarter of 2012.

“We don’t want to rush. We want this to be a successful endeavour,” said Dmitriev. (By Douglas Busvine; Editing by David Cowell)



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