Can Russian private equity help the country branch out into new industries?
Money may not grow on trees, but it can be harvested from land. Or at least that was the thinking when VTB Capital, the buyout arm of Russia's second largest bank, launched the country’s first agricultural fund last year. The platform will have up to $1bn to invest, and will seek to tap the industry’s potential by generating economies of scale and innovation.
That’s probably something many other sectors of Russia’s economy would love to see happening in their own backyard. Despite a lot of talking about diversification, the country has made little progress in weaning itself off revenues from oil and gas: energy still accounts for 70 per cent of Russia’s total good exports. And top-down efforts to breed national champions in non-extractive industries, such as the Skolkovo innovation hub, have so far failed to gain real traction.
What Russia really needs is more private investors willing to join in. According to a December report by the European Bank for Reconstruction and Development, Russia only spends 1 per cent of its GPD on research and development – most of it in the defence and mining sectors. And the country ranks among the emerging markets that receive the least foreign direct investments. Another paper by Aton, a Russian investment bank, recently showed that some 70 per cent of all FDIs going into Russia is actually flight capital returning back home.
That’s precisely where the buyout industry can help. “Russian private equity firms are raising more and more capital to invest locally. And they’re good at allocating resources to areas where productivity gains can be made,” comments an industry insider. The government seems to agree: it launched the Russia Direct Investment Fund, a platform to co-invest in commercial projects alongside large buyout funds, in 2011, and pledged to top the initial $10bn capital pool with an additional $8bn last year.
But both should recognise that this will hardly suffice. Despite a bumper fundraising year in 2012, the industry is still struggling to build scale: Baring Vostok’s $1.15bn Fund V, the largest vehicle ever raised in Russia, remains small compared to its Western cousins. And firms continue to face powerful headwinds at home. The EBRD says that the country’s dismal business environment, failures in the education system and a lack of skilled managers keep on making life difficult for many of Russia’s potentially successful businesses.
Private equity can still do its bit to support promising parts of the economy. VTB launched several large projects in consumer retail and advertising last year, and venture capital firms are attracting a growing amount of money to Russia’s nanotechnology and biotech markets. But for these efforts to really yield fruit, the government needs to do more than sign multi-billion dollars blank cheques to unproven public schemes – and start to recognise where the root of the problem really lies.