Understanding

Russia:Abyss or good ride?

Alexander Abolmasov

Managing Partner

NRG

www.nrgc.com

Good morning! Let’s discuss private equity investments into Russia. For many foreigners investing in Russia is like extreme skiing. It could be exciting, but many are afraid to get injured.

SuperReturn Emerging Markets 2011

26 - 28 June 2011, Geneva, Switzerland

What is Russia: ?

So what pictures come to you mind, when you think about Russia?

Have you imagined one of these?

To many people it is something of these.

British Point of View

Your stereotype image of Russia may depend on your cultural background. In UK most people thing about Russians as very rich people, who buy real estate in London. The same thing in Switzerland. On arrivals in Geneva airport I’ve see only one reference to Russia: an HSBC advert stating that Russian billionaires are 18 years younger than American ones on average.

German Point of View

In Germany they pay more attention to Russian natural resources, especially gas. Another problem is that on the map of Europe you always see only a small part of Russia. The rest just doesn’t fit on the screen or page. So it is hard to understand Russia, because it is moved to subconscious.

US Point of View

For Americans it is even harder, because Russia historically is the Arch Rival. Also Russia is broken into two parts on an American map of the World. America is in the center and Russia is surrounding World from the left and from the right. This is quite an uncomfortable notion for the most peoples minds.

Russia is so HUGE ?

But actually Russia is not so huge. To understand that you should look at Russia … from space at night. Most activities are located in Central Russia and near this zigzag of light, which is Transiberian railroad.

Central and

Northern Russia

Siberia

Urals

Not so huge for private equity deals

This corresponds with population density map. 90% of private equity deals are done in highlighted regions, which have the size similar to Europe. Once people understand this, it is much easier to fit Russia into their minds.

Russian Economy

Now to Russian economy. For the last two years it was in hate mode of love&hate cycle. However, yesterday’s poll results in this conference, where Russia took second place for investment climate among BRIC countries, shows that we are moving back to love mode of this cycle.

Partner

Leading LP company

If I bring Russian deal to Investment committee they could fire me. If I don’t bring Chinese deal to Investment committee they could fire me.

However, sometimes personal courage is required a to present Russian funds on investment committee, because people are afraid to be fired for this.

Let’s Test the Perception Gap about Russia

Do you

know what

is BRIC?

Have you heard of

“Let’s transform

BRIC into BIC”?

Have you heard that

Goldman Sachs updated

their report in 2010 and

Russia is now #2 based

on attractiveness?

Do you

know what

is BRIC?

Have you heard of

“Let’s transform

BRIC into BIC”?

Have you heard that

Goldman Sachs updated

their report in 2010 and

Russia is now #2 based

on attractiveness?

Statistic from BVCA Summit, London (March 2011)

95% 45% 0%

Jim O'Neill

Chairman of Goldman Sachs Asset Management

Concerns about Russia are overblown and offer investors a

chance to buy into booming growth stories.

Contrary to the email I get every two hours about why I

should drop the R from BRIC, I quite like Russia.

June 2011

Russia is still very attractive According to latest Goldman Sachs BRIC and N-11

economic research http://goo.gl/sx6Vb

#2 MCap growth10.2% forward 20-yr CAGR (#1 is China with 11.5%)

#2 Allocation growthFrom 1% to 3% in MSCI in 20 years

#6 GDPBigger than Germany and France in 20 years

#11 GDP growth But at least 30% GDP/capita higher than in countries with higher

GDP growth

#5 Strategic investors targetAccording to UNCTAD survey after China, Brazil, India and US

46% of wannabe entrepreneursAmong people 20-29 years compared with only 29% for 30-47

years.

-300

-200

-100

0

100

200

300

400

500

0

100

200

300

400

500

600

700

RU

R b

n

Tho

usa

nd

s u

nit

s

New car sales (left axis) Loans for individuals growth (right axis)

0

2

4

6

8

10

12

14

0

500

1000

1500

2000

2500# of Russian companies IPOs/SPOs RTS Index

Economic recovery in 2010-2011

Source: RTS, PREQVECA Source: Autostat, Bank of Russia

Financial side

- Stock markets

- Exchange rate

- IPO window

Consumer side

- Consumption

- Consumer credit

Biggest deals

raised $1.3bn in NASDAQ IPO

PepsiCo acquired 66% stake in

Wimm-Bill-Dann for $6bn

Mail.ru raised about $500m through

IPO in LSE

Nomos Bank raised $718m in first

Russian private bank LSE IPO

Biggest Net IPO Since

Outstanding issues

Corruption

Demographics

- Some progress, but not enough

- Main political topic with approval rating of

Russian government below 40%

- Crowdsourcing in fighting corruption

(Navalny and Rospil)

- Population stabilized (growth rate 0% in 2010)

- Main growth comes from CIS countries and minority

ethnic groups

- Russia is expected to have Muslim majority by 2050

Poll results SuperReturn Emerging Markets 2011

26 - 28 June 2011, Geneva, Switzerland

If you had to invest US$1m in one of the countries listed below, based on the

arguments, which one would it be?

34.4%

30.4%

24%11.2%

Brazil Russia India China

Private EquityLandscape

Russian PE consistently outperforms

Source: Cambridge Associates, EVCA/Thomson Reuters, Bloomberg and

EBRD

* EBRD tracked portfolio pooled end-to-end return, net of fees, expenses, donor grants and

carried interest. Excludes property funds, and includes liquidated partnerships.

** Pooled end-to-end return, net of fees, expenses, and carried interest. “The "Since

Inception" figure represents the net pooled IRR since inception for funds formed between

1980 and 2009.

6,4%

8,3%

16,7%

25,0%

20,6%

32,3%

16,9%

15,0%

20,1%

EBRD PE Portfolio**

Cambridge EM VC&PE Index*

EBRD Russia/CIS PE Portfolio

Ten years Five years One year

Russian PE industry snapshotEBRD Funds

Russia

Partners BVCP

NRG

Quadriga

Capital

UFG

Captive and semi-captive

New players

Mint

CapitalAurora

Russia

Da Vinci

Alfa CP Icon CP

Svarog

Capital

Rusnano VTB

East

Capital

Wermuth Uralsib

Elbrus

Capital

UCP

Prometheus

Aton

Capman

50-100 private funds/

family offices

Independent

Trends

MergersNorum/Capman, Delta/UFG

Spin-offs Elbrus, Quadro

Deathpool Eagle CP, Trifecta

New funds seeded

with HNW moneyAton, Prometheus, UCP

MezzanineNRG

Biggest Infinity and Nissan Dealer in Europe

12% of Nissan market in Russia

12 brands/24 dealerships in Moscow and in Central Russia

24

Case Study: Genser

Initial

investments: 2007Hybrid equity: April 2009

Secured loan with equity kickersExit to IPO

2011Multiple: 5x

IRR: 45%

Multiple: 1.5x

Current return 20%

IRR: 30%

Case Study: Begemot

#2 toy retailer in Russia

Mid/low prices

Growth in 2 years: 50 -> 200 retail outlets.

90% EBITDA growth

70% sales growth

25

Mezzanine transaction summary

• Secured loan with equity kickers

• Use of funds: refinancing/working capital

• Board seat and veto rights

• Current return: 18%

• IRR: 41%

43 42

50

58

10 1115 16

0

10

20

30

40

50

60

70

2008 2009 2010 2011E

Sales

EBITDA

1 384

724

1 000

1 465

66 44 56 54

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2008 2009 2010 2011E

Sales

EBITDA

NRG Portfolio

26

Ufanet: sales & EBITDA, $m (internet provider)Genser: sales & EBITDA, $m (car dealer)

Source: company data

Source: company data

Source: company data

Source: company data

123

106

125

178

12 15 1828

0

20

40

60

80

100

120

140

160

180

200

2008 2009 2010 2011E

Sales

EBITDA

Begemot: sales & EBITDA, $m (toy retail chain) Umnitsa: sales & EBITDA, $m (baby food)

11

19

54

68

03

1419

0

10

20

30

40

50

60

70

80

2009 2010E 2011E 2012E

Sales

EBITDA

NRG. Profile.

Independent alternative investment manager

Volga River One C.P.

First Closing: 29 Sept 2006

Current size (cash): US$178 m

Number of LPs: 20 (15 private + 5 institutional)

Portfolio companies: 6 (telecoms, retail, food production)

Tenor (years): 5+2 with 51% approval of LPs

Volga River Growth

First Closing: $135m, 4Q 2010

Target size: US$250 m

LPs: EBRD, local Institutional LPs

Tenor (years): 5+2 with 75% approval of LPs

• Russian private equity consistently

outperformed other private equity

markets

• Russia is #2 out of BRIC by

investment attractiveness according to

poll on this conference and also

according to Goldman Sachs

• Russian economy has fully recovered

after the crisis

• ~20 GPs with AUM of more than

$150m before the crisis

• Only a couple of GPs left with

significant amounts of dry powder

Alexander Abolmasov

Email: aabolmasov@nrgc.com

WWW: www.nrgc.com

Summary

Understanding Russia could take years, but understanding Russian private equity is easy. Just come to Russia for two days have meeting with 10-12 major players and you will get enough information to make a decision.