Alfa, Vostok-Nafta Join in $200M Fund

In a sign that foreign investors are ready to delve deeper into Russia's economy, Alfa Group has teamed up with Vostok Nafta -- led by Swedish energy magnate Adolf Lundin -- to create a $200 million direct investment fund.

Called the Russia Resources Fund, the investment vehicle will be used to channel foreign capital toward small and medium-sized companies whose shares are not actively traded.

Despite gains posted by Russia's stock market so far this year, foreign investors have shied away from directly investing in smaller, privately held companies, citing corporate governance risks. Private equity investing in Russia began to take shape in early 1998, but that year's financial crisis put an end to such ventures before they began.

Governance risks can be moderated by managers with extensive experience and a good track record, Alfa Group chairman Mikhail Fridman said.

"We've done dozens of the kind of deals where we bought assets, improved management and then exited," Fridman said Monday at a news conference. "In Russia, we've got the most experience."

The fund aims to acquire controlling or blocking stakes of companies working in Russia's oil and gas, petrochemical, electricity, paper and pulp, metals, mining and mineral refining sectors. This profile mirrors that of Vostok Nafta, whose portfolio is heavy with shares in gas monopoly Gazprom, and Alfa Group, which is joint owner of Tyumen Oil Co., Russia's fourth-largest oil producer.

It is possible that the fund will invest in projects where Alfa Group or Vostok Nafta is already involved.

"The time is right for private equity," Lundin said. "In order to get superior performance, we need to look deeper. We will be active participants, getting our people on the board and in some management posts."

Alfa Group subsidiary Alfa-Eco and Vostok Nafta have each contributed $10 million to the fund, which will embark on a marketing campaign later this week. The fund's managers hope to attract $50 million by the end of this year and have $200 million by the end of 2003. They are targeting hedge funds, private investors and institutions. A $1 million minimum investment is required.

The Russia Resources Fund was put together in a matter of months, said Lundin, who expects similar funds to pop up by the end of the year.

While direct investment in Russia is rare, it is not unheard of. ING Group subsidiary Baring Vostok Capital manages three direct equity funds with more than $400 million focused on Russia and other post-Soviet states. The U.S.-Russia Investment Fund, managed by Delta Capital Management, concentrates on technology and retail as well as financial services.

But some doubt whether direct investment will bring better returns. Although Prosperity Capital Management's charter allows it to engage in private equity deals, it has yet to do so.

"We believe publicly traded companies put our investors' money to better use," said Alexander Branis, head of the group of funds.