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. Last Updated: 07/27/2016

Private Fund Targets Success-Story Nizhny

The first sizable chunk of private foreign cash aimed at small and medium-sized enterprises is set to flow into reform-minded Nizhny Novgorod, a top fund manager said Monday.


Framlington Overseas Investment Management is preparing to launch a new regional fund to complement its existing $66 million Framlington Russian Investment Fund.


According to company management, the new Volga Fund will represent the first efforts by private institutional investors to single out the area around Nizhny Novgorod, Russia's third-largest city and a privatization success story.


The Volga Fund will likely be capitalized at $20 million to $30 million, said Connell Gallagher, Framlington's chief representative in Moscow.


The Volga Fund will target principally small and medium-sized businesses in the Volga region and will be managed out of Nizhny Novgorod, Gallagher said. Its prospectus also allows for up to 20 percent of assets to go toward listed equities and Russian government bonds.


The Volga region was chosen partly because of its advanced stage in the privatization process and consequent wealth of investment opportunities.


"It's a very progressive region," Gallagher said. "We think it's one of the major industrial heartlands of this country, and we've found some quite interesting companies which we think are worthy of investment." He added that part of Framlington's existing Russia investment fund is invested in a small telecommunications company in the city.


The European Bank for Reconstruction and Development has lent its backing to a $5 million fund in Nizhny Novgorod, the Small Enterprise Equity Fund, which also addresses small businesses in the area. But Gallagher said he was unaware of any further major Western investment in the region.


The fund will concentrate on direct venture capital investments, Gallagher said, in line with Framlington's general investment outlook and the obstacles to sinking large sums of cash into Russia's monoliths.


"Investing into very large companies in this country is very difficult, because the amount of restructuring to be done is enormous," he said. "We would rather focus on more manageable companies, where investment into the company and increasing capital will have more of an impact on the company."


He added that the fund will not seek out specific industry sectors, which also follows Framlington's general investment focus. Framlington already manages the $66 million Framlington Russian Investment Fund, which was launched at the end of 1993 and has been about 80 percent invested.


The Volga Fund will be a closed-end fund -- after it is closed to investors in the next month or two, no further shares can be issued. Framlington is seeking to list the fund, which will have a 10-year life, on the Dublin Stock Exchange, Gallagher said. The existing fund, also with a 10-year life, is listed in Luxembourg.


One prime investor in the Volga Fund will be the International Finance Corporation -- the investment arm of the World Bank -- which has pledged to take up to a third of the fund with an investment ceiling of $20 million. That means the fund could grow larger, but $20 million to $30 million is the expected range, Gallagher said.


The IFC has been heavily involved in the privatization process in Nizhny Novgorod, creating and implementing voucher auction models in 1992 that have been repeated throughout the country. The IFC also has $8 million invested in the Framlington Russian Investment Fund.


The organization's history in the region and Framlington's urge to launch a regional fund indicated that the Nizhny Novgorod area would be a natural choice for the project, said Doug Gustafson, the IFC's Europe representative in London.


"The IFC has had a lot of activities in Nizhny Novgorod, a long experience base and history working with enterprises in that region," he said.


"It seemed quite logical that if we wanted to try one of these regional funds, to rely on an existing base of experience and networks."


While Framlington will manage the day-to-day activities of its new fund, the IFC will be represented on the board of directors, which is responsible for ensuring that the objectives of the fund are carried out within the framework outlined in the prospectus, Gustafson said.


He said the organization's ties to the region will likely come in handy as well.


"Because we have people down there, we hope our people can introduce deals to the fund," Gustafson said.


The IFC also has $15 million in the First NIS Regional Fund, managed by Barings; $5 million in the Sector Capital Fund; and $2 million in the Russian Technology Fund. In addition, the IFC had exposure in Russia of $150 million as of June 30, 1995, from a worldwide total of $6.5 billion.


"We're still actively trying to enlarge our portfolio in Russia, and seem to be moving independently of political developments," Gustafson said.


Framlington plans to open an office in Nizhny Novgorod in the coming months after the fund is closed. The office will be manned by four or five as yet unnamed professionals, Gallagher said.