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. Last Updated: 07/27/2016

Private Equity Fever Grips Investors

Supermarkets in Moscow, dairy farms in Siberia and pay-TV channels in St. Petersburg are now on the books of funds sniffing out unlisted Russian assets with high yields as private equity fever grips Russia.

Despite the plight of equity investors burnt by the government's legal assault on oil giant Yukos, private equity in Russia has become hot on the back of the country's economic strength, helped by record oil prices.

Business is growing so fast that this is no time to exit, said David Geovanis, managing director at Basic Element, Oleg Deripaska's holding firm with $12 billion of assets.

"Our stuff is growing so fast that we don't want to sell too early," he said. "There's opportunity for outstanding or unusually high returns because of the market inefficiencies."

Few deals in Russia are cutting edge: "It's dirty, nothing high-tech," said Geovanis. "We're investors in coal, pulp and paper materials and agro-business."

That's not surprising in a country where raw material production still accounts for 70 percent of economic output.

Although Russia's private equity market is small with investment capital in unlisted firms estimated at some $1 billion, returns can be double that in mature Western markets.

"We wouldn't look at anything with returns of less than 30 percent," said Geovanis.

At Delta Private Equity Partners, Yekaterina Pantelyushina said returns were 40 percent in five investments exited in 2004.

The last deal was in August when Delta Private Equity Partners sold its DeltaBank venture to GE Consumer Finance, the retail lending unit of General Electric, for $150 million.

Private equity firms invest in nonlisted companies with a view to selling at a profit as they develop from start-ups to the point when they are floated or bought by another firm.

With the Kremlin consolidating control of strategic areas of the economy, private equity funds are targeting mid-market firms with no access to capital markets in a country where many of the 1,200 banks act as little more than corporate pocketbooks.

One focus is Russia's booming consumer sector where a retail revolution has fueled supermarket wars with malls in Moscow thronged with Russians out on weekend shopping sprees.

In August, Baring Vostok Capital Partners, managing $400 million in assets, teamed up with Societe Generale to create a consumer finance firm.

Delta Private Equity Partners announced last week it bought a 25 percent stake in St. Petersburg cable television operator National Cable Networks, Russia's second largest, for $5 million.

"We target sectors that respond to the growing needs of the middle class," said Pantelyushina at Delta, which has invested $300 million in Russia and is starting a new $100 million fund.

Increasingly, foreigners are braving the market's lack of transparency and weak corporate governance.

Mark Mobius, who oversees $12 billion of assets at Templeton Asset Management, said his group's strategic equity fund investing in private equity was "very heavy in Russia." The fund runs $100 million and Mobius expects another $100 million.

Among Templeton's private equity buys are supermarket chain Perekryostok, with sales of over $600 million per year, top tiremaker Amtel and dairy and juice firm Wimm-Bill-Dann, where Mobius was one of the original investors. Other private equity funds such as the Carlyle Group have also been raising money for Russia, fund managers said.

Global funds now face stiff competition from local business groups that are faster to strike deals, have better contacts and are less worried about exit strategies and due diligence requirements binding their foreign rivals.

Many are linked to powerful industrialists, known as oligarchs, such as Deripaska's Basic Element or Alfa Capital Partners of Alfa Group, one of Russia's largest privately owned financial-industrial conglomerates.

Deripaska last month took full control of Russia's largest aluminum producer Russian Aluminum by buying out billionaire Roman Abramovich's remaining 25 percent stake.

However, market sources say a listing there is a few years away.

"Russia is a tough market for foreign private equity investors," said Geovanis. "We can move so much faster."