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. Last Updated: 07/27/2016

Private Equity Players Waking Up to Russia

NEW YORK -- For some in the private equity world, Russia may be the next Asia. While many buyout firms are focused on China and India, some in the business say Russia represents the next great opportunity for private equity players.

The attractions include a tempting banking sector, a booming consumer market and red-hot real estate.

A buyout spree in Russia may be years away -- if it happens at all -- but with competition scant, valuations relatively cheap and liquidity abundant, some private equity firms are already diving in.

"What's really important to understand is that there is now increased wealth in the Russian middle class. They want everything," said Maria Boyazny, principal at Sigular Guff and Co., a New York private equity firm, with a fund focused on Russia.

Hamilton James, president of The Blackstone Group, a New York-based private equity giant, said in a recent interview that, indeed, Russia was the next region after Asia that would attract a flow of private equity bidders.

For starters, Russian consumers are busy buying more television sets and toiletries, computers and appliances.

Retail sales, led by clothing and footwear, rose to $190 billion in 2004 from $112 billion in 2002, according to the Economist Intelligence Unit, the business consulting arm of the Economist Group, publisher of The Economist magazine.

That makes Russia the 12th-largest retail market in the world. The country is expected to jump ahead of Spain, Brazil and Mexico in the next few years, The Economist unit said, adding that multinational corporations working in Russia have posted 15 percent to 30 percent sales growth in recent years.

Investing in Russia, however, comes with plenty of legal and political risks, said Marshall Goldman, professor of Russian studies at Wellesley College in Massachusetts and the author of "The Piratization of Russia," a book published in 2003. Privatization in Russia began in the early 1990s after the collapse of the Soviet Union.

"The rule of law is still problematic. In the general context, Yukos created enormous uncertainty," Goldman said, referring to the gutted oil company run by Mikhail Khodorkovsky, who is serving nine years in prison for fraud and tax evasion.

In addition to the legal and political risk factors, memories of Russia's 1998 financial crisis are still fresh in the minds of Western investors.

And while U.S. companies remain cautious about buying Russian companies, nimble private equity firms have been able to profit from their controlling stakes.

Last summer, General Electric Consumer Finance, a General Electric unit, paid $100 million -- or nearly four times book -- for Delta Bank, Russia's third-biggest credit card issuer.

"They spent 70 years with no consumer market. Now people have a choice of products," said Patricia Cloherty, CEO of Delta Private Equity Partners, the private equity fund that sold the bank to GE. "It's an underserved market." Cloherty also said Russia's media sector was another area ripe for private equity investing.

Central and Eastern European countries such as the Czech Republic are seeing similar economic growth. But Russia, with a population of 145 million, offers the most abundant opportunities, Cloherty said.

"What separates Russia is the scope of the market. It's a large country, with a large market," with good natural resources, she said. "It's an educated population with a small but expanding group of entrepreneurs."