How to manage funds

A lack of managerial skill at the helm of the country’s few investment funds remains a critical barrier to spurring innovation in the economy.

One of the few things communism got right was education. Russia is home to some of the best scientists in the world, but over the last two decades they have been unable to turn their ideas into products because of the lack of capital.

Prime minister Vladimir Putin personally initiated the creation of a venture capital sector in 2006, and earmarked hundreds of billions of roubles to seed funds that could eventually capitalise on Russia’s intellectual potential.

But it has been slow going. Alexander Kondrashov, the managing director of Rusnano, the state-owned agency that has been tasked with developing the business, said that despite progress, the state continues to dominate the nascent venture capital business.
“There are up to 80 venture capital funds registered [in Russia], but in reality only about 25 are actually doing deals – and some of those are not investing into Russia at all,” said Kondrashov.

The government set up the Russian Venture Company (RVK) to oversee the distribution of state funds. The idea is that privately managed funds pitch ideas to RVK, which then takes 49pc of a sub-fund worth about $50m and leaves the management to the professionals.

“RVK has become a fund of funds to invest only into other funds,” said Kondrashov. “We set up 10 funds to do private equity. We never take a management position in those funds but invite private managers to manage the funds.”

The problem is that the private equity business in Russia is still in its infancy, and despite the attractive conditions set up by the government, little private capital has become involved.

“The Russian PE market is young but in each cycle it gets stronger,” says Richard Sobel, the head of Alfa Capital Partners, speaking at the C5 Private equity conference in Moscow in March. “The current downturn is to be expected. Private equity is an inherently cyclical business and the extremity of Russia’s cycles exacerbate these flows [of money].”

“There is every condition you could wish for but there is still no impetus to make the [privately managed funds] become very active,” said Kondrashov. “The venture capital sector is almost 100pc owned by the government. Rusnano has a total of $130bn to invest, but most of this money raised is actually owned by the government.”

Even with lots of money available, there are still several major hurdles to overcome. One of the biggest problems with creating a new financial sector from scratch is that no one has any experience.

“Who is going to manage these funds?” Kondrashov asked. “The most pressing current problem is the absence of strong management teams. There are a handful of well-known names, but these add up to perhaps 10 people in all [of Russia]. There have been no big success stories (or even failures), so we can’t assess the performance of the industry, nor the managers. In this situation, it is important that the state is strong.”

Rusnano is actively working to solve these problems. Kondrashov said the next task is to create the legal basis that would allow funds to work: For example, venture capital funds are still governed by the same laws that regulate mutual funds; limited liability partnerships, which are legal preference for most venture capital funds, do not exist in Russia yet. All the groundwork has been done and Kondrashov believes that deals will start appearing this year.

“If 2009 was the year of the government, then 2010 will be the year of the management companies,” Kondrashov said.

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