Will the Russian Bear fall:How Protests and Rising middle class affect corruption and private equity landscape

Alexander Abolmasov Managing PartnerNRG www.nrgc.com

SuperReturn Emerging Markets 2011

25 - 28 June 2012, Geneva, Switzerland

American LPPartner

We planned to visit Russia in 2007, but then something happened. And now we would like to get update on what is going on in Russia

June 2012

I took a speed reading course and read 'War and Peace' in twenty minutes… It involves Russia.

Woody Allen 

Middle class tripled in 5 years and wants more than money…

Annual nominal household's disposable income

# of people, m Changes in # of

people, 2005-10, %2005 2010

>$15,000 11,9 45,1 278%

$10,000 - $15,000 17,5 36,1 106%

$5,000 - $10,000 57,3 45,4 -21%

$3,000 - $5,000 33,7 16,4 -51%

<$3,000 21,0 <1 -99,9%

Total 142,8 142,9 0,1%

Source: McKinsey

10.12.2011 50K peopleBolotnaya square First big protest in 20 years Reaction to fraud in the Parliament elections (04.12.11) and announcement of Putin returning back to power

24.12.11 70K people

Sakharova StreetAfter Bolotnaya success

the movement grew

6.05.12 70K people Bolotnaya – 2One day before Putin inauguration, clashes with police

13.05.12 20K peopleGarden Ring “Control walking”To show that people could do protests without agreeing location with government

12.06.12 50K people Law passed limiting

demonstrations with fines up to $10-20K

Political pressure is rising, but revolution is not on the agenda…

Demography specifics of RussiaConcentration in Moscow and few big cities No protesting youth

Protesters are middle class and want Retain status quo Respect and security And better government services

Russian population density map

1983 YOB

1981-1982 extra state

support for

families with

children

2007 YOB

1941-45 YOB

World War II

1933-34 YOB

Famine 1932-1933

1937-39 YOB

1967-69 YOB

“Echoes of WWII”

1990-95 YOB

“Echoes of war”

Collapse of SU

Men Women

Thousand people

Age

Russian demography: protests as a conflict of generations

“Soviet” Generation: ruling class

“New Russia” Generation: middle class

Children of 1978-

1987 YOBGeneratio

n

Brasil Turkey China Russia-2011

Russia-2012

84

52

14

93

48

Q: Whether you think it applies, or does not apply, to your country/industry, or whether you don’t know?

Brasil Turkey China Russia-2011

Russia-2012

20

56

26

58

18

Corrupt practices happen widely% of applies

to

% of applies to

Corrupt practices

have increased because of economic downturn

One of protests’ results: corruption is going down

…if we’re not going to “blackball” China (more authoritarian and repressive than Russia), Brazil (arguably more corrupt than Russia) or India (corrupt, and also rather unhelpful on Iran), then there doesn’t seem to be any real reason to “blackball” Russia.

Mark AdomanisJournalist

My fellow Americans, I am pleased to tell you I just signed legislation which outlaws Russia forever… The bombing begins in five minutes.

Ronald ReaganSaid during a radio microphone test, 1984

Russian PE industry snapshot

EBRD Funds

Russia Partne

rs

NRG

Quadriga

Captive and semi-captive

New players

MintAuror

a

Da Vinci

Icon CP

Svarog

VTB

East CP

Wermuth

UralsibUCP

Alfa CP

Prometheus

Aton

Capman

Independent

Marshall

Quadro

Elbrus

BVCP

Rencap

Troika

Delta

Norum

RPEFUFG

Merged

Spin-off

Spin-off

Merged

Russian PE consistently outperforms

Source: Cambridge Associates, EVCA/Thomson Reuters, Bloomberg and EBRD

•EBRD tracked portfolio pooled end-to-end return, net of fees, expenses, donor grants and carried interest. Excludes property funds, and includes liquidated partnerships.

•** Pooled end-to-end return, net of fees, expenses, and carried interest. “The "Since Inception" figure represents the net pooled IRR since inception for funds formed between 1980 and 2009.

6,4%

8,3%

16,7%

25,0%

20,6%

32,3%

16,9%

15,0%

20,1%

EBRD PE Portfolio**

Cambridge EM VC&PE Index*

EBRD Russia/CIS PE Portfolio

Ten years Five years One year

Great prospects for next 20 years

#2 MCap growth10.2% forward 20-yr CAGR (#1 is China with 11.5%)

#2 Allocation growthFrom 1% to 3% in MSCI in 20 years

#6 GDPBigger than Germany and France in 20 years

#11 GDP growth But at least 30% GDP/capita higher than in countries with higher GDP growth

According to latest Goldman Sachs BRIC and N-11 economic research http://goo.gl/sx6Vb

Debt/GDP about 10% (#181 in world)

#5 Strategic investors targetAccording to UNCTAD survey after China, Brazil, India and US

46% of wannabe entrepreneursAmong people 20-29 years compared with only 29% for 30-47 years.

Russian economy is still very attractive

You should be not afraid of Russians, because they already started a lot of

companies in US

4 out of 10 USA largest companies listed on Fortune 500 rating were founded by immigrants or their children.

Did you know that these companies were started in Russia?

And there even more…

Biggest Infinity Dealer in the World and Nissan Dealer in Europe

12% of Nissan market in Russia

12 brands/24 dealerships in Moscow and in Central Russia

Current multiple 5X and 45% IRR on initial investment

21

NRG Portfolio Case Study: Genser

2007 2008 2009 2010 2011 2012E

803.0

1366.6

723.2999.0

1600.1

2177.4

26.7 65.2 44.6 56.1 62.7 73.6

Revenue, $m EBITDA, $m

NRG Portfolio Case Study: Begemot

#2 toy retailer in Russia

Mid/low prices

Growth in 2 years: 50 -> 200 retail outlets.

90% EBITDA growth

70% sales growth

22

Structured equity transaction summary

• Secured loan with equity kickers

• Board seat and veto rights

• Current return: 18%

• Exited IRR: 41%

Rising middle class drives the transformation of Russia

Russian PE consistently outperformed

Russia is #2 out of BRIC (poll on SuperReturn EM 2011)

Existing funds will be able to cherry pick projects

It takes time for LPs to change their attitude, but contrarians will be able to harvest good returns

Alexander Abolmasov aa@nrgc.comwww.nrgc.com

Summary

Come and visit “New Russia” to see the Growth yourself!