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Russia and Eastern European markets:
opportunities in the “new” European
Economies
Kestutis Sasnauskas, East Capital Private equity
Private Equity World Middle East 2005
EAST CAPITAL
East Capital in brief
• 2 billion USD under management in
open ended mutual and private equity
funds
• 60 employees
• Offices in Stockholm, Moscow and Paris
• 250.000+ investors
• 7 year track record
• Independently owned and managed
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Our Toolbox
UCITS funds
Russia & CIS
Baltic States
Balkans
Central Europe
East Capital
Russian Fund
East Capital
Baltic Fund
East Capital
Balkan Fund
East Capital
Eastern European Fund
Offshore funds
East Capital
Bering Russia Fund
East Capital
Bering Ukraine Fund
Private Equity
East Capital
Amber Fund
Explorer Property FundBaltic States
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Average annual performance of the Funds versus benchmark index
since inception
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Performance in EUR
4
Suggested agenda
• Economic Outlook: stable
growth
• Scouting the Private Equity
Landscape in Russia
• Investment Opportunities in
Russian and Eastern
European Private Equity
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Reasons to invest in Eastern Europe & Russian private equity
• Strong underlying economic growth
• Competitive advantages in the enlarged
EU
• Attractive valuations
• The only way to access rapidly growing
sectors of the economy
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U k r a in e
K a z a k h s ta n
G e o r g ia
R u s s ia
Lith u a n ia
Tu r k e y
La tv ia
E s to n ia
P o la n d
B u lg a r ia
B o s n ia - H
R o m a n ia
S lo v a k ia
S e r b ia - M
M a c e d o n ia
S lo v e n ia
C r o a tia
H u n g ary
C zec h Rep .
USA
E u ro zo n e
GDP increase (%), 2004
Eastern Europe – Chinese-style economic growth
1 4 ,0 %
1 2 ,0 %
1 0 ,0 %
8 ,0 %
6 ,0 %
4 ,0 %
2 ,0 %
0 ,0 %
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What happened before?
GDP increase before entering EU
135
130
125
120
Estonia
Lithuania
Latvia
115
110
105
100
-4 yrs
-3 yrs
-2 yrs
-1 yrs
EUmembership
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What happened later?
GDP increase after entering EU
135
130
125
Spain
Portugal
Estonia
Latvia
Lithuania
120
115
110
105
100
EU
+1 year
+2 yrs
+3 yrs
+4 yrs
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Case study: Car industry in Slovakia
•
A school-book study on how to attract FDI
•
Slovakia may soon produce more cars per
head of population than any other country in
the world
– Volkswagen: 300,000 cars/year
– Peugeot-Citroën: 300,000 cars/year
(production to start in 2006)
– Kia Motors: 200,000 cars/year (production to
start H2 2006)
•
What made car manufacturers start production
in Slovakia?
– Tax reforms
– Competitive cost structure
– Full access to EU markets after May 1 2004
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Flat taxes in Eastern Europe – some examples
Personal income
tax
Corporate income
tax
Estonia
24%
0% (24%)
Latvia
25%
15%
Slovakia
19%
19%
Romania
16%
16%
Serbia
14%
14%
Russia
13%
24%
Ukraine
13%
25%
Georgia
12%
12%
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Source: Eurostat,
30
30
25
25
25
20
20
20
15
15
15
10
10
10
5
5
5
0
0
0
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B u lg a ria
R o m a n ia
S lo va k ia
P o rtu g a l
G re e c e
Central Europe
S p a in
H u n g a ry
Cze ch Re p.
P o la n d
N e th e rla n d s
Nordic vs. Baltic countries
F ra n c e
G e rm a n y
Lith u a n ia
La tvia
E s to n ia
F in la n d
D e n m a rk
Sw e de n
Wage differences between Eastern and Western Europe
The EU “cost leaders”
30
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Suggested agenda
• Economic Outlook: stable
growth
• Scouting the Private Equity
Landscape in Russia
• Investment Opportunities in
Russian and Eastern
European Private Equity
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Why private equity in Russia?
•
There are approximately 3 million registered
private companies in Russia
•
250 companies are listed on RTS
•
75 companies have depository receipt
programmes
•
90% of the index is in oil& gas, utilities and
telecom
the only way to access large part of economy is through private equity funds
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Private equity in Russia
•
Few private equity players on the market mainly
distributed in two groups:
– Local financial industrial groups
– Institutional investors (foreign capital)
•
Institutional funds are generally small: 15 – 400
MUSD in size.
•
Debt financing is still expensive, but…
•
…rapidly improving macroeconomic situation
resulting in decreasing cost of financing
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B u lg a ria
M a c e d o n ia
La tvia
R o m a n ia
S lo ve n ia
C ro a tia
P o la n d
Lith u a n ia
T u rk e y
R u s s ia
E s to n ia
Sw e de n
MCAP as % of GDP
140%
120%
100%
80%
60%
40%
20%
0%
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IPO activity is picking up
IPO volume in Russia 2000- 2005
V o lu m e (m illio n U S d o lla rs )
4 500
4 000
3 500
3 000
2 500
2 000
1 500
1 000
500
0
2000
2001
2002
2003
2004
2005
Within the next year we expect approximately 60 IPOs with a total value
exceeding USD 10 bn in Central and Central & Eastern Europe. Main activity in
Moscow and Warsaw.
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Suggested agenda
• Economic Outlook: stable
growth
• Scouting the Private Equity
Landscape in Russia
• Investment Opportunities in
Russian and Eastern
European Private Equity
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Investment opportunities
• Possibilities of privatisations of extremely undervalued
assets are already exploited
• Focus on exposure to domestic economy
–
–
–
–
Consumer goods and retail
Financial sector
Real estate & construction material
Retail & logistics
• Strong cash flows
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Source: Central Banks, 2004-12-31
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R o m a n ia
S e rb ia
R u s s ia
Lith u a n ia
B u lg a ria
P o la n d
T u rk e y
H u n g a ry
S lo v e n ia
E s to n ia
La tv ia
C z e ch Re p.
C ro a tia
G re e c e
E u ro z o n e
Banking Assets in % of GDP (2004)
300%
250%
200%
150%
100%
50%
0%
20
Growth of corporate & retail market in Russia
140%
120%
100%
80%
60%
40%
20%
0%
R e ta il d e p o s is
C o rp o ra te d e p o s its
2003
Source: CBR
R e ta il le n d in g
C o rp o ra te le n d in g
2004
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Property market opportunity in the Baltics
Yield rates on A-type commercial property
•
•
The Baltic property market is still
underdeveloped in a Western European
context, characterized by limited size, low
transparency and low liquidity…
…but, the market offers:
–
–
–
–
•
9-12%
5-7%
attractive yield rates
low interest rates
high demand for modern properties
declining vacancy rates…
….and strong fundamentals for value
growth for investors with local knowledge
and relationships
Baltic states
Western Europe
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Property market opportunity (cont.)
•
•
•
Significant gap (5-7%) between yield rates
and mortgage rates
Opportunity to make 15-25% annual
equity returns based on yield only
Gap between yield and mortgage
rates*
8%
7%
6%
5%
4%
3%
2%
1%
0%
In addition, market fundamentals indicate
good potential for value growth as well:
– Strong economic development
– Limited availability of office and retail
space
– Conversion process to Western European
levels
Tallinn
2000
Furthermore, low correlation with equities,
provides an attractive diversification
possibility
2002
Vilnius
2003
2004
Property price development*
250
200
150
100
50
•
2001
Riga
Tallinn
Riga
Vilnius
0
2000
2001
2002
*Figures for A-type commercial property
2003
2004
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Contacting East Capital
Head office
East Capital
Kungsgatan 30, Norra Kungstornet – Box 1364
SE-111 93 Stockholm, SWEDEN
Telephone: +46 8 505 88 500, Telefax: +46 8 505 88 508
www.eastcapital.com
Kestutis Sasnauskas, CEO, East Capital Private Equity
Direct phone: +46 8 505 88 515
Email: [email protected]
Carl Meurling, East Capital Asset Management AB
Direct phone: +46 8 505 88 519
Email: [email protected]
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