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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 EAST CAPITAL 2 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 EAST CAPITAL 3 Average annual performance of the Funds versus benchmark index since inception EAST CAPITAL 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 EAST CAPITAL 5 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 EAST CAPITAL 6 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 % EAST CAPITAL 7 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 EAST CAPITAL 8 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 EAST CAPITAL 9 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 EAST CAPITAL 10 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% EAST CAPITAL 11 Source: Eurostat, 30 30 25 25 25 20 20 20 15 15 15 10 10 10 5 5 5 0 0 0 EAST CAPITAL 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 12 Suggested agenda • Economic Outlook: stable growth • Scouting the Private Equity Landscape in Russia • Investment Opportunities in Russian and Eastern European Private Equity EAST CAPITAL 13 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 EAST CAPITAL 14 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 EAST CAPITAL 15 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% EAST CAPITAL 16 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. EAST CAPITAL 17 Suggested agenda • Economic Outlook: stable growth • Scouting the Private Equity Landscape in Russia • Investment Opportunities in Russian and Eastern European Private Equity EAST CAPITAL 18 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 EAST CAPITAL 19 Source: Central Banks, 2004-12-31 EAST CAPITAL 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 EAST CAPITAL 21 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 EAST CAPITAL 22 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 EAST CAPITAL 23 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] EAST CAPITAL 24