Good company for companies 951 - p. 1

Investment Opportunities in RussiaJan Dewijngaert, Gimv March 2009

Good company for companies 951 - p. 2

Russia: Economic and Business Outlook

Serious deterioration expected this year:

Source: Economist Intelligence Unit

2008 2009 2010

GDP 5,6% -3,0% 1,5%

Private consumption 11,4% -2,5% 1,2%

Fixed investment 10,3% -7,0% 2,8%

Real wages 10,5% -2,5% 0,0%

Inflation 15,1% 10,0% 8,0%

Budget surplus/deficit 3,6% -7,5% -2,8%

Current account surplus/deficit 5,9% -3,0% 0,2%

Rouble/$ (year end) 29,4 37,0 37,5

Good company for companies 951 - p. 3

Russia: Economic and Business Outlook

To put things into perspective:

• The situation in the rest of the world is not any better

• The outlook in CEE has sharply deteriorated in recent weeks

• Rouble and oil prices seem to stabilise

• Russia could quickly rebound (cfr. also 1998 crisis)

Good company for companies 951 - p. 4

Russia: Economic and Business Outlook

Why the recession in Russia could be over shortly:

• Oil price may rise to 45-55 $/barrel in 2009

• No Rouble crash expected

• Lower Rouble will improve competitive position of local procedures

• Increased public spending supported by high reserves

• Low level of household and government debt

Good company for companies 951 - p. 5

Russia vs. USA

Debt/GDP 2009F

0

20

40

60

80

100

120

140

Government Corporate Household Financial

%

Russia USA

Source: Troika Dialogue, Jan 2009

Good company for companies 951 - p. 6

Current vs. ’98 crisis

There are striking similarities…

• Stock market crash

• Flight of foreign capital

• Devaluation of the rouble

• Lack of bank finance

• Budget and current account deficits

• Negative GDP growth

• Economy still heavily dependent on oil/gas and minerals

Good company for companies 951 - p. 7

RTSI vs. DJ EURO STOXX 50

0

1000

2000

3000

4000

5000

DJ

EU

RO

ST

OX

X 5

0

0

500

1000

1500

2000

2500

3000

RT

SI

DJ EURO STOXX 50 RTSI

Good company for companies 951 - p. 8

Current vs. ’98 crisis

… but also important differences

2009 1988

Government debt +/- 6% of GDP Very high

Corporate debt +/- 500 bn $ +/- 50 bn $

Foreign currency reserves +/- 380 bn $ < 20 bn $

Unemployment Relatively modest High

OligarchsForced to restructure,

consolidate or sellEmerged stronger

Good company for companies 951 - p. 9

Deals in Russia (July 2007 – August 2008)

0 1 2 3 4 5 6 7 8 9

Services (other)

Real estate & development

Transportation

Retail & distribution

Financial services

ICT

Horeca

Food & drinks

Construction materials

Manufacturing

Energy

Source: Deloitte

Good company for companies 951 - p. 10

Deals in Russia vs. CEE (July 2007 – August 2008)

Source: Deloitte

0 5 10 15 20 25 30

Services (other)

Real estate & development

Transportation

Retail & distribution

Financial services

ICT

Horeca

Food & drinks

Construction materials

Manufacturing

Energy

%

CEE Russia

Good company for companies 951 - p. 11

Private Equity in Russia

• Historically, PE returns in Russia have been very high

• The period directly following the ’98 crisis has proven to be fantastic from a PE perspective

Net returns as at 31 Dec 2006Three years

Five years

Ten years

Since inception

Russia/CIS (*) 57,5% 21,7% 13,4% 12,9%

Central & South-eastern Europe (*) 36,2% 14,9% 9,6% 9,6%

EVCA all private equity 13,0% 5,4% 11,0% 10,8%

(*) Net returns for EBRD’s portfolio of funds

Good company for companies 951 - p. 12

Type of investment: Russia vs. CEE

Source: RVCA (2006), EVCA (2007)

Russia CEE

Early stage 11,4% 12,9%

Expansion 75,6% 4,4%

Turnaround/Replacement 12,9% 4,4%

Buyout - 78,8%

Good company for companies 951 - p. 13

Type of exits: Russia vs. CEE

Source: RVCA (2006), EVCA (2007)

Russia CEE

IPO 6% 3%

Trade sale 88% 56%

Buyback - 6%

Secondaries 6% 24%

Other - 11%

Good company for companies 951 - p. 14

Private Equity in Russia

New opportunities are arising…

• Downturn in the business cycle

• Marginally feasible businesses will disappear

• Best performers stay in business and find great expansion opportunities…

• …via organic growth and M&A

While at the same time:

• Less competition from oligarchs, bank captives, global PE houses and hedge funds

• Valuations are becoming more attractive

• The number of leads is rising

This should result in attractive returns

Good company for companies 951 - p. 15

Valuation Multiples (EV/EBITDA)

Company Industry 2007 2009E

LUKOIL Oil & Gas LKOH 3.52 2.35

Gazprom Oil & Gas GAZP 5.65 3.41

Uralkali Chemicals URKA 23.44 3.82

Silvinit Chemicals SILV 17.85 4.31

Magnit Consumer/Retail MGNT 14.31 5.55

Wimm-Bill-Dann Consumer/Retail WBD 8.42 4.63

Aeroflot Infrastructure & Transport AFLT 5.48 4.22

Source: Antanta Capital

Good company for companies 951 - p. 16

Deal flow in Russia

0

10

20

30

40

50

60

70

80

J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

# leads

2007 2008 2009

Good company for companies 951 - p. 17

ERF portfolio: Strata Partners

Sector: Fitness

Investment date: Feb 2007

Transaction type: expansion

Strata PartnersStrata Partners

Company Background:

• 3rd largest & fastest growing fitness clubs operator in Russia;

• 2 brands, 33clubs as of 1Q09, good locations;

• Target customer groups by monthly income per person: $2,000+ for Orange Fitness, $1,000+ for City Fitness;

• Company historically has a low bank leverage

• Strategy adopted to focus on own clubs and only use franchise at remote locations

• Launched 19 new clubs after investment, approaching 2 top players in Russia.

• Corporate governance and financial reporting were improved.

• ERF bought out the third shareholder together with management.

• Exit discussions advanced, but unclear if realized given financial crisis.

Developments since investment• Rapidly growing industry, but penetration still low: years of

high growth ahead;• Business idea: develop 2 strong brands in top & medium

segments, create strong base in Moscow and expand in regions, with 50 clubs by 2010;

• Strong, highly motivated and experienced management;• Exit strategy: trade sale

Investment Rationale:

Good company for companies 951 - p. 18

ERF portfolio: BASK

Sector: Outdoor wear

Investment date: Oct 2007

Transaction type: expansion

BASKBASK

Company Background:

• BASK Group is the leading local player in the Russian outdoor wear and equipment market.

• The Group manages the clothing and accessories brand BASK. In addition, well reputed international brands are distributed.

• The Group has its own retail chain with 6 stores operating in Moscow, which sell proprietary brands, international brands distributed by the Group and other outdoor merchandise.

• Introduction to Western outdoor retailers to advice on the Group’s retail activities sourcing & overall strategy.

• Three new retail outlets opened: Moscow, Nizhniy Novgorod & a web-store. Most likely a store will be opened in St Petersburg shortly.

• Corporate governance and financial reporting system have been improved.

• External consultants from the field attracted.• Company should be able to weather the storm

even with little or no bank finance available

Developments since investment• Both the sporting goods and outdoor markets have shown

impressive growth in recent years and similar performance is expected in the coming 5 years.

• The two founders have a long-term experience in the industry.

• The objective is to make the Group the undisputed №1 local player in the Russian outdoor clothing and equipment market.

• The main exit strategy is a trade sale.

Investment Rationale:

Good company for companies 951 - p. 19

ERF portfolio: PTI

Sector: Ingredients

Investment date: Oct 2008

Transaction type: expansion

PTIPTI

Company Background:

• PTI is the leading Russian producer and distributor of soy products, spices and flavourings, which are sold to food processors in Russia and the CIS.

• The Company has 20 distribution centres in Russia and the CIS and sells both its own brands and imported ingredients.

• The Company has a customer base of more than 2000 clients in the meat, dairy, softdrinks and confectionery industries .

• Legal restructuring has been completed & the investment was executed recently.

• Started working on corporate governance and financial reporting

• Implemented a “cash quality of earnings” policy, which should make it possible for the company to execute its investment plan with little to no bank finance

Developments since investment• The food & beverages sector in Russia has shown rapid

growth recently and is expected to continue growing the coming 5 years

• End-consumers are expected to get more quality & health conscious, whereas increased competition forces producers to pay more attention to product appearance, taste, etc. while keeping costs low.

• The Company has the potential to become the undisputed №1 in the industry in Russia and the CIS.

• Exit strategy: trade sale or IPO.

Investment Rationale: