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NewRussiaGrowth Private Equity Advisors

2009

Alexander Abolmasov

Recent trends in Private equity and Hybrid financing in Russia

May I call you back? I am just in the middle of something.

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- Liquidity crisis-We expect second wave of liquidity crisis in 3-5 months

- Private equity trends

- Hybrid financing trends

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Credit crisis – problems with liquidity

- The amount of Russian corporate debt due in 2009 will be about $350bn out of $900bn outstanding:

- $200bn Russian bank loans

- $120bn external debt (syndicated loans and eurobonds)

- $27bn domestic bonds

-International debt capital (syndicated loans or Eurobonds) is accessible only to biggest Russian corporations

-24% of Russian Eurobonds are Gazprom, another 29% - VTB, Sberbank, TNK-BP, Gazprombank and Agricultural bank.)

- Mid-sized Russian companies have problems with access to their usual sources of debt :

- local bank loans

- domestic ruble bonds

Source: Central Bank of Russia

Source: Central Bank of Russia

Bank loans55061%

Ruble bonds455%

External debt 30034%

Bank loans

Ruble bonds

External debt

Russian outstanding corporate debt structure, $bn

up to 6 months

9%

6-12months27%

1-3 years29%

after 3 years35%

Bank loans term structure, %

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Russian Banking System – liquidity problems for next 2-3 years

- New money is not available from the banks

- State banks (all TOP 5 banks) share increased from 42% to 47% of total loans since August 2008.

- Overwhelming share of government support goes to state banks

- State banks prioritize large state companies

- Private banks have problems with capital, because of losses and NPL, which could reach 10-30% by the end of 2009.

Source: Central Bank of Russia, Sberbank, RenCap

Source: Central Bank of Russia

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Russian banking system capital and additional capital required to keep the current loan portfolio

Russian banking system capital

Additional capital required according to Renaissance forecast (real NLB rate 1Q09 -10%; 4Q09E -40%)

Additional capital required according to Sberbank forecast (real NLB rate 1Q09 -10%; 4Q09E -30%)

$bn

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Russian corporate loans outstanding $bn

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Credit crisis – Corporate ruble bonds market will almost cease to exist

Source: cbonds.ru

- Banks were main buyers of bonds, but now the liquidity dried up

- No new corporate bond issues since August 2008 apart from Gazpromneft and Russian RailRoads (expected in April 2009)

- Average duration of domestic ruble bonds is just 0.86 years

- For third tier issues only 0.45 years

Source: Micex emission documents, evaluation of Bank of Moscow

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Redemption Coupons Put option

The schedule of monthly payments of corporate sector*bn. $

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Ruble corporate bonds outstanding$bn.

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Credit crisis – interest rates rise

-The borrowing rate for companies in ruble terms has gone up from 10% to 25-30%

- The borrowing rate for companies in USD terms has gone up from 8-11% to 16-25%

- Average interest rate for ruble bonds are 26 -29% (for the third tier issues - 53%)

- Eurobonds rates are 10-25% in USD.

- Russian Government bonds YTM increased from 6% to 10%.

Source: cbonds.ru

Source: Central Bank of Russia

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Ruble lending rates in Russia

Interbank rate (Mosprime, 6m)

Corporate lending rate

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35%

45%

55%

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Corporate bonds rates in Russia

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- Liquidity crisis-We expect second wave of liquidity crisis in 3-5 months

- Private equity trends -Private equity funds have problems with access to new money

- Hybrid financing trends

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• Total AUM of the global PE industry has grown from $960bn in 2003 to just under $2.5trn in 2008

• Overhang of $250bn of private equity fund interests:

• Liquidity problem (28%)• Denominator effect (35%)

LPs want to reduce exposure to private equity

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PE still out-perform other asset classes

Money weighted all PE average IRR’s

Source: Preqin, Volume 5, Issue 1

Med

ian

retu

rn (%

)

• PE returns will decline, especially the 2005-2007 vintages

• Median return from PE outperforms equities and real estate

Median return by asset classes of public pension plans, as of June 2008

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Problems with distributions and valuations

• Distributions from PE funds reduced 3-5 times in 2008 compared with 2007

• Problems with valuation:

• Number of funds with no valuation change increased from 15% to 80%.

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How long does it take to raise the fund

Source: Preqin

Average months spent on the road to close a fund• Fundraising is expected to take longer: • less money on the market • increase number of funds • poor economic conditions.

• More focus: • past performance• fund manager reputation

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- Liquidity crisis-We expect second wave of liquidity crisis in 3-5 months

- Private equity trends -Private equity funds have problems with access to new money

- Hybrid financing trends -Hybrid financing funds is a temporary solution

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Russian specific:

• Distressed funds will have very risky investment profile.

• Mezzanine funds will replace banks, which stopped to provide new money.

Corporate Restructuring:

• Acquire defaulted assets at deep discounts to intrinsic value;• Swap debt for equity.

Distressed Portfolios: Acquiring “Bad Bank” Assets • Seek deeply discounted portfolio;• Acquire and restructure portfolios into tranches and opportunistically sell off portions of

portfolios; and • Manage “bad bank” assets sourced from western funds, banks and other investors.

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Example: Distressed debt strategy

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Volga River Credit Opportunity Fund

Senior Debt with Equity Kickers

Strategy•18-24 month senior loans in USD•Low volatility businesses•No distressed companies•Collateralized•$10-50m ticket size•15%+ current return•Equity kickers – 30%+ gross return

Target industies•Non-cyclical (food and beverages, telecoms)•Counter-cyclical industries (discounters, fast food)•Import-substitution (agriculture, pharmaceuticals) •Exporters (petrochemicals)

Deal terms to include•Strong security•Control over use of funds•Board participation and strong shareholder-type negative covenants•Amortization after 15-18 months