Vibrant Picture of Russian Investment Environment Painted by TIGER 21 Presenter Patricia M. Cloherty of Delta Private Equity Partners

New York (November 10, 2006) – Russia has repeatedly been identified as one of the world’s most important emerging markets. Yet western investors can be forgiven for being skittish about committing capital to the former Soviet Republic. Western news reports about mob-related corruption and political assassination, tight government control over numerous industries, and an inequitable judicial system still conspire to keep Russia beyond the acceptable risk level for even sophisticated investors.

Members of peer-to-peer investment group TIGER 21 recently received a very different report on the investment climate in Russia thanks to Patricia Cloherty, venture capital veteran, now Chairman of the Board and CEO of Delta Private Equity Partners. A former chairman of the National Venture Capital Association and one-time deputy administrator of the US Small Business Administration, Ms. Cloherty has more recently led private investment initiatives in a number of Russian companies and is about to launch a new $300 million Russian-focused  private equity fund for Delta. In her view, Russia is an entrepreneur’s paradise, with a nascent consumer economy eager to support fledgling, well-run businesses.  

Ms. Cloherty, whose prior international investment experience extended from South America to Southeast Asia, first became exposed to the Russian market in 1995 when she was appointed by President Clinton to the board of the U.S. Russia Investment Fund (TUSRIF). She became its chair in 1998 and CEO in 2003.

TUSRIF’s mission was to help promote a free market economy in Russia by providing investment capital to entrepreneurial companies across a broad range of business segments. To date, the fund has invested $329 million in 44 companies, leading to 21 successful sales exits, including15 in the last three years. It  also  expects to return the entire grant  to the US government – one of the first times that the U.S. government has ever received a payout from an  international development assistance program.

The success of TUSRIF led to the establishment of the first Delta Russia Fund, launched in June 2004 with $120 million in capital. Investors included institutions and individuals from the U.S., Western Europe, Japan and Russia. The fund has committed $72 million in nine companies, with four already sold and a fifth sale in progress, a remarkable liquidity pace for a fund that is barely two years old.

“Patricia Cloherty’s command of entrepreneurial and venture capital investing, and in particular her successful experience in the challenging Russian market, make her a dynamic presenter,” said Tommy Gallagher, president of TIGER 21. “Patricia had the foresight to invest actively in Russia when not even the so-called global firms would consider putting capital there and they are now approaching her for opportunities.” Mr. Gallagher noted that a number of TIGER 21 members have been investors in various international funds including the first Russia fund. He expects members will also participate in Delta Russia II. 
 
Ms. Cloherty noted how rapidly some of Delta’s early investments became dominant market forces, in large part by servicing the burgeoning consumer segment. Some prime examples:

• Delta Credit – The first Russian mortgage bank, Delta Credit controls a fifth of Russia’s $1 billion home loans market – a market predicted to be valued at up to $30 billion by 2010. The mortgage bank was sold to Societe Generale in 2005 for 2.5 times book value.
 
• Delta Bank – This credit card issuer was sold to GE Consumer Finance for 4.3 times book value in November 2004. GE was looking for a platform and growth area in the burgeoning credit card market in Russia (there are 250,000 credit cards issued in all of Russia).

• NCN (National Cable Networks) – Based in St. Petersburg, Russia’s leading cable television operator was sold by Delta in July 2005 for 3 times cost.

To be sure, some investment watchdog groups still caution against direct investment in Russia. Transparency International is among those that have thrown cold water on the Russian market because of concerns over corruption and economic volatility.

Ms. Cloherty notes, “If you wait for Transparency International to give its top rating, you will be looking at five percent returns, which is not the business we’re in. Our approach is finding a tolerable risk level for maximizing returns. Right now there is so much pent up consumer demand in Russia and we see robust growth continuing, regardless of the larger political uncertainty.”

“American investors need to look past petro-economics and Putin-politics, and see the enormous traffic crowding into Ikea and other popular retailers for quality middle-class merchandise,” she added. “That’s the real picture of the emerging Russian economy.” 

No doubt, more investors will be taking a look at Russia as its gross domestic product is expected to rise around 6.2% this year, compared with 2.7% in the euro zone, according to a forecast from the Organization for Economic Cooperation and Development. In fact, Moscow is now teeming with new business and economic activity. Thousands of new buildings are being constructed and parking lots of major retail centers are jammed packed with shoppers. 

Here are highlights from Ms. Cloherty’s talk with TIGER 21 members:

 No shortage of deals looking for funding: Delta focuses its investment efforts on deals in consumer goods including retail, as well as financial services, media, and telecom. In any given week, it may be presented with 10-15 deals. The average investment to date has been in the $5 million to $10 million range; which will surely increase with the launch of Fund II in 2007. Delta does not consider privatization deals or investments involving natural resources (oil and gas), real estate, start-ups, and pure technology plays.

 Or investors waiting for deals: Delta has already received inquiries by more than 70 institutional investors about its next fund.  Ms. Cloherty wants the Delta funds to be a beachhead for investment in Russia.

 Demographics support growth: Emerging companies are finding an increasing supply of young Russians returning for opportunities at home after receiving degrees in the west. Ms. Cloherty’s deputy in the Russian Fund is managing director Kirill Dmitriev, a Kiev native who previously worked at Goldman Sachs and McKinsey & Co.; he also holds a Harvard MBA. 

 Providing access to outsiders: Staffed by Russian nationals and benefiting from relationships built over more than a decade, Delta Russia Fund has access to deals that most US or British private equity firms would not even hear about. At the same time, there is such demand for Russian investments that one of the challenges Delta faces is holding onto its portfolio companies long enough to nurture them into mature entities.

 Quick turnaround time on investments: Just as Delta has no scarcity of potential investment targets, the firm has no shortage of interested strategic or financial buyers. Just one month after one recent investment, the Delta Russia Fund was approached by another private equity firm offering to buy out its stake. “There are many global investment banks and institutions hovering over the country, ready to swoop in at the first sign of entrepreneurial success,” Ms. Cloherty said.

 Improving corporate governance and transparency: Russia’s free-market economy has experienced growing pains, and the country’s regulatory bodies are learning on the go. To be sure, corporate financial reporting standards are not on par with those in western markets. As Delta has helped companies grow, it has also helped make their operations more transparent, which in turn makes them more attractive to potential acquirers.

 Putin brings stability: Since taking over from Boris Yeltsin in 1999, Russian President Vladimir Putin has brought stability to the country’s economy and has encouraged unprecedented wealth generation. Despite pockets of excesses caused by the country’s “Wild West” conditions after the fall of the Soviet Union, Ms. Cloherty now sees the Russian economy taking on modern contours. In fact, Russia’s national balance sheet has become very healthy, with a balance of trade surplus and strong commodity pricing that is the envy of the US.  

 The Russian private equity universe: Ms. Cloherty described three distinct sources of private capital in Russia, including local pools of investors and western-based funds, as well as international financial institutions such as the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD) and The Netherlands Development Finance Company (FMO). The latter group, which often have a development mission, were traditionally the first providers of debt and equity financing. Their role is slowly diminishing as other private equity investors warm to the market.

 Protect investment, but no hard-line: Delta does not insist on control positions, but the firm does build in elements of control, such as being able to remove management for non-performance. Delta also typically takes a seat on the boards of companies they invest in.

 Fostering investment climate: Delta is also helping to bring stability to the Russian private investment market. The firm joined with six other international investors to form the Russia Venture and Private Equity Capital Association, a trade group. In addition,  TUSRIF, Delta’s first fund, founded the U.S. Russia Center for Entrepreneurship (CFE) in 2002, to provide Russian entrepreneurs with technical and educational assistance.