The Kremlin as a Co-Investor

Ashby Monk

If you were looking to partner with someone for private equity investments in Russia, who would be the top of your list? Any quick thoughts?

Well, if you said, “The Kremlin” then you chose wisely. What’s that? Why do you need the Kremlin on your side? Well how’s about we ask Russian President Dmitry Medvedev for some insights on the matter:

“I have already given my opinion on the investment climate in this country — it is very bad … Corruption remains a factor.”

OK. So the investment climate remains dire. What to do? It may seem a bit obvious, but how about finding a way for private equity investors to actually partner with the Kremlin as a co-investor.

Brilliant idea. Sold. Called the Russian Direct-Investment Fund, the Kremlin hopes that its $10 billion investment will attract upwards of $90 billion in foreign investment over the next five years. And, significantly, it appears the co-investment idea is having the intended effect, as the Abu Dhabi Investment Authority, China Investment Corporation, Kuwait Investment Authority and Korea Investment Corporation have all apparently been to Moscow in the past two weeks to meet with Vladimir Putin and talk about participating in the new SWF.

And why are these funds interested? According to one source from a SWF interested in investing in the RDIF:

“We perceive there will be no guarantee, but we expect there will be strong support on many areas by the Russian government…”

Put simply, the impetus for the new sovereign fund is to assuage the fears of foreign investors by creating a government-backed vehicle that they can participate in. For example, the CIC’s Lou Jiwei has reportedly said that the RDIF offers rich investment opportunities. He has also said that Chinese investors and companies should seek to cooperate with Russian governmental institutions to overcome the risks of investing in Russia:

“The Direct Investments Fund could be a flexible way to attract foreign investment, which can help overseas investors to work together with the Russian government, to find and assess the projects they need in Russia.”

So the backing of the Kremlin is probably the driving factor here, as individuals who might otherwise engage in corrupt practices with private investors wouldn’t dare mess around when the Kremlin is a co-investor.

Still, that’s not to say there aren’t other factors attracting these investors to the RDIF. For example, the new SWF will be headed up by a very talented fund manager: Kirill Dmitriev, founder and Managing Partner of Icon Private Equity. Mr. Dmitriev has a long track-record of successful private equity investing in Russia. From 2005-2006, he served as the Chairman of the Russian Venture Capital and Private Equity Association. In addition, he has also done time at Goldman and McKinsey as well as attending Stanford and Harvard. Basically he’s got the pedigree that institutional investors love. No doubt he’s an appealing part of the RDIF value proposition.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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