Russia's newest state fund made its first investment on Monday, buying a stake in Moscow's MICEX-RTS bourse to boost its IPO hopes and compete with big international centres like London for Russian company listings.
The $10 billion (6 billion pound) Russian Direct Investment Fund (RDIF), which is government funded but run by private equity specialist Kirill Dmitriev, is investing together with the European Bank for Reconstruction and Development. The pair is buying a total stake of 7.54 percent.
MICEX-RTS was valued at $4.5 billion in December when the two Russian exchanges combined, and at that value, the investment would be worth about $340 million. The announcement did not disclose the price but a market source said the investment was made at a small discount to the merger valuation.
Moscow has been trying to build itself as a global financial centre, but its ambitions have been undermined by the fact that many of Russia's companies go abroad to list their shares and raise debt.
A handful of companies have recently sought premium listings on the London Stock Exchange
We all know there is a massive potential for the Russian capital market and for a variety of reasons ... we are a long way from realising that potential, said Stephen Jennings, CEO of Moscow-based investment bank Renaissance Group.
This kind of investment ... can only help and frankly we need more of it, Jennings said in a telephone interview.
Under the deal, the RDIF, set up to attract foreign direct investment into Russia, will buy a 1.25 percent stake in the exchange, according to a press release.
It is making the investment alongside the European Bank for Reconstruction and Development (EBRD), which has a mandate to support ex-communist eastern Europe to make the transition to a market economy, which will buy a 6.29 percent stake.
This ... can only help in terms of trying to modernise the exchange, but also in opening up the debate about the role of the capital markets, said Jennings.
Capital flight from Russia reached $84.2 billion last year, the second highest ever. The World Bank recently forecast this should reverse after the March presidential election, which is expected to return Prime Minister Vladimir Putin to the presidential seat.
This is not only the first investment (from the RDIF) but it has come before the elections, said RDIF Chief Executive Dmitriev. It is an important confidence boost in the Russian market prior to the elections.
Russia's RDIF fund was created six months ago to give major foreign investors greater comfort in Russia's uncertain business environment and will be capitalised with $2 billion a year in state cash over the next five years.
It will invest on a risk-sharing basis in projects as long as its foreign partners at least match it, dollar for dollar.
The primary reason is this is a good investment and will generate very good returns for us, said Dmitriev.
Underlying that, following the (MICEX-RTS) merger, there are major cost and revenue synergies from the two exchanges. The basic investment case is it is a monopoly exchange in a growing market that will offer new products.
MICEX and RTS merged last year to create a unified platform with a view to floating in 2013.
At the time of the merger last year, the companies said the deal would create a 'one-stop shop' for trading in stocks, bonds, derivatives and currencies, and clear the way for further market reforms in 2012 including the creation of a central depositary.
The bulk of the MICEX-RTS trading is foreign exchange, with the remainder stocks, bonds and derivatives. The total volume of trading on the two markets was $3.5 trillion in 2010.
MICEX-RTS competes for listings against the London Stock Exchange and the NYSE-Euronext, which is currently awaiting a decision on whether it can merge with Germany's Deutsche Boerse.
Dmitriev said in a statement that the RDIF can also use its relationships with sovereign wealth funds and other investors to pursue additional pre-IPO investments in MICEX-RTS.
He said that the RDIF would expect to keep shares after the planned float although it may sell some in the IPO. The fund would want to remain an investor for 5-7 years, he said.
Other private equity firms could also be interested in taking an investment in MICEX-RTS ahead of the IPO, he said.
Among other private equity firms that have been considering investing in Russia -- or already made investments -- are Blackstone Group
(Reporting by Megan Davies; Editing by Douglas Busvine and Andrew Callus)