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Impact Investing

IPE special report May 2018

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Renaissance Asset Managers (RAM) has had a great run since it was founded as part of Renaissance Group, the Moscow-based financial services firm, in 2003.

Renaissance Capital, the investment bank founded in 1995 as the core of the group, was fully offloaded by its founder and CEO Stephen Jennings in November 2012, leaving RAM ruling the roost alongside Rendeavour, its African urban development business, Renaissance Credit Nigeria and Renaissance Real Estate.

And RAM itself has gone through quite a transformation over the past three years. It was established as primarily a Russia and Eastern Europe-focused investor for domestic wealth-management clients – and that was how founding CEO Andrei Movchan wanted to keep it. Jennings disagreed: he wanted it to tackle new markets and expand its client base internationally. In 2009, Movchan left with a significant part of his team – and RAM re-built.

A new CEO was in place by 2012. The choice of Barbara Rupf Bee, ex-global head of institutional sales at HSBC Global Asset Management – as well as one of her first moves, hiring PIMCO’s head of marketing for EMEA Mary Zerner – reflects Jennings’ ambitions. Luxembourg UCITS had already launched in 2010 to complement the existing Russia-domiciled and offshore vehicles.

But while the range of products has grown, RAM is neither attempting to become a ‘GEMs’ manager nor abandoning its Russia and Eastern Europe roots. Indeed, its new UCITS range includes two Eastern-Europe and one ‘Ottoman’ (Turkey-plus) fund acquired from Griffin Capital Management. Its Russia-focused products span an infrastructure equities fund to Russian fixed income through distressed assets and private equity, to an infrastructure projects joint venture started with Macquarie in 2007.

There are four Emerging Europe UCITS, a sub-Saharan fund and a pan-Africa fund, a global frontier markets fund, balanced asset allocation funds – even an offshore Zimbabwe fund. On the drawing board are plans in African infrastructure and debt, rouble bonds and Turkish equities. The one concession to ‘GEM’ – emerging market dividend yield – launched in December.  

And the clientbase? “It’s a bit of a two-tier approach,” says Rupf Bee. “In Russia, we already have an institutional practice for insurance companies and pension funds, as well as foreign insurance companies with ‘trapped cash’ in Russia, and that local-to-local approach works well for us in Russian fixed-income and equities.”

While the focus in Western Europe is initially on institutional and wealth-management fund platforms the 6-9% yields available at the short end of Russia’s curve are playing well for its fixed income products before a range of institutions.

“Eastern Europe and Africa are niche allocations for the pensions world, but we are starting to hear enquiries from consultants,” says Rupf Bee. “And the Africa and global frontier opportunity attracts more attention than Russia and Eastern Europe now, perhaps because investors joined the BRICs trend late and are anxious to be positioned early for the next big thing.”

It was the same thinking that led the turn towards Africa a decade ago with the Rendeavour, consumer credit and real estate businesses – at first glance an odd move for a Russia specialist.

“There was really a pretty concerted effort to find the next big pot of money in the world,” says CIO Plamen Monovksi. “But we are also realistic about where our strengths lie.”

That explains why RAM won’t become a run-of-the-mill GEMs player – but also the focus on Africa. Remember, when Renaissance was founded, Russia was hardly one of the mighty BRICs.

“Stephen came to Moscow not long after tanks were firing on the Kremlin and we had food shortages,” says Monovski. “It wasn’t obviously a good time to be setting up an investment bank. And during 1997-98 it wasn’t obvious to stick around, either. But the leadership knew that the greatest upside is available when things are most difficult simply because you face so little competition.”
Political stability, the weak rouble and the steady path to $100/bbl oil fuelled an almighty Russian recovery. Renaissance not only generated riches for its clients, but also gleaned insights into how to do so in difficult places.

“They began to look for somewhere similar to mid-90s Russia,” says Monovski. “Somewhere large, with an under-penetrated consumer sector and the potential for restructuring to take the state out of the economy – and somewhere ‘scary’. They took every marginal dollar from Russia and started investing it in sub-Saharan Africa.”

They saw a lot that they recognised in these frontier economies – partly thanks to the Soviet legacy on the continent and partly thanks to a shared entrepreneurial culture and the importance of natural resources. That gave them the confidence to look past another thing that Russia and Africa had in common – dreadful press worldwide – that explains the lack of long-term capital outside that of the African Development Bank, the World Bank and China.

“We saw the same thing with the global investment banks in Russia in the 1990s – they only want to be involved when things are going well,” says Monovski. “Even the multinationals that have stayed the course in Africa for years or even decades haven’t really rolled out significant operations.”

But while other parts of the group – notably Rendeavour – put permanent capital to work, RAM itself offers closed-ended funds investing in Russian private equity and infrastructure but not, as yet, in Africa. Its UCITS vehicles invest purely in public markets. How does this fit with the ethos of taking long-term positions in places with scant competition?

“The history of emerging markets shows that public markets open quite early in the process of development – and the public exchanges in Africa specifically are actually quite old,” Monovski explains. “Private markets are attractive, and we do have plans there. But public markets offer enhanced governance. In Nigeria, for example, the local pension fund community, led by Shell, is a guardian of minority shareholders’ interests. Just as many companies dual-list in Moscow and London, so we see companies dual-listing in Nigeria and London.”

Moreover, when the fast money cut and ran in 2008-09, it left public markets offering much keener value than private markets, a rich opportunity for pioneering contrarian investors: “We bring a long-term horizon to investing in franchises with considerable ‘moats’, where management has got ‘religion’ and put the fate of the business in their own hands rather than at the mercy of the business cycle, and where we are protected through valuation,” says Monovski.

Businesses like this exist in surprising numbers in frontier markets, building local dominance precisely because the boards of the global titans in their industries only dare to invest there in the good times. In Africa, Monovski picks out Dangote Cement, with its unassailable local footprint, pan-African potential, rigorous cost management and excellent investment record.

In Eastern Europe he likes Polish supermarket chain Eurocash, whose growth and cash-flow management compares well even against the formidable and better-known Bedronka.

From RAM’s Ottoman fund he picks turnaround opportunity Şekerbank, unloved after re-emerging from ownership by bankrupt Kazakh bank BTA. Although well-positioned to exploit its relationships with the thriving Anatolian small-business community, it is bad at cost-management. Some obvious restructuring would transform its low ROE to the upper-teens, says Monovski, anticipating 80% upside for the stock.  

This combination of local leaders and cheap value opportunities, against the background of continuing economic growth, requires a re-assessment of relative risk. Renaissance has been weighing these risks for 17 years – and now hopes the world’s institutional investors will follow.

“Emerging markets have been under the China drag,” Rupf Bee concedes. “But look at world valuations: Russia is super-cheap, just one up from Pakistan; look at Turkey, even after recent moves; look at China. A re-thinking needs to happen about the boundaries between our definitions of emerging and developed markets – and we think investors are starting to see it.”

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