The former head of the Investment department at MDM bank, Alexey Panferov, has founded NRG Advisors company to manage private equity funds. Greeting Mr. Panferov’s decision, his competitors nonetheless believe that this ambitious financier could encounter problems.

In the West, investment bankers often move to private equity funds. For example, Jerome Kohlberg and George Roberts, founders of the famous private equity fund in America, Kohlberg Kravis Roberts, worked at investment bank Bear Stearns prior to starting on their own.

In Russia, Alexey Panferov was not the first to decide on such a drastic career change. In the summer of 2004, the new private equity fund, Renova Capital, was founded under the leadership of Oleg Tsarkov, ex-director of the Investment banking department at Troika Dialog. Within a year, then Mr.Panferov’s colleague at MDM Bank, Konstantin Malofeev, had founded another private equity fund, Marshall Capital Partners.

“Investment banking is an extremely limited product line, though a very interesting one. It entails intermediation between a company and an investor. Managing private equity funds is also intermediation. But in this case it refers to long-term capital that is not allocated for a specific deal but rather entrusted to a management company with credible prospects of growth,” explained Alexey Panferov. “This is not pure intermediation but more of a long-term game”.

However, Alexey Panferov did not make his decision to play overnight.

Personal profile
Alexey Panferov was born in 1970. In 1993, he graduated from the Moscow Institute of Radio Engineering, Electronics & Automation (MIREA); and two years later the Moscow Institute of International Business attached to the Russian Foreign Trade Academy. Almost immediately after graduating from the MIREA, Mr. Panferov was appointed deputy commercial director of that institute. His next employer was Bank Zenit where Mr.Panferov reached the position of head of the investment department, which he himself played active part in creating. In March 2002, he moved to the similar position at MDM Bank; and in June 2002 he was appointed deputy chairman of the board. Officially, Mr. Panferov resigned from the investment department and chairmanship of MDM Bank in July 2006.

Personal development woes
Alexey Panferov first thought about changing his business two years ago. “Where could I progress from the level of deputy chairman of the board heading a very interesting subdivision,” reflected Mr.Panferov, “to become the board chairman?” However, this is a more representative role because when managing several thousand people you cannot spend time on deals, and I am not really interested in becoming solely a manager, I prefer to be both manager and businessman”.

In the summer of 2004, Alexey Panferov was considered one of the most likely successors to Vladimir Rashevskiy, who resigned from the position of chairman of the board at MDM Bank, moving to the Siberia-Ural Energy Company (SUEC). In the past, Mr.Rashevskiy had also managed investment operations. Being promoted in 2002, he lured Mr. Panferov from Bank Zenit, delegating to this new and ambitious expert the leadership of his own department. According to tradition, Mr.Panferov would inherit the subsequent position of Mr. Rashevskiy and became the president of the bank. Especially as it was due to Mr. Panferov that this department at MDM Bank, which previously had specialized mainly in making deals for industrial companies affiliated to the bank, had become a full-scale competitor of such big players in the domestic investment business as Renaissance Capital and Troika Dialog. IPO of Irkut Corporation, held in March 2004, was the moment of fame for Panferov’s team. The company that was dealing neither in primary resources, nor in consumer goods (most demanded by investors sectors of Russian economy), raised $127 million through IPO.

However, the owners of MDM Bank, Andrey Melnitchenko and Sergey Popov, as many other domestic bank owners, were eager to sell their bank. Evidently, they did not think that Mr. Panferov, the investment banker interested in cutting deals, possessed the administrative talents required for the bank presale preparations. Andrey Saveliev, the somewhat pedantic head of the banking products division, became the chairman of the board. Prior to coming to MDM Bank, Mr. Saveliev had worked at EBRR and knew very well the tomes of world financial bureaucracy, and thus had to understand the potential needs of a strategic investor.

The new chairman of the board considered that the bank had to be “institutionalized”. As he thought, this meant reduced dependency on “specific managers”. It soon became evident that Alexey Panferov and his team, to put it mildly, did not always follow Saveliev’s concepts. In investment banking, the personnel means a lot if not everything. Without the “personal factor”, which Mr.Saveliev wanted to minimize, nothing can get done. “You cannot use a conveyor belt approach in quality investment banking,” asserted Alexey Panferov. “Every team member must bring his own creativity and be both an entrepreneur and a team player at the same time.”

Within less than a year from the change of the bank’s management, key experts who organized the IPO of Irkut, including Konstantin Malofeev, quit Panferov’s department. “Shareholders reduced their risks which correspondingly affected the opportunities for new deals”, explained Konstantin Malofeev concerning the reasons for his resignation from MDM Bank. However, there is another explanation going around: the team who organized the IPO was reputedly dissatisfied with the award fee paid by the bank’s owners and decided to forsake their niggardly employers.

In an attempt to avoid losing the whole team, Mr.Panferov requested Andrey Melnitchenko and Sergey Popov to grant full autonomy to his department. MDM Bank’s owners were against such disintegration of the bank, already fraught with considerable depreciation of its financial assets. The situation was further complicated when Andrey Saveliev tried to separate the retail division, which was also very important for MDM Bank’s capitalization.

In one of its previous issues, the ‘Secret of the Firm' (SF) described this collision in detail (see No.48/2005). №48/2005). To prevent MDM Bank from collapse, in late 2005 the shareholders had to cancel the contract with Andrey Saveliev. And in February 2006, Alexey Panferov informed his employer of his resignation.

By that time the position of chairman of the board at MDM Bank was again vacant. Melnitchenko and Popov started negotiations with the ex-director of Raiffeisen Austria, Michel Perhirin. But Mr. Panferov, according to his colleagues, decided even as early as the autumn of 2005 to follow in the footsteps of his previous subordinate Konstantin Malofeev and change from investment banker to investor.

No middle man
“Successful deals are impossible without thorough investigation of a client’s business,” said Alexey Panferov. “In fact, you re-invent someone else's business, trying to make the company more transparent for the capital market. You run a considerable risk to your reputation by issuing securities for a client. Why then can’t you take the next step and become an investor taking part in the generation of added value?”

Besides subjective factors that made Mr. Panferov change his field of activity, there were some objective pre-requisites to striving for transformation from investment intermediary to beneficiary. Alexander Vinokurov, Chairman of the Board at KIT Finance, noted that today the commission fees obtained by Russian investment banks are considerably lower. On the other hand, more and more often domestic clients resort to the services of foreign financial institutions, such as Morgan Stanley and JP Morgan, which have much better opportunities to sell securities. In particular, that is why mandates for the IPO's of Russian companies go to western financiers. So, Alexander Vinokurov believes that “it is much more profitable to take the role of a buyer of Russian assets than that of a seller.”

At the same time, experience in investment banking can give a serious competitive edge to the manager of a private equity fund,” thinks Oleg Tsarkov. “Firstly, investment bankers are expected to chase a client,” adds the head of Renova Capital. ”We will not relax and wait for projects. Secondly, after working at a bank we have many connections. And finally, ex-investment bankers have a better understanding of specific risks in Russia, know how to minimize them, and are able to make a deal quickly; private equity funds with international shareholders need twice as much time. Generally, portfolio companies do not have enough time, they need to grow”.

The results of “investment banking” fund operations indirectly confirm what Oleg Tsarkov has said. During their two year existence, Renova Capital has invested in six companies. The fund’s deal to buy control in Corbina Telecom was structured as a leveraged buy out. Before that, Russian private equity funds, unlike their American counterparts (e.g. Kohlberg Kravis Roberts), have endeavored to get along without borrowed funds.

The portfolio of Marshall Capital Partners is much more modest as yet. Konstantin Malofeev took away from MDM Bank not only a considerable part of the team (all the members of the corporate finance division of the investment department followed their chief), but also their two clients – the cellular provider SMARTS and the milk producing company Nutritek. However, restructuring of the SMARTS stock capital resulted in serious controversy between Malofeev and the primary owner of the company, Gennady Kiryushin. In fact, Mr. Kiryushin and Marshall Capital Partners simultaneously started buying up 20% of SMARTS’ shares from minority shareholders. As a result, Konstantin Malofeev had to quit the project and yield to a raider, Pavel Svirskiy.

On the other hand, 2% of shares of Nutritek, where Marshall Capital Partners is controlling shareholder, were bought by Templeton. Then there was talk in the market that the milk producing company was close to an IPO. And as was revealed recently, Renaissance Capital will be the organizer of Nutritek's IPO planned for next year. Thus Marshall Capital Partners could become perhaps the first Russian private equity fund to succeed in bringing a portfolio company to the stock exchange. “I have achieved much more than I could have done at MDM Bank”, - Konstantin Malofeev summarized the results of Marshall Capital Partners operations, emphasizing that he wished the same success to Alexey Panferov.

Money cannot buy happiness
Alexey Panferov who took the place “by the other side of the counter” later than his former competitor counterparts, tries to create something special. He is not going to confine himself to the role of a “captive” attached to some oligarchic financial and production group (FPG), expecting to stay independent from fund investors, whose investments are managed by his company. Mr. Panferov has no intention of working with exclusively “Russian money” but wants to attract and manage the funds of western institutional and private investors, and global leaders in the private equity investment industry. “We are building the business so that any western investor, such as Blackstone or Carlyle, can apply to us and provide the funds for management. And we have made some negotiations in this area,” claimed Alexey Panferov.

The competitors of the head of NRG Advisors view this innovation with ambivalence. The executive director of the investment group A1 Group (formerly Alpha Eco), Alexander Savin, doubts that western private equity funds are going to trust their money to external managers. “They very rarely follow such a practice,” said Mr. Savin.

On the contrary, Oleg Tsarkov thinks that NRG Advisors still has a chance to be successful. “To work in Russia, western funds will have to hire local management teams. But there are few qualified experts, and all of them are busy on specific projects. Therefore, if western investors want to invest in this class of assets, they’d better entrust their funds to Mr. Panferov,” stated the head of Renova Capital.

Likewise, Konstantin Malofeev is certain that with a fine reputation the money will not be a problem, because the primary goal is projects. “If the manager of a fund makes a mistake when selecting the target for investments, then he alone is responsible, unlike in an investment bank,” said Mr. Malofeev. However, as long as Alexey Panferov decides to play a “long-term game”, we can only make a final judgment on his success or failure in five to seven years time at the earliest, when the first funds managed by NRG Advisors will close.

EXPERT ON THE ISSUE: “This undertaking is very risky and long-term,” says Roman Monin, Director of Logitech’s branch office in Russia. “I think it is quite logical that a top banking manager goes into private business and starts working independently. At some time you understand that you want to make independent decisions and run a reasonable entrepreneurial risk, for which you may pay with your own capital. Finally, carrying out our of own ambitious projects is a good motivation for working effectively, and we can expect much better rewards in comparison with anything we achieve to benefit of our employer.

In Panferov’s case, overall success depends on two factors: the client base and a professional team. As I understand, the new team mainly stakes on working with western investors, which makes it all very risky and long-term. Only market authorities or players with serious administrative or financial support can obtain the recognition of a foreign banker. From time to time, it is quite difficult to help a western manager understand the economic and political intrigues of our business and convince him to invest in a seemingly no-win project or refuse a “super profitable” asset. It is much simpler to work with domestic investors, though the competition for “Russian funds” is more severe. Moreover, today it is difficult to gather talented managers, especially starting business ‘from the ground’, without the protection of serious financial groups.

Managing one's own business is a complex task. Therefore, the degree to which an owner is ready to manage his business operations, in a sense, strongly affects many other aspects. In a bank, Mr. Panferov could only do business by not getting involved with human resource management, accounting details, and technical administration. Now everything is different. Owning a business brings many additional problems, which need to be handled along with client operations. On the other hand, independence in decision-making and selection of development strategy for one’s own company are exceptional ‘motivators’, helping the owner to overcome technical difficulties.

In general, the market for private equity investments is quite attractive for a start-up. However, in this market, as in every business, the director must have a handle on all the details.

Text: Alexander Birman
Source: Secret of the Firm

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