Vladimir Palikhata: “Changes in economy influence at the strategy of the investment funds”
In the second part of 2016, economists of Legacy Square Capital fund repeatedly passed an opinion that Russia had overcome conventional economic “bottom”. Despite the publication in 2016 of the figures concerning GDP decrease, range of such significant parameters, as electric power consumption and housing commissioning continue to grow. At the moment, it may be said with the supreme confidence that 2017 shall become for Russia a year, when the growth of economy shall begin. This opinion is shared by the Russian entrepreneur, president of Legacy Square Capital investment fund Vladimir Palikhata.
- Vladimir Mironovich, there is a feeling that the peak of crisis has fallen behind, but its influence still makes itself felt ...
- If we remember the scale of external influence at the Russian economy, including two-fold reduction in export income, and introduction of limitation for attraction of financing, it may be said, that we have got off cheap.
In the course of peak of the crisis development, there were the opinions, that the “Russian economy is torn to shreds”... In fact, we see, that the Russian economy is really able to accommodate itself to the crisis conditions. Of course, fundamental reason of sharp fluctuation in exchange-value of ruble has not disappeared, and, despite the economic policy, dependence of exchange-value on the oil price may be overcome only on a long-term horizon. Cost of 60-70% of Russian export commodities are directly tied up in the oil.
Consequently, basic mechanisms of formation of crisis phenomena in the Russian economy shall be preserved in the long range.
- Which crisis factors had the most significant negative influence at the economy?
- The crisis has typified an important mechanism of chain reaction, leading to GDP reduction via the formation of negative expectations form the part of the banks. In the end of 2014 conversion of the ruble deposits into the currency ones, beginning of the deposits’ outflow and expectation of even greater outflow forced the banks to form a liquid buffer.
The banks began massive closing of negotiable crediting limits.
Capital constraints lead to the raw material processing reduction, as well as goods’ sales result reduction. As a consequence, it is natural that gross revenue of the companies dropped, and expenses for loan services increased together with the rates. The situation grew worse because of the fact, that historically, the companies in Russia have to finance development by means of short term credits. In 2015-2016 companies began massively coming out of the schedules for the settlement of indebtedness.
Even the constructive work with the creditors can’t guarantee the escape of bankruptcy. In conditions of uncertainty, one “uncompromising creditor” is enough the initiate the procedure of bankruptcy.
Elimination of this risk is considered to be a difficult tusk and shall be performed stage by stage. The tools have already been formed, and such a crisis is unlikely to repeat. Central Bank has tried new mechanisms of liquidity provision and shall be able to act more promptly in future.
- What are the results of the crisis?
- Many experts admit, that in contrast with the crisis of 2008, at the moment we appeared in a new economic reality. Pre-crisis development of Russia was largely connected with redistribution of additional oil and gas revenues, transferred to the population via overvalued rates (“Dutch disease”).
A range of sectors was developing only through high consumers' demand, which dropped in conditions of the crisis.
Current crisis has led the companies to “sobering” and demonstrated, what may be caused by low currency credit rates.
I suppose that the drop was caused by the curtailing of “artificial economy”, and “qualitative economy” received incentive for growth with the beginning of the crisis. The drop took place rapidly, and the growth requires time, which is the reason of negative statistics. I dare say that at the moment health of Russian economy is better, than it was before the beginning of the crisis.
- What is in store for us?
- That is a very relevant question, which is asked by many people. Russia demonstrated, that to attain the preservation of micro-economic stability even in conditions of unprecedented pressure, but stability, by itself, is not enough for the provision of targeted growth - higher than worldwide average level.
Simplistically, economic growth may be connected with the growth of export, as well as of the internal demand or investment growth.
Existing example, such as sale of new Lada Vesta into Germany, demonstrate, that on a long-term horizon export may make its contribution into the growth of Russian economy.
Domestic demand shall, undoubtedly, in the nearest time make its contribution into the economic growth, at least through the effect of deferred demand.
Shall we wait for the increase of internal investments in the near future?
- Expected reduction of rate at the financial markets shall inevitable provide frontal improvement of the company’s economic results and, accordingly, set free the cash flow for investments into development.
At the moment investment rate in relation to GDP in Russia is at the historically low level, which is technically may be a signal to the growth of investment volumes in future. But we shall think over, where we shall take such investments.
- Shall we hope for the foreign investors?
- Foreign investments have become proverbial for any authority. Everybody wants to receive them, but we shall not forget about the fact, that they consist of three different parts.
For example, direct foreign investments.
Such investments into Russia are connected, primarily, with large-scale projects, and, as a rule, are politicized. Due to this fact, difficult to reckon on them at the nearest future.
On the other hand, if in 2014-2016 international corporations observed only reduction of the parameters in Russia, nominated in USD and Euro, then in 2017, there is every likelihood that they shall see double-digit growth in currency.
This year we may unambiguously expect sharp growth of corporate interest to the projects in Russia, and this fact shall influence at the economic growth, beginning with 2018.
Significant role is also played by the external credits.
Legacy Square Capital fund analysts performed an analysis, which demonstrated that actual debt of Russian residents doesn’t exceed 200 bln USD. It’s a very low level, supposing huge growth potential.
Since the end of 2016 Russia entered into the top of favorites of portfolio investors, which estimated additional profitableness, connected with appreciation of rate by almost
30 %. Speculative investors have entered into the Russian financial market and actively participate in carry trade transactions, which, appositely, forms additional difficulties for the Central Bank, being one of the factors of ruble strengthening.
What are your forecasts concerning domestic crediting?
- Simple analysis demonstrates strong synergies between the growth of credit volumes and economic growth.
Developed countries have significantly more high ration between the volume of issued credits and GDP. In Russia this ratio is 65%, at that, it decreased from 70% (a year before) due to strengthening of ruble and formal decrease of currency credit share. By comparison: such ratio in EU is 151%, in China - 194, and in the USA - 236.
Basic impact into the growth shall be undoubtedly provided by the ruble crediting. Its volumes are continuously growing. In 2016, banking system managed to overcome the consequences of the crisis according to all the parameters. Banks restores profitability, in IV quarter for the first time “on record” bank system reserved decreased,
High level of assets liquidity, good parameters of capital adequacy and constant inflow of ruble deposits allow to say about the readiness of the banks to increase ruble crediting. In my opinion, growth of crediting shall become a key factor of Russian economy growth in 2017.
- You are a head of Legacy Square Capital fund. Towards which projects is your fund oriented at the moment?
- Historically, the task of
Legacy Square Capital fund is receipt of profit for investors through the work with the distressed assets in conditions of instability in the economy.
Beside receipt of profit, the task of the fund is to preserve and develop enterprises, in the result of which they become competitive and commercially viable, as well as economically attractive without assistance of the state.
Very often, methods of restoring the enterprises to health are seemed to be radical, but I suppose, that you shall agree, that it is better to make the difficult way of debt restructuring, then to increase credit lines, or, even worse, to “drop into bankruptcy” with further liquidation.
In the whole this work leads to the rehabilitation of economy of the country due to the improvement of financial situation, as well as preservation of working places. The Fund works in collaboration with banks and holders of the assets, and, in many respects, gives “new lease of life” to the enterprises.
Of course, changes in economy influence at the strategy of the investment funds.
Return of economic growth, on the one hand, may decrease amount of investment possibilities for Legacy Square Capital, and, on the other hand, I assess optimistically the prospects of growth of the fund revenues. At the moment we manage 20 projects, in the range of which I am an investor. Most of them begin to bring profit even at the initial stage.
In the course of restoration of the companies’ economy, I expect transformation of the fund into the classical private equity fund, which invests into the perspective companies with a view to the increase of cost of its share.
At the moment Legacy Square Capital и has all the competences for the assessment and realization of such transactions. Its’ emergence in the fund’s portfolio is just a matter of time.
- It is no secret that beside business projects, you are involved into social and cultural projects. Please, tell us about them.
- Such projects are no less important for me, then the commercial ones. Paying attention to them, I acquire harmony and personal balance, this gives me energy for the business.
Since 2010 I am a founder of the magazine called “Our Heritage”. It is a landmark periodical in the world of culture and art. This magazine is published since 1988 and is under the aegis of UNESCO. Inspirators and ideologists of this periodical were academician Dmitry Sergeevich Likhachev and Raisa Maksimovna Gorbacheva.
Together with the magazine, in 2013, antiquarian gallery “Our Heritage” was founded, it is located in the Central House of Writers at Povarskaya Street. Its purpose is in preservation of subjects of historical heritage of our homeland.
In last November Russian version of Inc magazine was published. I consider it as the most qualitative tool for the assistance of start-ups, small and medium enterprises.
Beside publishing activity, in 2012 I was elected as a president of Chess Federation of Moscow. At the moment we have very strong team of Russian chess-players. For example, Aleksandr Grishchuk won blitz world tournament, and Yan Nepomnyashchiy became a vice champion of the world in rapid chess. Men’s and women’s teams made a golden double in team scoring of the European Championship, to a large extent, this victory was brought by Moscow athletes.
In the whole, business and cultural projects are closely interconnected with each other. Unfortunately, it is impossible to realize significant social purposes without regular financing.
- There are rumors in the business circles, that Moscow Capital Club shall be opened in the nearest future.
- Yes, really, opening is planned for April. There was a long-standing objective need. It is symbolic, that Moscow Capital Club is located in the Central House of Writers. As you understand, place of location is chosen not coincidentally. The history of this building is really unique. For the years of its existence this mansion was both place of meeting of the most significant in Russia masonic lodge, and family manor estate, and club of writers, and “closed” restaurant. During these years Central House of Writers was a place, inaccessible for an outsider.
After years, not much changed. Members of the Club are distinguished and successful people in the sphere of politics, business, science and culture. Having founded Moscow Capital Club in the Central House of Writers, we preserve a centuries-old tradition. Experience tells me that, having no competence, you shouldn’t deal with the project by yourself, that is why we engages undoubted international expert in the sphere of closed clubs, experienced managers - CCA International.CCA works in 15 countries, makes business in Europe and Asia. The task of CCA is an activity on provision of access of members of the associated clubs on the basis of mutual agreements between the private clubs of the chain.
Organization was founded more than 30 years ago and at the moment unites more than 250 private clubs all over the world, including dozens of thousands members.
In my opinion, Moscow Capital Club - is a colossal resource of global level, giving an opportunity of free communication between its members, inter alia, with a purpose of realization of joint tasks and projects in such spheres, as business, culture, politics etc.
- How do you spend your free time, and do you have any free time at all?
- Family is the most important thing for me. I have three children, and I try to spend all my free time with them. Because the best investment - is investment in your children.
Palikhata Vladimir Mironovich, President of Legacy Square Capital Investment Fund.
Was born in 1967.
Since 1991 till 1993 - managing forwarder, head of the branch in trading and purchasing cooperative.
In 1993 began the career of individual entrepreneur as an independent trader at the Russian Commodities and Raw Materials Exchange and Moscow Commodities Exchange. Since 1997 left the stock market and began to work with investments in real sector of economy.
Consolidated assets in Russia and the Ukraine, placed in electrotechnical enterprises, and was the head of Rosenergomash.
In 2010 founded Legacy Capital investment group, began to deal actively
with investment in distressed and undervalued assets of European and CIS countries, and its further management.
In 2015 formed Legacy Square Capital LP fund.
Vladimir Palikhata - Ph.D. in Economics. Has Master Degree of Business Administration Moscow State Academy.