Private Equity World Middle East 2005

Russia and Eastern European markets: opportunities in the “new” European EconomiesKestutis Sasnauskas, East Capital Private equity

EAST CAPITAL

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East Capital in brief

• 2 billion USD under management in open ended mutual and private equity funds

• 60 employees

• Offices in Stockholm, Moscow and Paris

• 250.000+ investors

• 7 year track record

• Independently owned and managed

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Our Toolbox

UCITS funds

East CapitalEastern European Fund

East CapitalRussian Fund

East CapitalBaltic Fund

East CapitalBalkan Fund

Central EuropeBalkansBaltic StatesRussia & CIS

Offshore funds

East CapitalBering Russia Fund

Private Equity

East CapitalAmber Fund

East CapitalBering Ukraine Fund

Explorer Property Fund-Baltic States

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Average annual performance of the Funds versus benchmark index since inception

Performance in EUR

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• Economic Outlook: stable growth

• Scouting the Private Equity Landscape in Russia

• Investment Opportunities in Russian and Eastern European Private Equity

Suggested agenda

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Reasons to invest in Eastern Europe & Russian private equity

• Strong underlying economic growth

• Competitive advantages in the enlarged EU

• Attractive valuations

• The only way to access rapidly growing sectors of the economy

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Eastern Europe – Chinese-style economic growth

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What happened before?

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-4 yrs -3 yrs -2 yrs -1 yrs EU-membership

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GDP increase before entering EU

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What happened later?GDP increase after entering EU

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EU +1 year +2 yrs +3 yrs +4 yrs

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Case study: Car industry in Slovakia

• A school-book study on how to attract FDI

• Slovakia may soon produce more cars per head of population than any other country in the world– Volkswagen: 300,000 cars/year– Peugeot-Citroën: 300,000 cars/year

(production to start in 2006)– Kia Motors: 200,000 cars/year (production

to start H2 2006)

• What made car manufacturers start production in Slovakia?– Tax reforms– Competitive cost structure– Full access to EU markets after May 1 2004

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Flat taxes in Eastern Europe – some examples

Personal income tax

Corporate income tax

Estonia 24% 0% (24%)

Latvia 25% 15%

Slovakia 19% 19%

Romania 16% 16%

Serbia 14% 14%

Russia 13% 24%

Ukraine 13% 25%

Georgia 12% 12%

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Wage differences between Eastern and Western Europe

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Nordic vs. Baltic countries Central Europe The EU “cost leaders”

Source: Eurostat,

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Suggested agenda

• Economic Outlook: stable growth

• Scouting the Private Equity Landscape in Russia

• Investment Opportunities in Russian and Eastern European Private Equity

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Why private equity in Russia?

the only way to access large part of economy is through private equity funds

• There are approximately 3 million registered private companies in Russia

• 250 companies are listed on RTS

• 75 companies have depository receipt programmes

• 90% of the index is in oil& gas, utilities and telecom

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Private equity in Russia

• Few private equity players on the market mainly distributed in two groups:– Local financial industrial groups– Institutional investors (foreign capital)

• Institutional funds are generally small: 15 – 400 MUSD in size.

• Debt financing is still expensive, but…

• …rapidly improving macroeconomic situation resulting in decreasing cost of financing

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MCAP as % of GDP

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IPO activity is picking up

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Within the next year we expect approximately 60 IPOs with a total value exceeding USD 10 bn in Central and Central & Eastern Europe. Main activity in Moscow and Warsaw.

IPO volume in Russia 2000- 2005

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• Economic Outlook: stable growth

• Scouting the Private Equity Landscape in Russia

• Investment Opportunities in Russian and Eastern European Private Equity

Suggested agenda

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Investment opportunities

• Possibilities of privatisations of extremely undervalued assets are already exploited

• Focus on exposure to domestic economy– Consumer goods and retail– Financial sector– Real estate & construction material– Retail & logistics

• Strong cash flows

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Banking Assets in % of GDP (2004)

Source: Central Banks, 2004-12-31

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Growth of corporate & retail market in Russia

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Retail depos is Corporate depos its Retail lending Corporate lending

2003 2004

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Property market opportunity in the Baltics

• The Baltic property market is still underdeveloped in a Western European context, characterized by limited size, low transparency and low liquidity…

• …but, the market offers:– attractive yield rates– low interest rates– high demand for modern properties– declining vacancy rates…

• ….and strong fundamentals for value growth for investors with local knowledge and relationships

Yield rates on A-type commercial property

Baltic states Western Europe

9-12%

5-7%

Baltic states Western Europe

9-12%

5-7%

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Property market opportunity (cont.)

• Significant gap (5-7%) between yield rates and mortgage rates

• Opportunity to make 15-25% annual equity returns based on yield only

• In addition, market fundamentals indicate good potential for value growth as well:– Strong economic development– Limited availability of office and retail space– Conversion process to Western European

levels

• Furthermore, low correlation with equities, provides an attractive diversification possibility

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Tallinn Riga Vilnius

Gap between yield and mortgage rates*

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2000 2001 2002 2003 2004

Tallinn Riga Vilnius

Property price development*

*Figures for A-type commercial property

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Contacting East Capital

Head officeEast CapitalKungsgatan 30, Norra Kungstornet – Box 1364SE-111 93 Stockholm, SWEDENTelephone: +46 8 505 88 500, Telefax: +46 8 505 88

508www.eastcapital.com

Kestutis Sasnauskas, CEO, East Capital Private EquityDirect phone: +46 8 505 88 515Email: kestutis.sasnauskas@eastcapital.com

Carl Meurling, East Capital Asset Management ABDirect phone: +46 8 505 88 519Email: carl.meurling@eastcapital.com