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AgendaAugust 1 2012

Renaissance Capital investment bank head seeks emerging market niche

After leading Morgan Stanley’s equities business outside the Americas, John Hyman is working to position Renaissance Capital as a focused player in a number of very different markets across emerging Europe and Africa.
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Renaissance Capital investment bank head seeks emerging market niche

When John Hyman joined Moscow-headquartered Renaissance Capital (RenCap) as head of investment banking and financing in October 2011, he already had considerable experience of the country from his time at Morgan Stanley. That had culminated in running the bulge bracket bank’s emerging Europe, Middle East, Africa and Asia capital markets businesses.

Since 2003 in particular, he says the emerging markets had loomed large in those geographies in terms of total activity, and Mr Hyman had participated in the Russian initial public offering (IPO) boom during that period, as well as working on ground-breaking deals such as the listing of Kenya’s Safaricom. But while travelling widely, he had always been based in London. Changing that was one of the attractions of the job at RenCap, he says.

“I had been working in global roles in a very global industry. When you are based in an emerging market, the view of the world is very different. There is a dichotomy between the financial markets that are affected by contagion from events in western Europe and the US, and the underlying economies that are still growing well, if a little slower than before,” says Mr Hyman.

With about 1000 staff, RenCap is also a very different proposition from Morgan Stanley in terms of size, and Mr Hyman describes it as a more “invigorating” environment. As he acknowledges, it would be even more invigorating if global financial stress abates. RenCap has been a bookrunner on all the successfully completed Russian IPOs in 2012. But there were only two of them – RusPetro’s $260m offering in London in January, and technology company EPAM’s $83m listing in New York in February.

Changing profile

Of course, RenCap is affected by the same malaise facing all securities firms at the moment, but Mr Hyman emphasises that the company is not gripped by the type of structural challenges absorbing the management attention of the world’s largest financial institutions. The Russian press has recently speculated that the investment bank is shedding 10% to 15% of its staff, mostly in Moscow, as activity remains very subdued.

As a privately owned company, RenCap does not disclose exact numbers. What is clear is that returns on the Russian stock market were worse than those for Italy or Spain in 2011. As Mr Hyman notes, this underperformance will not persist, given that Russia is enjoying economic growth of more than 4% while many eurozone countries are in recession. Consequently, the RenCap story is not just one of unmitigated downsizing in Russia.

We know what and where we want to be: a leading equity broker and investment bank in CEEMEA

John Hyman

“Russia is traditionally a high-beta market in every sense, one that people buy or sell based on their global macro view. It is logical to let people go if volumes are low, but we are also building where we can. And this is a good time to do so, because specialist emerging markets bankers at many of the global banks are finding themselves marginalised as their institutions focus on their home markets,” he says.

A recent raft of hires from banks such as Citi and Mr Hyman’s former employer Morgan Stanley appears to confirm this trend. And he believes there are other factors at work in the Russian market that will ultimately benefit RenCap.

“Historically we have been very active on sales of Russian assets to multinationals, but we are adapting to the changing environment. Cross-border portfolio and strategic investor flows to and from Russia are lower than they have been, but strategic activity within Russia has picked up significantly since the [presidential] election [in March 2012]. That obviously plays to our strengths as a Russian-based full-service investment bank,” he says.

Given the importance of the natural resources and energy sectors within the Russian market, RenCap has always maintained a strong specialism in these areas. Those businesses, together with transport and utilities, are precisely the ones that are now the subject of intra-Russian investment and consolidation. In May 2012, the Macquarie Renaissance Infrastructure Fund, a joint venture with the Australian bank, was a co-investor in the purchase of a 26.4% stake in Russian power generator ENEL OGK-5 from state-owned power generator and distributor Inter RAO UES, for $625m.

State sector challenge

While RenCap may have the edge over foreign investment banks in handling this type of business, it also has to compete with the growing might of the state-owned sector. With the purchase of Troika Dialog by Russia’s largest bank, Sberbank, in 2011, there are now two state giants – the other being VTB Capital – that can combine investment banking expertise with balance sheet bulk.

Mr Hyman compares this challenge with that posed to the pure-play global investment banks by the largest universal banks. RenCap has a rouble bond franchise, but does not attempt to compete with the state-owned banks for market share. The equity business is more competitive, and while primary markets are quiet, there is still plenty of secondary market activity, especially in derivative and hedging transactions. This suits RenCap, which tightened its hold on its number one market share for Russian equity trading in London in 2011.

“I do not think there is any bank that is still pursuing the 'me too' approach of trying to maximise market share in every business line. As the Russian economy and financial markets continue to grow, clients will increasingly use different providers for different services. That means there will always be opportunities for us stemming from our excellence in trading, research and product innovation,” says Mr Hyman.

Finding the right footprint

There is a more profound way in which RenCap has kept opportunities open. The investment bank has diversified geographically, creating one of the largest investment banking networks in sub-Saharan Africa, including the purchase of the brokerage arm of South Africa’s Barnard Jacobs Mellet in 2010. In 2011, RenCap bought Turkish brokerage Mira Menkul, and initiated equity research on Poland, Hungary and the Czech Republic to add to its existing coverage of Kazakhstan and Ukraine.

Mr Hyman says the Turkey acquisition made sense on two levels. First, RenCap is aiming to be a leading investment bank for central and eastern Europe, the Middle East and Africa (CEEMEA), covering about 90% of the companies in the key equity indices for those regions. Turkey was the most important gap in that coverage, and one that is attracting a lot of interest from international investors at the moment.

Second, Turkey is Russia’s second largest trading partner, and there are significant strategic flows from Turkey to Russia and Africa, especially in the construction and manufacturing sectors. Mr Hyman says that Turkish construction companies are among the largest contractors in Russia, central Asia and Africa.

The firm now views Africa, especially the sub-Sahara region, as effectively a second home market. In sharp contrast to the crowded Russian investment banking scene where international banks feel obliged to maintain a presence, RenCap has achieved something of a first-mover advantage in Africa. The bank executed deals in 20 different countries in 2011, extending far beyond the most developed South African markets to include frontier destinations such as Mozambique and Guinea.

“Competition in Africa is much less homogenous, global banks have too much on their plate to establish the kind of on-the-ground presence that we have built. That means we have been able to differentiate ourselves by bringing international best practice investment banking across the region,” says Mr Hyman.

He says there is a healthy IPO pipeline building, although many deals may wait for global conditions to improve further. In addition, there is widespread intra-African consolidation activity, especially in the South African and Nigerian financial services sectors. Mr Hyman is particularly excited about the opportunities in Nigeria, where a large population, still developing financial markets and ongoing economic reforms, are combined with a large hydrocarbons sector – an area of special expertise for RenCap.

“We know what and where we want to be: a leading equity broker and investment bank in the CEEMEA regions with additional focus on frontier markets and natural resources. So we have the geography that we want, now it is a question of deepening our engagement in those markets,” he says.

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