Delta's dos and don'ts for Russia investors

By Douglas Busvine

MOSCOW (Reuters) - So you have cash to invest in Russia, but where? Here's some advice from Patricia Cloherty, chairman and chief executive of Delta Private Equity Partners.

"We do not do real estate, we do not do privatizations, we do not do oil and gas, no commodities of any sort, we do no pure technology risk and we do very few greenfields," Cloherty, a 37-year veteran of the private equity business, told Reuters.

An American, she spent much of her career with private equity pioneer Apax Capital Partners before getting involved in Russia in the 1990s as adviser to a U.S.-backed investment fund.

That evolved into Delta Private Equity Partners, which has invested around half a billion dollars to date. Cloherty has been here full-time since 2003, and Delta's most recent fund has generated realized annual returns "in the low 200s" percent.

So where are the best returns to be made in a country seen by many as politically risky, plagued by corruption, lacking legal redress and where standards of transparency can be poor?

"We do that whole diverse range of products and services that are in demand by Russia's emerging middle class," Cloherty told the Reuters Russia Investment Summit.

"It's been concentrated in three areas -- financial products and services, technology, media and telecoms and broadly consumer products and services."

Small is beautiful for Delta, an early-stage investor that invests $8 million per deal on average. It has stakes in digital and pay TV firm Almirida, clothes retailer Veshch and OneGlobe, which runs an airline booking system.

Recent disposals include Compulink, a systems integrator, at 4.8 times initial investment, and Independent Network Television Holdings, operator of Russia's TV3 channel, at 12.8 times cost.

Delta is poised to launch a new fund, its third, and is aiming to raise around $550 million from institutional investors. It will keep its focus on the consumer and treble the size of its typical investment, she said.

POCKETBOOK ISSUE

Transparency is key for Cloherty as she examines prospects in the business-to-business and business-to-consumer spaces. Owners are starting to understand that clarity, especially of ownership, is increasingly key to unlocking value.

"It improves your ability to realize value. Having 10 times earnings as your reward, rather than a single tax shielded stream of income, is a pocketbook issue of the biggest sort," Cloherty said at the Reuters office in Moscow.

Unlike some of her peers, Cloherty does not consider having ownership control to be vital: "But you have to be very careful with the people that you deal with. You want to deal with people you trust."

She does insist on the right of veto on strategic decisions, however. "Elements of control are always built into a minority position, so this is not going naked," she said.  Continued...