bne IntelliNews – The Da Vinci III fund aims to deruss the companies in its portfolio and to enhance their value

Da Vinci Capital, one of Russia’s largest private equity investors, has helped companies in its portfolio develop more international business that will increase their valuation. Now he has launched a new fund that invests in companies across the emerging European region, but explicitly avoids Russian companies.

At the same time, part of its investment strategy is to take Western companies and bring them to the region to take advantage of the vast pool of highly talented labor available who work at a much lower cost.

Da Vinci is a veteran of investing activities in Eastern Europe. He played a key role in the capital market reforms in Russia in 2012 that linked him to the international settlement system and gave investors around the world direct access to stocks and bonds, making his investors a whole in the process.

Now he has just closed the Da Vinci Capital III (DVCIII) fund for the first time, raising $ 90 million, and hopes to increase that amount to $ 300 million in subsequent rounds.

As economies around the world rebound, Western stock markets have overbought but emerging stock markets begin to recover, investor interest is palpable.

German development bank DEG (Deutsche Investitions- und Entwicklungsgesellschaft) is the benchmark investor with $ 35 million, but was joined by Kazyna Capital Management (KCM), a private equity fund of funds to promote development of the republic, as well as Samrik-Kazyna, the country’s sovereign wealth fund, as main investors in the first round of DVCIII. In addition, there are a number of investors and private funds and more are expected to enter subsequent funding rounds.

“There are 22 other private investors who have joined and other development finance institutions,” said Dennis Fuller, managing director of the fund in an exclusive interview with bne IntelliNews.

Russia excluded

The DVCIII fund targets growing companies across emerging Europe, but specifically excludes Russia.

“This is mainly the result of the mandates of some of our investors in development finance institutions. For example, the International Finance Corporation (IFC) is one of the investors and it is not allowed to invest in Russia, ”Fuller explains. “But that’s not a problem because there are a lot of great prospects throughout the region. We have a lot to do.

Having development banks in the fund is a boon as it gives them some political cover and better access to government. It also encourages Limited Partners (LPs) to invest as risks are reduced.

“DEG was already a co-investor in our second fund in Ukraine, but not an LP,” Fuller explains. “This time he became an anchor investor.”

The exclusion of Russia is specific to the third fund, but it was already a theme of the second Da Vinci fund. Four years ago, she bought a 20% stake in Russia-based software reseller Softline which bne IntelliNews recently profiled, and helped the company to go beyond its main Russian market to a great effect.

“We’re the only independent player and we’ve helped deruss it,” Fuller says. “When we bought out, around 80% of his business was Russian, but it’s now down to around 60%. We have assisted them with mergers and acquisitions of international companies and she now operates in 55 countries. The company is preparing for an IPO in October, a double listing in London and Moscow. “

Derussification of the companies in the DVCIII portfolio is both profitable and strategically attractive to owners. The fund is allowed to invest in companies that work with Russia as long as Russia represents less than half of their activity.

“The problem most homeowners face is that they are forced into their own markets,” Fuller explains. “They may be looking for a strategic or foreign investor exit, but it’s not there. Most of the outflows are domestic to domestic and this limits the available liquidity. We buy a business and help it go international. If you reduce the share of Russian companies, you increase the valuation, even if Russian companies are strong. “

Target countries and technology

The theme of the internationalization of companies is a common thread and for DVCIII it goes both ways. The fund invests around 70% of its capital in Eurasia and helps these companies develop international activity, but it also invests around 30% of its capital in Western companies that wish to gain a foothold in emerging markets.

“Challenger Bank, based in the United Kingdom, wanted to move its technical production to Ukraine because it is cheaper,” Fuller explains. “Our investment was to get them there. You know these markets are difficult to work with and therefore a company like this needs our help. “

The bank currently has its tech section based in Portugal, but sees that it can do the same job at a fraction of the cost in Ukraine.

While many investments are in the technology sector, DVCIII is not specifically a technology fund. However, thanks to the coronavirus (COVID-19) pandemic, the tech industry has grown tremendously and many of the best opportunities are in tech.

“We will look at anything transformative. However, cloud services are where transactions take place and this business is growing exponentially. We want to be exposed to that, ”Fuller explains.

DVCIII plans to invest in other activities related to the development of firewalls and anti-piracy software, which Fuller says are also areas of growth.

Another advantage of Eastern European technology is that there is no infrastructure gap to fill. Fuller says technicians in Eastern Europe are as good, “and probably better”, than their peers in the West.

Russia remains the economic powerhouse of the region and already has a sophisticated and rapidly developing technological sector. As bne IntelliNews reported Russia e-commerce is booming. However, there are many opportunities in other markets in the region. Fuller highlights Turkey, Kazakhstan, Romania, Ukraine and Belarus in particular.

“We have no problem building a pipeline. We’re looking to invest $ 10-20 million and we have a dozen contracts going on at that level, including in Kazakhstan, ”Fuller said.

Kazakhstan has only 17 million inhabitants, but thanks to its oil activity, per capita income is comparable to that of Russia and two to three times higher than in other Central Asian countries.

“Lending to SMEs in Kazakhstan is taking off and its first branchless bank has just set up,” Fuller says of one of the fund’s investments. “It’s a proven business model and Kazakhstan could become a technology hub for the whole region. “

Another country in which DCVIII invests is Belarus, despite the political crisis there. As bne IntelliNews reported, Belarus has a large and dynamic IT sector which is still functioning, albeit under very difficult conditions.

“We are selectively looking at companies and a document authorization software company in Belarus,” Fuller says. There is also an interesting investment in data art in Romania and the Balkans have some interesting companies as well.