November 15, 2012
He is one of only two foreigners in Russia officially dubbed "oligarch" by the international press, but for Stephen Jennings the dream to build a "Goldman Sachs of the East" is over. On November 14, it was confirmed that he will sell his remaining 51% stake in investment bank legend Renaissance Capital to his long-time partner and co-owner Russian oligarch Mikhail Prokhorov for an undisclosed price.
It is a sad day, as I have many happy memories associated with Rencap, as it is popularly known in Moscow. The first serious (and well paid) job I had as a young freelancer in 1996 was to write Recanp's first ever annual report. I spent a week in the bank meeting with then-owner Boris Jordan (the other foreign oligarch according to a ranking by the British paper The Independent
published a few years ago), the lanky Russo-American that founded the bank with five other founding partners.
Even then the younger Jennings was a presence in the room, a driven and bright young banker who played number two to Jordan's brash governorship of the business. Both men had arrived in Moscow with Credit Suisse First Boston and made their name by persuading their bank to buy privatisation vouchers. These were later converted into shares in some of Russia's biggest companies and the bank made a $100m profit on the deals, a third of its global total for that year. Jordan and Jennings took their bonuses, hired a room in the Penta hotel (now appropriately renamed the Renaissance Moscow Olympic Hotel) and set up the bank.
They quickly hooked up with Vladimir Potanin, owner of Norilsk Nickel, who funded their expansion and through him met Prokhorov, who was the manager at the metal mine at the time.
The idea was to create a "Russian bank with a western face" that could bring capital in from outside by speaking the language of international finance, but thanks to its boots on the ground could ensure international investors were not ripped off in the rough and tumble of Russia in the 1990s. That included the launch of the highly successful Sputnik Funds at this time – among the very first Russia-dedicated investment vehicles to target international investors.
Rencap shot to stardom. The bank's annual conference became a classic fixture on the calendar, held in those days in the Grecian Moscow Chamber of Commerce and Industry building just off Red Square where Stalin was laid in state after his death. It is a relatively small building and investors, oligarchs and journalists were packed in shoulder to shoulder to listen to the likes of German Gref and Anatoly Chubais talk about reform and Russia's future.
One of the most memorable was held in 2000 just after President Vladimir Putin came to power where oligarch Boris Berezovsky spoke and was harangued by investors who accused him of stealing their money. Media mogul Vladimir Gusinsky was also due to speak, but he was already fighting Putin and in the middle of the event the news broke that Gusinsky had fled the country, never to return. Berezovsky was gone a few weeks later.
The bank was also a key broker in the privatisation of a 25%-1 share stake in Russia's fixed-line operator Svyazinvest for over $1bn, working with international financier George Soros – a deal that went sour and ended up as "the worst deal of my life," according to Soros.
It was not an easy time to do business and the bank in those days had a cowboy reputation: they were involved in several questionable deals like the takeover of oil company Sidanko for Potanin (that was later taken over by TNK, screwing BP in the process), and Jordan became manager of Gazprom Media that took over Gusinsky's NTV television empire after he had fled.
Friends of mine have subsequently told me that the bank nearly went bust on at least one occasion in its first years and had to be bailed out by Potanin. Few remember now, but in the spring of 1998 Rencap closed a deal to merge with Mezhdunarodnaya Finansovaya Kompanya (MFK), the investment-banking arm of Potanin's group, run by Prokhorov. The bank even got as far as rebranding and I still have some analyst reports with the new MFK-Renaissance logo on them, but the deal fell apart when the Russian economy went into meltdown a few months later following the devaluation of the ruble on August 17, 1998.
Rencap only just survived the 1998 crisis. Jordan left, taking the Sputnik Funds with him to concentrate on things like insurance, selling his stake to Jennings who became the majority owner.
In 1999, bored with freelancing, I briefly took a job in Rencap's research department and sat next to Stephen Konigsberg, the senior legal council, who only quit the bank this October. Konigsberg was constantly on the phone day and night trying to collect debt and putting off international clients demanding their debt back. It was a delicate balancing act, taking in some cash and passing it on again to placate irate investors. But Jennings pulled it off.
I interviewed Jennings at the end of that year, when he told me: "We have been quiet for a year while we sorted out the mess. But now we have paid off all our obligations and are ready to take our story to the world."
In 2000, the economy started booming. The economy grew by 10% in that year alone – a record yet to be bettered – and by 2005 Russia was in a full-blooded boom. As the specialist broker focused on international investors, Rencap was making money hand over fist.
Jennings re-engineered the bank as a leading player, first in Russia, but rapidly moving into the other markets of the Commonwealth of Independent States (CIS). Between 2005 and 2008, big offices were opened in Ukraine, Kazakhstan and a Hong Kong office added 2010 as the bank spread its wings as far as Mongolia. Jennings also astutely bought a retail operation, Renaissance Credit, right at the beginning of the consumer-lending boom, which today is one of the three biggest retail lenders in the country.
But the biggest gamble was to branch out into Africa in 2006. Jennings told me at the time: "It is the last untouched emerging market. It looks a lot like Russia: huge country with plentiful natural resources, but with all the problems that Russia had in the 1990s. We know how to do this sort of business." It was a ballsy move, but one that has since paid dividends, as Africa now accounts for a quarter of the bank's bottom line.
It was at this point that the ambition was born for Rencap to become "the Goldman Sachs of emerging markets." Jennings was on a roll. The bank launched a series of adverts on CNN describing itself as the leading emerging market investment bank that didn't mention the world "Russia" once.
Russia's second big crisis in 2008 nearly broke the bank again. The African adventure was a good idea, but the bank was spread very thin as a result. As the economy went into meltdown, Konigsberg was on the phone again trying to stave off another disaster. Jennings eventually caved into the inevitable and agreed to sell a 49% stake to Prokhorov to stave off collapse. "It had to be done and the bank is back in business," a Rencap vice president told me in the following days, "but the dream of becoming an international emerging markets investment bank is over. Now we are only an investment bank that wants to make a lot of money for its shareholders."
Jennings has soldiered on, but the ongoing crisis since 2008 has worn down Rencap. The focus on its international brokering business made piles of money in the boom years, but is a liability now; Rencap spent heavily on very expensive deals and brokers, but began to struggle after inflows to the Russian equity market dried up. The investment bank made $30m of losses in 2010 and another $100m in 2011. The retail credit business nearly brought the group down in 2008 as loans went bad, but in the consumer lending boom that followed it is now the part of the business that is keeping things going.
The nature of investment banking in Russia has changed. With the bank sector assets growing at over 40% in the boom years, there was plenty of money to go round. But with assets growing by only 20% since then, competition is fierce. Rencap's position has not been helped by the merger of its biggest rival Troika Dialog with Sberbank and the rise of VTB Capital to create two state-controlled investment-banking giants.
The crucial change in the investment banking sector that these mergers have made is that the two new giants have access to their parents' balance sheets stuffed with cash from their corporate banking businesses. It means they can source investment-banking business, like IPOs, from the corporate clients and offer them as part of a package. Rencap doesn't have this corporate business and so lives off the fees it charges from offering its core services, which are expensive. At the same time, small lean banks are offering the same services at knockdown prices to smaller clients. The upshot is the state-owned investment banks are taking all the choicest deals. "The industry will end up with a barbell of a small number of these enormous, essentially commercial banks, which have investment banking operations," Jennings told delegates to the bank's annual conference this year. "The killing zone will be in the middle."
Prophetic words. Jennings claimed in August that he had stopped the hemorrhaging, but his best people have been quitting en masse to join the competition. Almost no one from the late 1990s vintage is still at the bank. Jennings tried to convince clients that Rencap was in that big weight at the heavy end of the barbell, but his announcement to quit is a concession that the bank is actually in the killing zone.
Jennings is stepping down as RenCap's CEO, but will remain chief executive of Renaissance Group, the parent company, which will focus on asset management. John Hyman, RenCap's deputy CEO, will replace Jennings. The terms of Prokhorov's purchase weren't disclosed.
Onexim, Prokhorov's investment vehicle, said on its website:
"Once the transaction has been completed, Onexim will become the indirect shareholder of 100% of Renaissance Financial Holdings Limited ("RFHL"), the investment bank operating internationally under the name Renaissance Capital, and indirect owner of 89% of RCISL, the consumer finance bank operating in Russia under the name Renaissance Credit. RFHL and RCIL will maintain their stakes in certain assets previously owned by Renaissance Group (the most significant of which are stakes in Ukrainian Agrarian Investments and Russia Forest Products) that were transferred to RFHL's and RCIL's ownership in the last 18 months as part of the restructuring of the debts owed by Renaissance Group to RFHL. The transaction is subject to regulatory consents in the jurisdictions where these companies operate.
"Onexim is dedicated to developing Renaissance Capital as the premier independent emerging markets investment bank, and to the further development of Renaissance Credit as a leading consumer lender in Russia. John Hyman, who joined Renaissance Capital in 2011, has been appointed CEO of Renaissance Capital. Renaissance Credit's long-time CEO, Aleksey Levchenko, will continue in his position."