Financial success in the Ruble market

There is a genre in modern literature that might best be described as ”gurus of the financial markets give advice on how to become successful quickly”. Books published by famous investors, financiers as well as other security analysts and experts in the inner workings of the stock markets easily find themselves among top best sellers. Nassim Taleb, Warren Buffett, Jordan Belfort – these are the names that trigger readers’ associations of jingling coins and rustling dollar bills.

In the meantime, the Russian economy has its own Buffets as well as its own Belforts. It seems that a book by Ilya Sherbovich, President of UCP Investment Group, could be the most popular bestseller considering what traders say about him: “If Sherbovich jumps through the door, follow him – there is success there for certain”. A multi-billion Vkontakte deal, the acquisition of significant shareholdings of Russia’s biggest companies: Gazprom, Lebedyansky, INTER RAO, the successful sale of Transneft’s large shareholding after protracted and tough litigation; the list goes on. There are also rumours: his connections with influential Russian and foreign politicians such as Dmitry Medvedev, Sergei Ivanov, Dick Cheney, Jimmy Carter and with Igor Sechin, the ‘Grey Cardinal’ of the Russian oil industry.

Sherbovich with his $950m fortune has recently been included into the Forbes’ list of Russian billionaires (russian version). However, he has never shared the secrets of his successful career in finance and we have not yet seen a best seller entitled “Ilya Sherbovich: Think and Gain”. Such a pity, it could be a fascinating story. No one knows much about Sherbovich’s personality: is he a Buffett, a Belfort, or perhaps more like Carl Icahn? How did he make his fortune and what was the story behind the bland official statements? The facts speak for themselves and the biography of this famous Russian financier is highly instructive. While this is a peculiarly Russian story, it is also a perfect case study for business students the world over. ‘How to make money from portfolio investments?’ – One can answer this challenging question by studying Sherbovich’s biography in more detail.

Secret one. The early bird catches the worm

“It’s a good saying, especially if you are not the worm”, jokes a character in one of Walt Disney’s cartoons. Ilya Sherbovich was born on December 23, 1974 in Vladimir and it is unlikely that he would have seen this cartoon, but he would certainly have appreciated the original saying considering that his father and grandfather, both avid fishermen, made little Ilya keen on fishing when he was just four. Even at a young age, Sherbovich did not waste his time. At school he excelled at English, maths and the sciences, as well as playing chess to a high standard. Instead of going to a university in his hometown, he attended the famous Plekhanov Russian University of Economics in Moscow. On arrival at the Plekhanov in the summer of 1991, he decided not to major in a traditional discipline, like Management of Socialist Production; (remember, all this was back in the days of the USSR, shortly before the Soviet coup d’état attempt) but rather in the trendy new field of Economics and Business Management.

After just six months, the modern Russian Federation emerged from the ruins of the Soviet Union. These were the ‘turbulent 90s’ and everyone survived as best as they could. Others worked as ‘suitcase traders’ and brought bundles of acid-washed jeans from Turkey. Some sold video tapes at pop-up markets. A few of today’s Russian oligarchs started out like that. Sherbovich followed his own path: in 1992 as a second-year student, he was recruited by the International Financial Corporation (IFC) – a subdivision of the World Bank controlling investments into developing countries. Two years later, Sherbovich was employed by the Stock Market Monitoring Department in the Federal Commission on Securities Market of Russia (FCSM) where he worked as consultant until 1995 while simultaneously studying at the Plekhanov Institute (he graduated with degree in economics the same year).

Secret two. The Samurai’s Journey

When Sherbovich was young, he preferred to stay in the shadow of his more experienced colleagues and, apparently, this is how he easily found favour with many influential people. Diligent, agile, quick-witted and, as they say about people like him, ‘a child prodigy’. In 1995 Boris Fyodorov – former Minister of Finance, who only a year before that had left civil service to run his own business, paid attention to Sherbovich. In partnership with an American banker named Charles Ryan, Fyodorov founded UFG investment bank (United Financial Group) and hired Sherbovich.

These were the days when foreign capital flooded into Russia. The Russian market had just opened to investors for the first time after the fall of the ‘Iron Curtain’ and lured western businessmen who saw it as a new El Dorado. The young economist found himself somewhere he could gain valuable experience: in Russia back then, very few people understood how the global financial markets operate or were familiar with the legal environment for investors. New rules of the game were just beginning to develop; many people did not even understand the vocabulary of international finance, to say nothing of the practical implementation of global investment ideas. It is obvious that Sherbovich not only mastered this new knowledge easily but also successfully implemented it. In 1998, he became a principal shareholder in UFG after buying shares from the French bank – Paribas. Several years pass and Sherbovich becomes one of the company’s co-owners and its President, head of structural financial products and corporate finance. The financier worked in UFG for twelve long years “like a Japanese”; he said later making a joke in reference to the famous Japanese rule of “life-long employment”.

Secret three. Under the tank with a grenade

In the 1990s, Russian business standards differed drastically from those existing in Wall Street and the London Stock Exchange. Some businessmen, who got in the way of their more influential competitors, ran the risk of losing not only their business but also their lives. The stories of big Russian companies, especially those that were privatised, still conceal a quite a few skeletons in the closet. In an environment where frank business discussions could be ‘uncomfortable’ UFG was unafraid to challenge the mighty Rem Vyakhirev, Head of Gazprom. As a significant shareholder in the gas monopoly, UFG accused Vyakhirev of inefficient management: with good reason. In those days, Gazprom looked more like a Soviet ministry rather than a publicly listed company and it did not quite understand market rules. Some managers in Gazprom treated it as their own private bank: funds of the national company were used to buy farms and sawmills under the pretence of fulfilling social obligations. Moreover, there were persistent rumours going around investors’ circles that management were funnelling a fantastic volume of assets out of the corporation: oil and gas reserves of created companies allegedly equalled the reserves of Kuwait.

Vyakhirev’s response was typical for those times. A massive attack was launched against UFG: the company was accused of violating Russian law when purchasing Gazprom shares and that the shares were transferred to foreigners via shady schemes. Amid this attack Gazprom management tried to use the services of unwitting government agencies: an investigator at the Office of Investigations at the Directorate of Internal Affairs in Moscow initiated a criminal case and in 2001 searches and document seizures were carried out in UFG’s 28 offices. However, thorough investigations did not reveal any illegal activities by UFG. In fact, all Gazprom’s shares that were used to vote for Fyodorov at shareholder meetings, were controlled by UFG itself and the financing of foreign investors did not give the latter any ownership rights nor rights to manage these shares. Most importantly, more than 50% of UFG itself (unlike many other companies that operated in the market with Gazprom shares at that time) was always owned by Russian shareholders (headed by Fyodorov). No presidential decrees were ever violated.

Gazprom came under new management, headed by Alexey Miller, and a more constructive relationship soon developed. Gazprom did not pursue claims against Fyodorov, Ryan, Sherbovich, nor any of their colleagues. UFG quickly connected with the management team and established a reputation as proactive supporters of shareholder rights.

Secret four. Press Esc button at the right time

By 2005, UFG became Russia’s leading investment bank. Many financial experts say that Ilya Sherbovich played a crucial role here and in 2005, the Russian National Stock Market Participants Association (NAUFOR) dubbed him the “best investment banker of the year”. A more notable measure should be the fact that Sherbovich successfully survived the transformation of UFG into a division of Deutsche Bank.

For a long time the foreign financial giant had been looking for an opportunity to expand into the Russian market: rumour has it that they chose UFG because of Fyodorov/Ryan connections and the reputation of Sherbovich as one of the most successful, if not the most successful, Russian financial experts. By this time, UFG was no longer an ordinary broker company – it had evolved into a first-rate investment bank. In 2003, the Germans purchased 40% of UFG’s shares with an option for complete purchase of UFG, which they exercised in 2006. The business grew so rapidly during this period that Deutsche bank recovered the cost of its initial investment within just a single year. In 2005, UFG topped the ranking of merger and acquisition consultants: from 2003 to 2005, the company took part in 24 deals amounting to $10.7 billion. Sherbovich’s share in UFG by this time was around 20% and it was the largest after that of the group’s founders, Boris Fyodorov and Charles Ryan. He easily retained the position of President in the new Deutsche UFG structure and headed up Deutsche Bank’s investment business in Russia.

However, despite his joke about “The Japanese”, Sherbovich never really considered himself a corporate soldier: a job in UFG and Deutsche UFG was not his long-term ambition but rather just a logical step on the way to his own business. No one knows for sure whether he always wanted to have his own business or whether it developed later. One thing is clear: Sherbovich pressed the Esc button at the right time as he managed to break free of the corporate matrix and get his own business off the ground just one year before the global financial crisis. Already in November 2006, Sherbovich had approached senior management at Deutsche UFG managers asking them to terminate his contract. However, they did not let him go immediately: by this stage he was far too important to the company’s development. “There are a lot of charismatic and vivid personalities among investment bankers but not many of them, except Sherbovich, can say that they were involved in most deals exceeding half a billion dollars”, said a commentator when discussing the Russian financial market. Nevertheless, in September 2007, Sherbovich finally managed to start his own project. According to market insiders, the entrepreneur made around $200 million from the sale of his shares in UFG

Secret five. Gather up and dominate

Since 2007, Sherbovich embarked upon a new stage of his career: together with employees he used to work with in UFG, he created the United Capital Partners investment group (UCP). In total, about 20 employees and shareholders left UFG and Deutsche Bank for the new company. Among UCP’s partners today, are his former colleagues from UFG with whom he had worked so successfully: Alexander Shmelev, Viktoria Lazareva, Mikhail Trofimov and Alexander Mishuris. It was a team of young, ambitious and talented managers having diplomas from well-respected educational institutions and a thorough knowledge of investment transactions. All these people, as Sherbovich once revealed in one of his interviews, invested at least 70% of their personal fortunes in the company and its funds.

Secret six. Buy – enhance value – sell

Going for broke’ justified itself again and again, and today UCP is one of the largest investment groups in Russia. Back in 2007, UCP purchased 10% of Modny Kontinent’s shares — a fashion retailer operating under the INCITY brand. By October 2007, UCP’s holding amounted to 26% of the share capital and by 2017 it had increased to 29%. In 2007, INCITY clothes had just appeared on the market; today, this retail network operates in almost 200 cities in Russia, Kazakhstan, Kirghizstan, Ukraine and Belarus. The value of Modny Kontinent’s shares has increased many times over the period.

In this case, similar to many other investment cases, the strategy of Sherbovich and UCP was classic and efficient. They purchased a stake in an undervalued asset that, for certain reasons, was not in demand on the market (for instance, because of an argument among shareholders, low quality management at the time and for a variety of other reasons). Then UCP, despite not looking for a controlling interest, insisted on carrying out certain overdue reforms. Thanks to this approach, the company’s share price increased considerably and UCP waited for the right moment to exit from the investment at the peak price. The asset, having previously been categorised as ‘distressed’ now became a premium asset: everyone profited including the companies themselves, having increased their efficiency and size thanks to the positive changes. At the same time the length of the investment cycle was different: for example, UCP started negotiations to sell three companies owning exploration licenses in Western Siberia to Novatek shortly after their acquisition from former owners (the deal was closed in 2010 and UCP realised a profit of Rub 4.7bn). However, the principal investment strategy stayed the same.

In 2008, UCP buys around 10% of RTS Stock Exchange shares and after two years sells this holding for ten times the investment cost. The same year, in 2008, that marked the crisis for the global and Russian economy, the investment group acquires 10% of shares in Lebedyansky food conglomerate – manufacturer of mineral water and fruit juices. Then this shareholding was sold to PepsiCo: UCP’s internal rate of return (IRR) on this investment exceeded 30%. A new company was formed out of Lebedyansky – Progress Capital. Sherbovich managed to double his shareholding in it and generate around 20% IRR on exit.

After finding its feet in the first two years of operation and successfully surviving the global financial crisis that brought down numerous start-ups and long-established companies, UCP began expanding into the industrial sector. Between 2009 and 2011, the company had acquired 25% of Gazprom Neftekhim Salavat’s shares. In summer 2010, UCP made another large-scale investment in the sector — it purchased a stake in Uralmash Drilling from GK Integra creating Uralmash NGO Holding — the largest manufacturer of drilling equipment in Russia.

In 2011, Sherbovich and his team invested in the Saint-Petersburg Stock Exchange, increasing their share to 10% by 2013.

Secret seven. The art of communications

Ilya Sherbovich is gradually becoming a more influential and noticeable figure in the Russian financial community. The ‘in-crowd’ becomes aware of his connections in the corridors of power and the economic establishment. Connections he acquired both as a result of his deals and thanks to the fact that he was on the board of some of Russia’s largest companies: for instance, Sberbank and Rosneft. Sherbovich is also acquainted with the most influential person in the Russian oil & gas sector – Rosneft President Igor Sechin. This relationship triggered rumours in the mass media saying that Rosneft’s President was behind the acquisition of the Vkontakte social network shareholding by UCP. Sherbovich’s detractors attribute much of his business success to his powerful connections.

Sherbovich himself has always denied such rumours, holding his opponents from Vkontakte shareholders accountable. Journalists at Forbes Magazine who carried out a thorough investigation of the corporate conflict around Vkontakte did not find any “traces of Sechin nor Rosneft” in this deal.

At the same time, this deal shows that Sherbovich has mastered the most important skill of any businessman: he knows how to cultivate a dialogue with different people, regardless of their background and social status.

That may help to explain how Sherbovich managed to persuade Vkontakte co-founder Vyacheslav Mirilashvili, who turned down an offer from Alisher Usmanov’s Group before, to sell UCP his shareholding. Mirilashvili, together with his partner Leviev, had wanted to sell their holding in the most successful social network in Russia for a long time following a bitter disagreement with the company’s co-founder Pavel Durov. This conflict between shareholders prevented VKontakte from developing further, thus creating a perfect opportunity for UCP to implement it’s tested before investment strategy of buying a stake in an undervalued company with an intention to significantly increase its valuation. Overall, UCP did not succeed in implementing all the improvements it planned for the business, as Durov at that time was focusing on building his new company Telegram and rejected most of the UCP initiatives, including an IPO of the business. However, UCP still managed to exit from this investment with a substantial profit selling its stake to Mail.Ru Group for $1.47bn dollars after 17 months. As a matter of curiosity, the new buyer took a note of Sherbovich’s ideas and is now successfully implementing the Vkontakte monetisation strategy that was suggested by UCP some time ago.

Secret eight. One burning passion

Even considering his pragmatism and business acumen, Sherbovich is an idealist by nature. Otherwise, it would be hard to explain why, in March 2016, he became embroiled in a fight with the management of Transneft where UCP had previously bought a stake of preferred shares on the stock market. Sherbovich was convinced that Transneft was intentionally underpaying dividends to its minority shareholders. However, the conflict soon escalated into a crusade for shareholder’s rights: Sherbovich has highlighted many times in his speeches that litigating against a state company is primarily an ideological issue and about defending the interests of all minority shareholders in Russia. Material claims are of secondary significance. The fights have turned out to be tough and resulted not only in several litigations worth many billions but also in a large-scale PR attack on Sherbovich in the mass media. UCP demanded that Transneft management should provide documents on business transactions in an attempt to find out the reasons for previous losses. As a result, in many publications ‘sponsored’ by his opponents he was almost labelled a foreign CIA spy. Sherbovich sardonically replied that his opponents’ responses are somewhat diverse: one moment he is labelled a western agent and the next a Kremlin protégé. The recent fight with Transneft resulted not only in a big win – in March, 2017 UCP exited from the state company’s capital by selling its holding of preferred shares for a considerable sum of money (according to a number of top mass media, it equalled Rub169.7bn). Sherbovich was also successful on the ideological front that was important for him: in December 2016, Transneft, for the first time in its history, approved a dividend policy that fixed standards of equal dividend payment to all shareholders. Sherbovich is no longer a shareholder of Transneft, but all the other minority shareholders (numerous Russian and foreign funds, natural persons and companies) can be happy: their dividends per share increased many times thanks to UCP’s efforts.

Secret nine. One needs to run just to stay in place

Not all Sherbovich’s investments were accompanied by corporate conflicts: he usually manages to resolve matters more amicably and without publicity. In 2012-2014 UCP, by buying shares on the Moscow Exchange and the London Stock Exchange, acquired a large shareholding in the Chelyabinsk Zinc Plant – the biggest zinc producer in Russia – equal to 15%. Then the holding was increased to 27% with respective blocking minority rights. By January 2015, the share price had increased threefold and in August, the same year, Sherbovich sold his shares.

The same year in 2015, UCP continued its strategy of buying into distressed assets. UCP and Gazprombank each purchased 50% of Stroygazconsulting; a company that specialises in the construction of compressor plants, pipelines and oil-and-gas fields. This deal helped the contractor win a number of large orders from Gazprom and acquire new clients.

UCP’s strategy is not limited to investments in troubled enterprises. In 2015, the investment group acquired around 10% of Inter RAO’s shares –a successful and efficient energy giant – from Norilsk Nickel. A year after the deal, Inter RAO shares were four times more valuable and UCP sold its stake to a consortium of financial investors and pension funds.

To sum up, during these ten years of work, Sherbovich and his partners proved to be extremely successful and proficient financial experts possessing some kind of a mystical talent for identifying great investment opportunities. UCP have invested in new technology, oil and gas, metallurgy, infrastructure, retail, and financial services. It is clear that Sherbovich and his team follow a principle that is both simple and brilliant: UCP goes into any sphere if it helps expand their business and increase the value of assets. The result is self-evident: UCP now controls over $3.5bn of assets and Sherbovich himself now appears in the 2017 Forbes’ list with a fortune of $950m.

Secret ten and the last one. Fishing philosophy

Sherbovich prefers not to discuss his private life: it is known only that he is married and has two children: a son and a daughter. Family, work and fishing are listed by him as his priorities, in this order. It is hard to draw many lessons from this scant information about Sherbovich’s private life, but his passion for fly fishing tells us much. Sherbovich is not content to stand idly by a river with a rod. He is a master of the art of fly fishing. A complicated technique demanding concentration as well as a gradual and precise sequence of actions. This technique has a lot in common with Sherbovich’s investment philosophy: in both cases, we see the same thorough analysis of opportunities, the ability to cast a fly with speed and precision, the patience to wait for the perfect moment and then to ‘strike’ with speed and decisiveness. It is also curious that fly fishing follows the principle of “catch and release”: a fish is caught for the sake of art and not for nourishment. In his investment philosophy Mr. Sherbovich also ‘catches’ and ‘releases’ shareholdings in promising companies: the only difference is that, unlike fly fishing, the financier receives a considerable gain.

It is no wonder that the Sherbovich has achieved several world records from the International Game Fish Association (IGFA). Two records are particularly notable: in October 2015, Sherbovich caught the biggest Siberian taimen (30.4 kg) and in December the same year — the biggest Danube taimen (13.84 kg). As he says himself, he fishes purely for pleasure but never misses a chance for a productive talk with other fishermen. More than 10 years ago, Sherbovich bought Ponoy River Company from its American owners. This place is beautiful and unique in terms of both its natural features and the abundance of salmon. It is also notable for the uniqueness of its guests. Some of the more famous visitors to have fished for salmon in the cold, clear waters of the Ponoy include former American President Jimmy Carter and former Russian President Dmitry Medvedev. Sherbovich manages and protects the conservation areas adjacent to the base at his own expense and is highly active in the fight to preserve the Atlantic salmon population in rivers of the Kola Peninsula.

Original article: Russian Business Weekly