Interview
with Tim Enneking and Alexander Polykovskiy
of Altima Asset Management
Eurekahedge
April 2006
Tim Enneking is a founder and director
of both the Tera Capital Fund and its investment
manager, Altima Asset Management. Enneking
is the chairman of Altima. He is also the
director of corporate development for Optim
Advisors, which manages over US$25 million
in assets of the Diversified Property Fund
(DPF), a fund focused on emerging European
markets, as well as president of Optim's
Metals Group and president of Magnesium.com,
which include all DPF's metal production
and trading activities. He is also chairman
of the board of Amerim-1, which is constructing
a warehouse complex between Moscow's Sheremetyevo
International Airport and the main road
link between Moscow and St Petersburg.
Prior to joining Optim, Enneking was the
president of Tera Finance, a financial consulting
firm, and the CEO of Baytree International,
a B2B Internet company. He was the vice-president,
M&A of GTS, working for GTS from 1997
to 2001. While with GTS he was a key player
in taking two Russian companies public on
the NASDAQ. In various positions, he has
been the principal on over 50 M&A transactions
throughout Europe and the CIS Countries
worth over US$10 billion and has extensive
analysis and transactional experience in
Russia. He speaks near-native Russian and
French. He has four advanced degrees: in
international business, international law
and Soviet Area studies from Georgetown,
the University of Baltimore and the University
of Maryland.
Alexander Polykovsky is a founder and director
of both Tera Capital Fund and Altima Asset
Management. He has been successfully managing
investments and business in Russia since
1992. He recently successfully completed
construction and sale of a large warehouse
complex near Sheremetyevo International
Airport outside Moscow. Polykovsky is a
graduate of the Moscow Production Engineering
Institute. He is also co-founder and a board
member of the Alan Group of companies, including
logistics and construction companies.
Given that the Tera Capital fund
has a much lower minimum investment requirement
relative to the industry norm, does this
increase the sensitivity of Tera's performance
to redemptions? What checks do you have
in place to address this issue?
It is certainly theoretically possible
that Tera is more sensitive to redemptions
than other funds. However, during Tera's
relatively short existence, we have
not had a single redemption of any funds
whatsoever, although the number of new
investors has been increasing steadily.
Pleasantly, the opposite is true - the
average investor in Tera has already
invested twice in the fund; we have
invested several times each. Also, since
investors are free to invest relatively
small amounts, it's kind of like the
labour market: if you can't fire someone
you don't hire them. With Tera, it's
relatively easy to get out, so one is
comfortable leaving money in.
In terms of checks and balances, we
have the relatively standard authority
to delay redemption in the event that
it causes serious cash flow problems
within the fund. Of course, the funds
in which we've invested also require
a certain period for redemption, so
in effect we end up with the 30 to 60-day
redemption period reflected in our prospectus
and marketing documentation. We think
this is plenty of time to be able to
effect redemptions in a controlled manner.
Finally, we are very slowly allowing
a bit of cash to accumulate in the fund.
Of course, this will never reach a large
percentage of the fund's assets because
we need to put the money invested in
Tera to work, but there are several
good reasons to have some cash on hand,
and meeting redemptions is one of them.
Since our minimum and average investment
is relatively small, we really do not
need a large reserve to handle redemptions
of even several investors at once.
Therefore, we see the lower average
investment size as an advantage, not
a disadvantage.
Could you also discuss the above
in terms of the capacity constraints
on performance?
We certainly don't see that having
a larger number of investors than most
funds of funds constrains us in any
way. If anything, the opposite is true.
For instance, one of the funds we invest
in has almost US$2 billion under management,
but has only approximately 225 investors.
If five of those investors decide to
leave within a relatively short period
of time, that fund will have to really
work to redeem them all in a timely
fashion. Given our, if you will, diversification
in sources of investment, as well as
in the investments we make, we would
not have any difficulty in redeeming
a far larger number of investors under
comparable circumstances.
How does Tera Capital's mix of
investee funds meet its investment objectives?
We really have tried to diversify as
much as possible in the relatively new
markets in which we invest. We invest
only in equity. Consequently, through
the investee funds, we invest a significant
portion of our assets in "blue-chip"
stocks, another significant portion
in secondary stocks, some in tertiary
stocks and relatively young companies,
with a reserve that we are planning
on investing in private equity but have
not yet done so.
Could you give us a break-down
of the fund's assets by targeted/actual
market segment and/or asset class, and
the rationale behind the same?
Interestingly, we cannot provide a
detailed breakdown by market segment
because we don't have complete transparency
with respect to the funds in which we
invest. Given that we are heavily invested
in Russia at the moment, we are obviously
also have significant investments in
the oil and gas industry, extractive
industries and raw materials. However,
we also have significant holdings in
power generation, telecommunications,
FMCG, pharmaceuticals and other rapidly
growing industry segments in Russia
and Eastern Europe.
In other words, given the nature of
the markets in which we invest, we are
really pretty much an opportunistic
fund. While we look periodically at
investing in a single sector - and in
sector-specific funds, such as power,
telecommunications, or oil and gas -
for the moment we have elected to stay
more of a generalist fund. This gives
us considerably more flexibility and
makes us far less dependent on developments
in any specific sector. Given that some
of the markets in which we invest are
not deep, and perturbations can be significant,
we feel that this approach is much better
from both a diversification and risk-minimisation
standpoint
Insured bank deposits are cited
as an effective means of reducing political
and other macro-economic risks in Russia
and the CIS. What other risk mitigating
practices does the Tera Capital Fund
have in place?
Risk reduction was probably our top
priority in structuring Tera. That is
one of the reasons that we created it
in an offshore jurisdiction and not
in Eastern Europe. Given that we only
work with highly professional funds,
this means that investments in Tera
are made through major banks, that the
individual investments in the investee
funds are effected between major financial
institutions who act as our respective
administrators, that our fund and the
funds in which we invest are audited
by major firms, and that deposits are
all insured by major insurers or institutions.
Overall, we feel that, although we are
clearly exposed to significant regional
and country risk, we have been able
to minimise collateral risk such as
banking system risk, repatriation risk,
and various other types of risks that
are not directly related to the investment
itself.
Comparing the Eurekahedge emerging
markets hedge fund and fund of funds
indices over the past few years, one
notices that for the period from May
2005 to date (the collective period
of operation of Tera's investee funds),
funds of funds have actually overtaken
(up 26%) their hedge fund peers (up
23%). Do you feel this is a reflection
of an increase in quality of fund of
funds managers, or of the benefits of
diversification, in such markets?
Frankly, it's difficult for us to answer
that question without a deeper analysis
of which funds have really generated
that sort of performance. Hazarding
a guess, however, I would say it might
be due to the fact that more funds of
funds are focusing on emerging markets
and during the period of Tera's existence,
emerging markets have done extraordinarily
well. Of course, in that case, it's
only a temporary aberration; the underlying
investee funds almost have to catch
up and surpass the funds of funds eventually.
How does Russia stack up against
other emerging markets in terms of opportunities
for hedge funds/funds of funds?
Russia is the largest single market
and the most resource-rich one in the
region on which we focus, therefore
it's probably the most interesting.
However, given where the Ukraine is
today - about where Russia was six or
seven (or even more) years ago - that
market, among others, is also extremely
interesting. Unfortunately, the level
of political stability in the Ukraine
has not quite met expectations, and
it's probably still too early for all
but the least risk-averse capital to
enter the country in a serious way.
As we have been looking at various markets
in Eastern Europe, using Russia effectively
as a base, there has been rather surprising
development: investment in Russian companies
has become progressively less an investment
in just Russia. Russian companies are
so cash-rich that they are buying more
and more interesting assets outside
of Russia: in the former Soviet Union,
in Eastern Europe, in Central Europe,
and even in Western Europe and the United
States.
Therefore, as we are looking to further
increase Tera's diversification, the
portfolio is diversifying all on its
own.
Given the increasingly stable political
environment in Russia - whether you
agree with the politics of the current
party or not - the prospects in Russia
and in most contiguous countries look
to be quite good for at least the next
three to five years.
Do you foresee a crowding out
of opportunities for alternative investment
in the Russian markets any time soon?
What is your fund's main edge over its
competitors?
Interestingly, there appear to be very
few funds of funds focusing on Eastern
European emerging markets. I'm sure
you know more about the others than
we do. And, while there is probably
more money chasing good projects and
companies than ever before in Russia
and Eastern Europe, the need is tremendous
and there will be no shortage of investment
opportunities for years to come.
One of the interesting distinguishing
features of Tera and its management
company, Altima Asset Management, is
that Altima covers all of Tera's expenses
and only collects a success fee. In
other words, investors in Tera do not
see their investment whittled away by
load fees, banking expenses, or even
auditor's fees - Altima pays them all.
Altima only earns money if Tera earns
money.
Between those two characteristics of
Tera, we think it is singular. It also
gives the management company one heck
of a motivation to succeed!
You mentioned that the need
for investment in Russia is tremendous.
Would you have some figures at hand
that might give a better picture of
the kind of demand chasing the kind
of capacity among hedge funds allocating
to the region?
Some approximate figures:
i) Power sector: Over the next 15 years,
US$450-600 billion of investment will
be required. The power sector has been
a very successful sector for investment.
ii) Gas sector: For projects currently
underway or approved, almost US$100
billion in the next five years.
iii) Oil and gas pipeline construction:
US$150-300 billion over the next 15
years.
iv) Foreign investment increased by
10% in 2004, 10% in 2005 and is expected
to increase 11% this year. However,
the total for 2005 was still only US$6
billion - an almost insignificant sum
given the size of the country, its population
and the size of its economy (where foreign
trade turnover alone totalled almost
US$300 billion in 2005).
In other words, demand for foreign investment
is enormous and, even with the recent
increases, the amount being invested
in Russia is extremely small.
Further, there are enormous investment
requirements in the financial (banking,
insurance, etc), FMCG, food, manufacturing
and other sectors that are just beginning
to be felt. 70 years of communism didn't
help Russian and the other countries
of the former Soviet Union modernise.
More importantly, there was virtually
no emphasis on consumer goods. Finally,
while the very top level of technology
in the Soviet Union may have been comparable
to that of the West (even ahead in some
areas, while behind in others), there
was one enormous distinction: in the
West, a good idea is distributed through
all levels of the economy and society
very quickly by entrepreneurs or existing
companies. In the Soviet Union, such
ideas were generally closely guarded
and reserved for a small group of elite.
Consequently, consumers needed everything
in Eastern Europe and the former Soviet
Union. Uncontrolled imports, among other
things, contributed to the crash in
Russia in 1998. Now, we are seeing much
import substitution and demand for high
quality, Russian-made goods is enormous.
Again, statistically, much of the impact
of this is being masked by climbing
oil prices, but the trend is real and
clearly visible "on the ground".
Curiously, since most production facilities
in Russia and Eastern Europe are old
and/or in poor condition, the region
has an advantage: it can simply leap
four or five generations of technology
and invest in the most recent. In the
West, where a company may have invested
not long ago in technology that is now
only one or, at most, two generations
old, there is a tough economic decision
to make as to whether to upgrade. Here,
there is no such decision. And since
there is plenty of cash from exports
in Russia, in particular, we are seeing
much investment in state-of-the-art
facilities as a result.
Could you share with us your
outlook for Russia in the near and medium
term?
In the near term, two or three years
out, we think Russia will grow quite
rapidly. The same is true over the medium
term if Russia addresses some of its
more serious problems: corruption and
the lack of real opposition political
parties, an independent media and an
effective judiciary.
However, there are lots of "haves"
in Russia now compared to ten years
ago when there were really only "have-nots".
Therefore, it is in the best interest
of those who can influence political
and economic events that the situation
in Russia remains stable and profitable
for everyone. There is also a tremendous
amount of diversification in terms of
production taking place in Russia today
that is hidden from a statistical standpoint
by the simultaneous increase in oil
prices.
These two factors, which are largely
hidden from the outside world, significantly
enhance the prospects for stability
and growth in Russia.
Of course, much depends on the world
price of oil as Russia has only begun
its economic diversification process.
Given that there are few, if any, indications
that the price of oil will fall below
US$50 per barrel,
however, and given the pace of economic
diversification that we see every day
here in Russia, we do not see major
cause for concern.
That said, Russia runs on the old "Internet
time"; one year in Russia, or in
most places in Eastern Europe for that
matter, is five years virtually any
place else. You have to be on your toes
here and know what you are doing because
things change very quickly. And that
makes events a bit more difficult to
predict.
Contact Details Tim Enneking
+7 495 765 2824 te@altim.ru
