HF_5
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The document discusses options for the future of Hermitage Fund's activist investment strategy. It recommends continuing the activist approach with PR support in Western and local media, litigation in Russia, and diversifying by providing consultancy services to Russian companies and developing an investment climate improvement program with the Russian government. It also suggests reducing risks to Browder personally by shifting the PR focus from him to Hermitage and introducing succession planning.
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HF_5
- 1. The WORLD according to Browder It’s your WORLD – if you don’t like it, CHANGE IT! Presented by Tatiana Rukavitsyna Ekaterina Ladogina Andrey Fedorov Alexander Belenky Ekaterina Melnikova
- 2. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 2 - What Is It All About? How do you make the difference? Who is Mr. Browder? What about corporate governance? Will media help? Outlook for Hermitage’s future? Development of Russian Economy? Central Issue: Future of Hermitage activist strategy – Dismiss? Change? Refine?
- 3. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 3 - Recommended Course of Actions Continue activist approach with PR support in Western and local media, litigation in Russia Diversify Hermitage activist approach by: Providing Consultancy to Russian Companies planning to go public/M&A or willing to introduce corporate governance policy (new business line) Developing an Investment Climate Improvement program in cooperation with Russian Government (new initiative) Reduce personal risks by shifting PR focus from Browder personality to Hermitage Introducing succession planning program at Hermitage
- 4. Significant factors 1. Institutions & mechanisms 2. Media campaign 3. Russian Business Ethics 4. Hermitage VS Traditions
- 5. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 5 - 1. Ineffective in Russia Weak law base Breach of laws Manipulation by judges etc Minorities Stakes Dilution Company laws breach Ignoring established shareholders meeting procedures • Widely condemned accounting standards of Russia • inefficient work of audit companies Institutions & mechanisms Political involvement against interests of minority investors Boards domination and charters change by individuals& groups Russian Legislation Securities Regulators Financial intermediaries Accounting Rules and Regulations Company laws, charters and boards, shareholder’s meeting
- 6. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 6 - 2. Media campaign pros & cons Pros Public attention to the initiated lawsuits Governmental response to scandals Communication with investors Impact on oligarchs image within international community Relatively low cost Cons and risks Upsetting potential customers with bad portfolio Unpredictability of public battles - risk of losses – anti PR Efforts- and Time-consuming Russian events become less newsworthy
- 7. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 7 - 3. Russian Business Ethics Diversion of cash via offshore firms Misspending Massive asset stripping Stealing and accepting bribes Transfer pricing Corruption and weak courts Shareholders dilution Profit skimming Self-dealing and interested-parties transactions Voucher auctions & loans-for-shares privatization – foreign investors exclusive
- 8. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 8 - Activism Board rep, Russian courts Regular and frequent visits to portfolio companies Work with the government, Russian SEC, shareholders to fight corruption Portfolio concentration on high-profit sectors PR in Western media Highlights on shareholder activism Russian market underestimation and growth potential Long-term investments Passive approach, operating “in the shadows” Traditional diversification Traditional “NOT to air dirty linen in public” Short term-trading 4. Hermitage VERSUS Traditions Result:Hermitage outstanding growth rates (being linked to activist approach in PR – partially result of portfolio strategy and quality PR in reality)
- 9. Justifications 1. Strengthen activism 2. Joint Program 3. Consultancy 4. Browder - unique resource
- 10. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 10 - 1. Strengthen activism Shareholder Activism • Research and make public • Call for board of directors change • Investor campaign with all international media/PR • Restructuring plan by Hermitage and Government Officials • Law suits if needed • Minority shareholders consolidation Results • Unlocking company’s value • Attracting investors • Publicity for Hermitage • Improved financial performance Shareholder activism to add value Outsiders Shareholders Before After
- 11. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 11 - 2.1 Joint Program: Mutual Interest Government Foreign and local investments attraction Prevention of the capital outflow abroad Legislation development Hermitage Fund PR First-hand information on investment market development (long-term) Lobbying of investment climate Governmental reference
- 12. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 12 - 2.2 Influence of the Program Before the Joint Program Government Court A company After the Joint Program Government Regulations/Good business practices A company __ __
- 13. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 13 - 3. Consultancy Multi-phase Integration Phase 1 Research & evaluation Phase 2 Investment Decision Phase 3 Shareholder Activism Phase 4 Share Price Increase Phase 5 Dividends Consultancy Activity Due diligence Recomm- endations Transformation of the company Capitalization Increase Adding value Healthy business Fund Activity
- 14. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 14 - 4.1 Unique resource: Browder’s Power Head of the US Communist party Fighter by nature Stanford MBA Solomon Brothers banker Head of Hermitage Fund
- 15. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 15 - 4.2 Build to last? “…one of three people in the world…” and the key to Hermitage success Is Browder too big for Hermitage? Isn’t it too risky for Hermitage to bear Browder’s activities? Personally if I was an investor I’d be concerned about Hermitage future. Will Hermitage go on without Browder? Browder should build confidence in company's future… Would you let fighter’s pilot to aviate a jumbo jet?
- 16. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 16 - Alternative Solutions Portfolio Diversification Strategy Other segments: financial services etc Other markets: CIS Split of Hermitage into Hermitage Activist (same risky strategy) / Hermitage Conservator No change Browder to retire from Hermitage
- 17. 27 Mar 2005 AIBEc case competition: The Hermitage Fund- 17 - SUMMARY Activist strategy continue no modify diversification yes no no yes yes
- 18. Thank you
Editor's Notes
- We have to decide on whether
- <number> (auditing firms, equity analysts) (auditing firms, equity analysts) Charters are not in compliance with R-n law Lack of well-functioning CG institution Controlling shareholders: Convene meetings & take decisions without the knowledge of minority shareholders Improper entering of major- or interested party transactions Minority shareholders’ stakes are diluted without their knowledge and consent
- (court of Public opinion is more effective & fairer than the Russian legal system)
- Portfolio concentration on high-profit sectors vs. traditional diversification PR in Western media vs. traditional “NOT to air dirty linen in public”: Highlights on Hermitage shareholder activism (Board representation, Russian courts, publicity) Russian market underestimation and growth potential Hermitage shareholder activism vs. traditional investor’s passive approach: Board representation, Russian courts Regular and frequent visits to portfolio companies Work with the government, Russian SEC and other shareholders to fight corruption Long-term investments vs. short term-trading Result: Hermitage outstanding growth rates (being linked to activist approach in PR – partially result of portfolio strategy and quality PR in reality)
- <number> Payment of significant
- Dialog:
- It is well-known that Hermitage would not have the position of today without its founder. He inherited a real fighter nature, added knowledge and experience so that in aggregate it resulted in the unique resource of Browder’s capacity.