State-Sponsored Russian VC: Destined for Failure?

I’m currently wired to a translation device at the bilingual Russian and CIS Private Equity and Venture Capital Forum, in the record-breaking heat wearing way too much jewellery as Russians tend to dress glamorously. But I must admit that it has only been the government speakers that have presented in Russian so far.

Andrey Sharonov, the deputy minister of economic development and trade of the Russian Federation says that PE managers can now invest in outer space, transport and aviation as these sectors have opened to private investment.

In addition the Russian Government will launch the Russian Venture Company in the Autumn of 2007. This fund is best described as a public-private partnership where the Russian government will provide half of the capital and take a minority stake in the funds. The first round of tendering took place in May and VTB Venture Management and Finance Trust have been chosen from 12 applicants as partners. Another tender process will take place in the fall.

Funds must invest in at least 8 Russia technology firms. It will be tricky for foreign private equity managers to participate in these funds because managers must be Russian or a Russian-based company, thought it is possible to have a Russian partner and invest that way. The structure of the funds are also closed-ended unit trust which are not ideal for foreign investors but are simply the best available structure available in Russia at the moment. Though Sharonov promised new fund structuring legislation possibly this year.

The Russian government is simultaneously trying to fund a Russian venture capital industry which lacks management talent and a technology industry.

So is the Russian Venture Company destined for failure?