Renaissance Capital: A Moscow Survivor

Stephen Jennings, the co-founder and chief executive officer of the Russian investment bank Renaissance Capital, is far from his adopted home in Moscow. Sitting on a throne-like dais, the black, red, and green Kenyan flag draped behind him, Jennings presides over the launch of Tatu City, a planned community for 60,000 northeast of Nairobi. Renaissance has already spent $100 million of its own cash on land and planning. "We've never been involved in a project that has excited and inspired me more," Jennings tells an audience of Kenyan officials and business leaders in his broad New Zealand twang.

Constructing a city from scratch in such a dicey market might seem like a reach for a bank that has barely survived two near-death experiences in only 12 years. Kenya ranks among the world's worst countries in an annual corruption index compiled by the advocacy group Transparency International—154th out of 178. For Jennings, this kind of gamble is business as usual: part of a risky and expensive push into brokerage, investment banking, and real estate across sub-Saharan Africa. That strategy fits into his larger ambition of making Renaissance a financial powerhouse in emerging markets worldwide.

Vimal Shah, a Kenyan co-investor in Tatu City, calls Jennings "a believer." The owner of an oilseed refining business, Shah recalls a 2007 helicopter ride over the Tatu site, now a coffee plantation. Looking south at the sprawling slums of Nairobi and the traffic-choked roads surrounding the capital, the Renaissance CEO "understood instantly" the potential appeal to the Kenyan business class of a gleaming suburb with its own complex of modern residences and office buildings, says Shah. "He said, 'Done. Let's do it.' "

Tempering his boldness, Jennings, 50, has demonstrated a canny pragmatism when protecting his interests back in Russia. He understands and observes Moscow's murky and sometimes rough local rules. After Vladimir Putin, a former KGB officer, was elected President in 2000, Jennings hired several executives with connections to the Kremlin and the Russian intelligence service, now known as the FSB. Renaissance has generally avoided run-ins with the government, even if that requires sacrificing an investment opportunity. In Africa, Jennings once again will have to balance his appetite for risk against the hazards of doing business in a volatile environment.

The Taranaki peninsula, where Jennings grew up on a farm, is "the boonies, even by New Zealand standards," he says. An avid rugby player, he excelled at school and landed a spot in a prestigious economics program at the University of Auckland. From there he went to work for New Zealand's Treasury Dept. during a period of tax cuts and privatization. A subsequent job with Credit Suisse First Boston took him to Moscow for what was supposed to be a six-week consulting assignment.

Boris Yeltsin's government had hired Western investment banks to help privatize the post-Soviet economy. Jennings, who didn't know any Russian, was paired with fellow Credit Suisse banker Boris Jordan, the American grandson of Soviet émigrés and a fluent speaker. They set up shop in the art nouveau Metropol Hotel, across from the Bolshoi Theater, and hired 300 students from Moscow State University as temporary staff. Jennings, then 32, and Jordan, 27, soon spotted a lucrative opportunity.

The Yeltsin government had issued vouchers that citizens could use to acquire shares in state-run businesses. Many Russians wanted quick cash instead. Lacking rubber bands, they bundled the vouchers with cut-up condoms and brought them to Credit Suisse, which bought and resold the certificates at a fat profit. Jennings and Jordan then decided they could make more money buying undervalued Russian assets themselves. In early 1995, they quit Credit Suisse and started Renaissance Capital.

They were an incongruous pair. Baby-faced, gregarious Jordan hobnobbed with politicians and journalists. Lanky, no-nonsense Jennings quietly ran the business. By 1998, Renaissance was raking in $150 million in annual profits. In June of that year, the co-founders held a client conference that featured a party at the pastel-pink-and-white Kuskovo Palace near Moscow. Hundreds of guests strolled through gilded drawing rooms, sipping premium champagne and grazing on caviar and lobster. Bolshoi dancers pirouetted on a stage while a team of jet-skiers zoomed though flaming hoops on an adjacent lake. "Boris and Stephen, God bless them—it was over the top," recalls Robert P. Smith, a Boston-based investor who attended the gala.

Ten weeks later, Jennings woke at 3 a.m. to find a haggard Jordan at the door of his Moscow apartment. Jordan had come from the Russian White House, where leaders were holding emergency economic talks. He had learned that Russia would devalue the ruble and default on its immense sovereign debt. Renaissance was owed hundreds of millions of dollars by clients that were suddenly insolvent.

"Boris," Jennings told his partner, "we're broke."

Renaissance had five shareholders. Their holdings now worthless, Jordan and three of the others quit and moved on to other pursuits. Jennings says he never considered following suit—"not for one second."

Goldman Sachs (GS) and other competitors took the 1998 debt crisis as a signal to flee Moscow. Renaissance shrank, but it endured. Within a few years, Jennings had the company humming again, fueled by a Russian oil and gas boom. He branched out from investment banking to private equity and consumer lending. Renaissance moved into a skyscraper overlooking the Moscow River and recruited executives from bigger banks. "It was a place that a lot of people aspired to be," recalls Robert Foresman, whom Jennings hired away from Dresdner Kleinwort Wasserstein in 2006. "The buzz in the place and the atmosphere and tempo were at a different level than at a global bank," says Foresman, who now heads the Russian operations of Barclays Bank (BCS). Jennings bought himself a Gulfstream jet, a vacation spread in New Zealand, and a British country estate in Oxfordshire.

Then, in September 2008, it all came tumbling down again. As the global credit crunch hit Russia, Renaissance's sources of short-term loans dried up. Jordan was on a weekend fishing trip near the Volga River city of Tver when he received a cell phone call from his former partner. "All his [credit] lines were cut overnight," says Jordan, who now runs Sputnik Group, a Moscow-based fund manager. "He had to deliver money to his clients, and he had no lines to do it. He needed to close a deal by Monday to save the bank. He asked me if I would buy some equity to come back in."

Jordan rushed back to Moscow only to discover that Jennings had already found an emergency source of cash: Mikhail Prokhorov, a Russian billionaire with holdings in mining and other industries. On Sept. 22, Renaissance announced that Prokhorov, best known in the U.S. as the co-owner of the New Jersey Nets basketball team, would pay $500 million for 50 percent of Renaissance, minus one share. The deal left control in Jennings' hands but underscored the bank's weakened condition. Prokhorov's investment valued it at $1 billion; in 2007, according to Russian press reports, Renaissance had rejected an offer by state-controlled bank VTB to buy it for as much as $4 billion. Jennings unloaded his Gulfstream and got rid of most of the bank's top executives, along with almost half of the 1,400-person staff.

As Jennings rebuilds, he's aiming higher than ever. The scenario he sketches assumes that the U.S. and Europe will play a diminishing role in the global economy. They will be outpaced not only by China, Brazil, and India, he predicts, but also by tiny but fast-growing economies such as Zambia, Bangladesh, and Guyana. More and more of the investment powering this growth, he reckons, will originate in emerging markets, bypassing New York and London. Who better than Renaissance, battle-hardened in Moscow, to play dealmaker?

Renaissance has handled transactions worth nearly $14 billion in 20 emerging markets over the past year. These range from the $2.2 billion Hong Kong listing of Russian aluminum group Rusal to the $955 million sale of Central African Mining and Exploration to Kazakhstan-based Eurasian Natural Resources. Some 25 percent of the bank's revenue comes from Africa. "The world is designed for us right now," Jennings tells his 16 Nairobi employees over a lunch of steak and salad on the trading floor of Renaissance's offices in the Kenyan capital.

Skeptics say Jennings could be overreaching—again. Even after Prokhorov's cash infusion, Renaissance is fighting to regain its financial health. The bank posted a $3 million pretax loss during the first half of 2010, after eking out a $12.7 million full-year profit in 2009. Moody's Investors Service (MCO) and other rating agencies are raising questions about the $800 million that the bank has lent to affiliated businesses, an amount equivalent to 75 percent of its total equity at the end of 2009. Much of that has been used to finance the expansion in Africa. Before investing in Renaissance, Prokhorov insisted that the bank strictly limit such lending in the future. In a Dec. 8 interview with Bloomberg Television, Prokhorov said he is happy with his investment in the bank, which he estimated has doubled in value since 2008.

Investment bankers in sub-Saharan Africa face daunting obstacles, including political instability, weak legal protections, and rampant corruption, says Christopher Palmer, head of global emerging markets at Gartmore Investment Management in London. Even in countries considered relatively investor-friendly, such as Uganda, governments have abruptly "reinterpreted" deals, Palmer says. "There are not only challenges to making a deal...but will the deal stick? The business environment is more challenging than Eastern Europe or South Asia, and far more challenging than Latin America or the Far East."

Jennings contends that Renaissance's experience in Russia's chaotic markets gives it an edge. The bank has largely avoided clashes with Russian officialdom—no small feat in a country where businesses are periodically targeted with dubious investigations that, executives complain, amount to shakedowns or asset grabs. "It's much less of an issue for us than people might think," Jennings says. Russian officials, he says, respect his bank because "we've promoted Russia, we helped open capital markets." Asked whom he admires in Russia, Jennings immediately mentions Putin: "I respect what Putin has done to consolidate power. I don't agree with everything he's done, but Russia was getting into a very anarchic situation."

In 2005, Renaissance led a group of investors that outbid oligarch Viktor Vekselberg for VSMPO-Avisma, a Russian company that is the world's biggest titanium producer, supplying the likes of Boeing (BA) and Airbus. The following year, the Kremlin made it known that it wanted control of the titanium group. Renaissance agreed to sell its stake for an undisclosed sum to the government's military export company, Rosoboronexport. Jennings said at the time that he didn't want to pick a fight with the Kremlin. Renaissance says on its website that it realized a "strong return" on the deal.

Renaissance chose to walk away from another potential confrontation after learning that two of its former subsidiaries had been involved in an alleged scheme to obtain $107 million in fraudulent tax refunds from the Russian government. The purported fraud took place in 2006, shortly after the bank had sold the subsidiaries. Renaissance says it was not involved in the affair and did nothing wrong. Hans Jochum Horn, a deputy chief executive, says that when the bank learned about the fraud allegations, it decided not to alert the authorities because "we did not suffer any losses, nor did any of our clients."

The incident came to light after Hermitage Capital Management, a London-based fund that had been a leading investor in Russia, complained publicly that some of its subsidiaries had been enmeshed in a similar tax refund episode. In a court filing in New York in 2009, Hermitage said that after discovering abuse of its units in 2007, CEO William Browder received a call from Igor Sagiryan, then Renaissance's president. Sagiryan offered to help Hermitage liquidate its subsidiaries, a step that would have made it difficult to track the perpetrators of the alleged tax fraud, according to the filing. Hermitage learned later that the two former Renaissance subsidiaries had been involved in a similar scheme and then were liquidated, the filing said.

Renaissance's Horn says Sagiryan, who no longer works for the bank, was not authorized to contact Hermitage. Horn says he doesn't know what Sagiryan said to Browder. Sagiryan did not respond to interview requests, and Browder declined to comment for this article.

Apart from the dangers posed by Moscow's fraud artists, Renaissance faces other challenges in Russia. State-controlled VTB is pushing into the brokerage business, overtaking Renaissance as this year's top underwriter, with a 12.3 percent share of Russian stock sales, according to data compiled by Bloomberg. VTB and other local rivals are poaching Renaissance's talent, including, in recent weeks, its chief strategist and top oil analyst.

Against that backdrop, growth in Africa looks even more attractive to Jennings. As the sun sets in Nairobi, he pulls out his BlackBerry and clicks on an e-mail from Clifford Sacks, his African equities chief. The bank, Sacks reports, has been chosen to handle the initial public offering of a Nigerian cement company.

Grinning broadly, Jennings reads the note aloud: "Typically Renaissance. We started behind the pack. Elbowed, scrapped, kicked our way to the front. This was a great performance of which we can be proud."

    Before it's here, it's on the Bloomberg Terminal.