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Advisory work for Rusenergo Fund, 2010-2014

The Rusenergo Fund (formerly the Otkritie UES Capital Partners Fund) was established in 2008 with the financial support of state-owned energy companies and banks. The 2009 crisis resulted in the net assets of the fund turning negative in September 2009 and led to the restructuring of the Fund, with Otkritie's removal from the shareholders of the Rusenergo Fund.

In March 2010, the management of the Fund was transferred to the newly elected Board of Directors, which brought Xenon Capital Partners (Cyprus) on board as a financial advisor. The Xenon team's core efforts focused on the implementation of priority measures to optimize the Fund's investment portfolio through the removal of companies with low growth potential and subsequent equity investments in more promising companies.

In 2010, the shares of numerous companies in the investment portfolio were either fully disposed or partially sold down, for a total value of over $140mm. At the same time, in accordance with decisions taken by the Fund's Board of Directors, shareholdings were taken or increased in companies with high growth potential, primarily power distribution companies. The resulting portfolio was made up of stakes in 15 companies, with such leading power sector companies as Rushydro, Rosseti, Inter RAO, E.ON Russia and Enel Russia accounting for 90% of the portfolio.

After the optimization of the Fund's investment portfolio, the Xenon's primary undertaking was to identify and analyze opportunities whereby the Fund could acquire a significant equity stakes in companies, and actively manage these investments in order to substantially increase the value of the holdings.

The $625mm acquisition of a 26.43% stake in Enel OGK-5 from Inter RAO by a consortium of investors in October 2012, the largest private equity investment in the Russian energy sector by international invetors, was made accordingly. Alongside the Rusenergo Fund, the consortium also included the Russian Direct Investment Fund, the Macquarie Infrastructure Fund, and a Kuwaiti sovereign wealth fund.

The 26% equity stake in Enel Russia and the resulting presence on the company's Board of Directors allowed the consortium to make a significant impact on the direction of the company, evident in a number of key strategic decisions. In particular, in October 2013, the Board of Directors of OGK-5 approved a dividend policy, under which the Board of Directors would recommend at the Annual General Meeting the approval of a dividend payment amounting to 40% of Enel OGK-5's net income according to consolidated IFRS financial statements.

Increasingly stringent regulation in the power sector, the uncertainty associated with the choice of a new electricity market model, and the implementation of a number of measures aimed at curbing rising energy costs, including a freeze on tariffs for natural monopolies, have resulted in a dramatic fall in the company's share price. Further deterioration in the financial and economic environment as a result of the imposition of sanctions by the EU and US diminished any hope that regulatory pressure on the power sector would soon ease and sector companies would see share price growth in the near future. Consequently, a significant gap arose between the market value of the Fund's assets and their fundamental value. The market value of the Fund's assets fell below that of the liabilities owed to the Fund's creditors, which made servicing the debt impossible. As a result, the Fund's assets were transferred to the creditors.

 

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