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Push Comes To Shove

Stephen Jennings, founder and controlling shareholder of Moscow-based Renaissance Capital, was forced to sell half the investment bank to Russian billionaire Mikhail Prokhorov's Onexim Group for $500 million.

Timing the market is tough in the best of times; lately it’s become next to impossible. Just ask Stephen Jennings.

The founder and controlling shareholder of Moscow-based investment bank Renaissance Capital rebuffed a takeover attempt by Russia’s VTB Bank a year ago, when some analysts were estimating RenCap’s value at as much as $4 billion.

Over the past six months, Jennings has held talks with billionaire Mikhail Prokhorov. Those negotiations took on an urgent air last month as the global credit crisis whipsawed Russia, sparking massive capital flight, a stock market plunge and frantic government efforts to shore up the country’s banks. Seeking shelter from the storm, Jennings agreed to sell 50 percent minus one share to Prokhorov’s investment fund, Onexim Group, for $500 million, a price that valued the investment bank at just two and a half times its forecast earnings for this year.

"It did not matter that we were liquid or profitable when the worst of the market crisis hit — the rules of the game changed extremely rapidly," Jennings, 48, tells Institutional Investor . "We just had to accept the reality that the price reflected market conditions. Long term, the value of the bank will be much greater as a result of this deal."

Prokhorov, 43, is Russia’s fifth-richest man, with a fortune of $22.6 billion, according to Forbes magazine. An oligarch who acquired a big stake in Norilsk Nickel for a rock-bottom price during the 1990s, Prokhorov in April sold his 25 percent holding to aluminum producer Rusal for an estimated $7 billion in cash and a 14 percent interest in Rusal, making him one of Russia’s most liquid billionaires. Jennings advised Prokhorov on the sale.

Prokhorov’s Onexim Group "was always our preferred partner, since it brings us a lot more political strength, as well as financial strength," says Jennings. "We’ve always known we needed a strong Russian shareholder to be seen as a Russian investment bank and to avoid being excluded from opportunities."

But the deal happened sooner than Jennings had anticipated. Amid the global chaos that followed the collapse of Lehman Brothers and the U.S. government bailout of American International Group, Russia’s Micex index plummeted 25 percent and capital outflows squeezed local firms. The authorities closed the stock market for two days, arranged for the rescue of a bank and a brokerage, and put some $60 billion on deposit with Russian banks.

"The game today is all about confidence, and with roughly $1 billion in cash and equivalents on our books after the sale, our balance sheet is much stronger, while many competitors are in considerable disarray," says Jennings, who together with other senior managers still owns the remainder of RenCap.

Founded by Jennings in 1995 after he left his job as co-head of Credit Suisse First Boston’s Russian investment banking operations, RenCap expects to earn $400 million in net profit this year, up 17.8 percent from 2007. The bank is the country’s top lead manager of equity issues, handling three deals worth $827 million in the first nine months of this year, according to Dealogic. The firm also dominated II ’s All-Russia Research Team for the fifth straight year in 2008, winning 11 of the 12 first-team places.

As well as buying the stake, Prokhorov is making at least $250 million in credit lines available to RenCap. "Fortune favored the cautious yesterday, which is why we sold this stake," says Jennings. "But going forward, fortune will favor the well positioned, the financially strong and the bold."