Boris Podolsky, Executive Director of Management Company RUSNANO, “We ought to view this crisis as an opportunity to innovate”
Boris Podolsky, Executive Director of Management Company RUSNANO
Photo: TASS / Sergei Petrov
RUSANANO, one of the largest state investors in high-tech, enjoyed several widely-publicized successes last year: the estimated value of OCSiAl, a graphene nanotube manufacturer, increased to $1 bln; a wide scale construction of wind farms began in the Rostov region, and the first Russian large-capacity gas turbine for the energy sector passed its testing phase. The newspaper Izvestia has learned how the socio-economic impact of investing in high-tech is assessed and about the state of the nanotechnology industry in year 2019 from Boris Podolsky, Executive Director of Management Company RUSNANO.
— What were RUSNANO’s goals, tracked using KPIs, in 2019 and to what extent were they achieved?
— Overall, our KPIs are tied to the development of the nanotechnology industry and the amount of additional nonstate funding we attract for its growth. Factors, such as turnover from the sale of nanoproducts and export volumes are clearly indicative of the sheer scale of operations of our portfolio companies. Last year, their turnover rose by 11% to reach RUB 445 bln, and the equivalent cumulative sum, based on prices for end buyers, for the entire period exceeded RUB 2 trln. Export sales by portfolio companies increased by 8% in 2019 (in comparison to the previous year) and reached RUB 78 bln, and the equivalent cumulative sum based on manufacturers’ prices was over RUB 350 bln.
However, I understand that these figures do not tell us much about the level of innovation. Hence, JSC RUSNANO’s strategy includes a point about a relative KPI tied to turnover from nanoproducts and export sales, which have to be greater than the corresponding growth in the non-natural resource-based industries of the Russian Federation by 1%. In other words, if the high-tech innovative sector is doing well, it will grow faster than other segments of the economy.
In fact, the turnover of portfolio companies is going up at an even faster pace, and by the end of 2019, the rate of increase of income from nanoproducts was 8% higher than that from industrial sectors of the Russian Federation, thus exceeding the KPI 8-fold. The 4% growth in exports of nanoproducts exceeded that of the non-natural resource-based sector of Russia’s economy, thus exceeding the aforementioned KPI 4 times. This measurement of success is important because it shows the demand for and the competitiveness of products and solutions that we have invested in on the global market. After all, innovations, as a rule, target markets worldwide. Based on the results so far, we are doing fairly well.
— What about RUSNANO’s second goal—investments?
— At our current stage of development, which began in 2014, we have been following a private equity fund model, i.e. we have been investing in new projects only using newly-established funds, managed by Management Company RUSNANO, that focus on specific industries or regions. Funds are created by attracting at least 50% of the total investments from outside partners. We assess our performance based on the total amount of external funding the new funds attract, which were established with participation of RUSNANO. The more of them there are, the more support promising high-tech solutions will receive.
By the end of 2019, we were able to create nine funds, managed by Management Company RUSNANO. They attracted RUB 80 bln in funding from external investors. Last year, more than RUB 26 mln of the aforementioned total came from mandatory payments made by partners as part of their strategic partnership agreements. During the next phase, the money will be used to establish funds. I think that soon they will be able to make their first investments and you will be sure to hear about them. So in this particular area, we have been able to reach the goals that we set in 2019.
New funds, established with the participation of RUSNANO, have already invested approximately RUB 43 bln in portfolio companies. For instance, the Far East High Technologies Fund (FEHTF) reached its first four deals last year, and all of them are in areas that are new for us. The following businesses received funding on condition they localize their products and services for the Far East: Hotlead, a cloud-based service; Visitech, a provider of solutions for automating occupational and industrial safety systems; Titan Power Solution, a manufacturer of ultracapacitors, and Cinemood Portable Movie Theater.
— The government is reforming the system for evaluating business innovation support provided by the state in order to ensure investors have rights when taking on risk. How effective do you think the investment mechanisms in the company are?
— We fully support the government’s work in this area. In fact, we took part in drafting of this legislation. It is important to ensure that the government’s regulation of spending is compatible with global norms used to assess the performance of the direct and the venture capital investment sectors.
Accordingly, RUSNANO has long been using the portfolio approach to evaluate performance by taking into consideration the entire portfolio of assets during an investment cycle or the life cycle of a fund. At the end of 2019, the combined investments made by JSC RUSNANO in projects of the entire portfolio (since its inception before 2014) amounted to more than RUB 200 bln. The other part of the portfolio is funds, which I talked about earlier.
We ended our involvement in approximately 54 projects, i.e. almost half of the portfolio. And the average IRR (investment rate of return) on exit was 15.5% based on the fair value of an asset at the time it was handed over to be managed by Management Company RUSNANO. Our earnings from the investment portfolio, including from assets we sold off, exceeded RUB 90 bln.
But is this a large or a small sum if the life cycle of a fund is not over yet? We compare returns on investment from projects and the fair value of current assets with corresponding investments made in the portfolio. If the difference is positive that means the investor is making money at that moment. For year 2019, this difference was positive for RUSNANO and amounted to more than RUB 14 bln. In addition, it is important for RUSNANO to look at our achievements in the context of the aim initially set by the government (our main shareholder), which was to create a new sector of the economy—the nanotechnology industry—in the nation.
— Unlike many venture capital funds, RUSNANO is a state entity. Do you, therefore, worry about being socially responsible or only concern yourselves with returns on investment from the portfolio?
— Our investments focus on tangible high-tech projects, i.e. technologies for our actual economic and industrial sectors. When you provide funding for technologies in manufacturing and take into account the complexity of a technology life cycle and the need for constant upgrades, naturally, there is a socio-economic impact of the investment.
For instance, as part of our work, 115 enterprises and R&D centers, with a presence in 35 regions, have been opened throughout the Russian Federation. As a rule, there were no existing equivalents used on industrial scale in Russia to technologies deployed. Since these enterprises started operating, they have paid RUB 152 bln in various taxes, thus increasing the contributions made into budgets by the innovation sector of the economy. More than 40,000 jobs have been created at the new production facilities. Frequently, individuals with absolutely new competencies are required by these enterprises. But, at present, it is next to impossible to find such staff in the Russian labor market, which is why the Fund for Infrastructure and Educational Programs (FIEP) is involved in designing educational programs to train such future unique experts.
Despite rumors to the contrary, RUSNANO does not provide direct support for innovative products and solutions, instead we invest in businesses. However, indirectly, our investments create demand for research and development work. After all, the established enterprises are innovative businesses, which are always searching for the best technologies and investing a certain percentage of their revenues into R&D on an annual basis. Over all, by the end of 2019, our portfolio companies allocated approximately RUB 47 bln for research and development.
— What are your expectations for year 2020? And what effect has the Coronavirus pandemic had on RUSNANO’s plans?
— For now, we have switched to working remotely just as most other companies. In light of the current crisis, it would be too presumptuous to say anything with any certainty about year 2020 or the nearest future. No one can accurately forecast what consequences the current crisis will have on the state of our projects and on the Russian or global economy.
Without a doubt, it has already become more difficult to attract new investments to and to exit (sell our share) ongoing projects. Plus, many of our enterprises are facing hard times just as other small and medium-sized businesses. All of this is bound to have an impact on RUSNANO’s plans.
On the other hand, the pandemic has led to new growth in some areas of medicine and of the sector providing solutions for automation of occupational and industrial safety systems. Hence, we are attentively monitoring how the landscape of the technology sector is changing. Incidentally, many of our portfolio companies have adopted to the crisis by focusing their work on current needs to fight the Coronavirus pandemic. I know that several FIEP startups are currently waiting for approvals of their tests for detecting a SARS-CoV-2 Coronavirus infection. Our portfolio companies are also developing vaccines and a number of medications, and are manufacturing diagnostic and other equipment for medical facilities converted into COVID-19 centers.
After the lock down is over, arising issues will include identifying and repairing weak spots in the IT infrastructure and security systems in cities. And we can offer the following solutions: fiber-optic cables from Saransk to ensure quality Internet connectivity; video surveillance and facial recognition systems, and smart cameras, and robots that can perform people’s jobs in crowded spaces and the logistics sector. So we should view this crisis, just as we would any other, as an opportunity to meet the demand for innovative solutions.