After the collapse: Igor Vayn made crumbled Renaissance Capital bring profits again
Igor Vayn would not claim the credit for turnaround of Renaissance Capital, says this is achieved by the team
At the end of November 2012, on a late Friday night, Igor Vayn, CEO of Otkrytiye Capital, got a phone call. Dmitry Razumov, President of Mikhail Prokhorov’s Onexim, with a university degree in diplomacy, called to ask for Vayn’s opinion re one of the candidates to the position of the head of Renaissance Capital.
Days before the call, on 14 November 2012, the investment bank was through the most dramatic point in its history – it lacked the cash to pay for its current operations and settle margin calls. As a result, the share owned by Stephen Jennings, the founder of the company, was sold to Onexim for about USD8, i.e. USD1 per each of the Group’s eight companies. Jennings left Russia that very day and was not seen in Moscow ever since.
Prokhorov’s investment was not limited to USD8. All in all, he invested around USD1 billion into Renaissance Capital: USD500 million was paid for one half of the company the billionaire (Prokhorov) bought back in 2008, another USD 485 million had to be spent in 2012. As a result of its operations in 2012, Renaissance Capital wrote off a loss of USD378 million; however already the next year the investment bank earned a profit, USD15 million, according to Vayn.
When asking for the advice on one of the candidates, Razumov was not in fact going to consider anyone else but Vayn. That is why after about half an hour, he put his main question, that is if Vayn himself would be interested in this job. A graduate of the school of economy of the Tver State University, and Pace University of New York did not take long to come back with the answer — one week later he entered his office in the Moscow City Business Centre.
“This was a challenge for Igor,” says Christophe Charlier, Deputy CEO of Onexim, in charge with the turnaround of Renaissance. “If he took the challenge and succeeded, he would see impressive prospects before him.”
However, back in early December 2012, Vayn saw debris rather than prospects. “Every day we were losing huge money and discovering curious things,” Igor Vayn says. For a while, Onexim became something like the Central Bank for Renaissance: Charlier got a room in the Moscow City, and the new management sent him daily reports on the state of the bank’s accounts and the profit or loss received during the day. This is exactly the way commercial banks report to the Central Bank. This practice is still in place in Renaissance.
After Jennings had stepped down, the new management was not only to keep the bank afloat, but also to bring it back down to earth and make it profitable despite the circumstances. “Stephen had insisted on having a large scale infrastructure, so that the bank would have been able to quickly respond when the market emerged,” Charlier says. That is why Renaissance Capital ran much into excess starting from the “client floor” (floor 48), where every room featured a table made of some special sort of wood, to the separate café for managing directors, which Vayn was surprised to discover. “When I asked why they needed that café, they said it was made separate so that managing directors could talk at lunch. I didn’t understand that. Now we haven’t got anything of the kind”.
A typical example is the introduction of the USD18 million worth SAP system. “This is a huge industrial automation system, good for industrial enterprises rather than an investment bank of our size,” Vayn says. By December 2012, USD12 million had been spent on the system, and it needed another year to start operating, according to him.
“When it appeared that a system that would fully cover our needs cost USD500,000 I couldn’t help slamming my fist on the table. The introduction of SAP was immediately suspended, the money already invested was written off as a loss. “This simple example shows a lack of touch with reality; under Jennings, every manager wanted to spend as much as they could because the higher the budget, the higher their chances to get their contract renewed, and the higher the bonus,” Vayn says.
Then, in those first months, Vayn fired high-paid investment bankers and replaced them with younger bankers. Jennings had stuck to the opinion that they needed top stars, and as soon as there appeared a noticeable banker he was acquired by Renaissance Capital. The new management decided to grow professionals in the house. Vayn says that today, instead of those «stars» with the annual compensation at USD250,000, employees do the same job for USD50,000. “They know that if they do well, next year their compensation will be USD75,000, and this is a good incentive,” Vayn explains the new HR policy.
The first four or five months, the new management was cutting the costs and selling off non-core assets. Jennings used to be enthusiastic about investments into African projects, forestry and agrarian business. “He had started investing there before we came to be a shareholder of the bank in 2008, and had been financing the projects using the funds of the investment bank,” Charlier says. “Back in 2010, we insisted that he should sell those assets and return the cash to the bank. However nothing changed by November 2012, and the debt kept growing because of the interest.” (The investments were documented as borrowings within the Group – Forbes). Then, in 2012, Onexim, weary of the situation, swapped the assets against the debt. According to Charlier, the proceeds received after the sale of the non-core assets covered only a share of the debt. Jennings’ Renaissance Group contributed another USD50 million. “I do not know where that money came from, but I wish I knew,” Charlier says.
Is the shareholder happy with the profit of USD15 million? Charlier repeats the words he said half a year ago: we are happy but we are not satisfied. He admits, though, that it was a surprise for Onexim that Renaissance managed to start generating profit that soon. When asked how long it will take Renaissance to repay the one billion dollars, Vayn says the shareholder understands there is no point in setting the time term at 12 or 24 months, because the business of any investment bank depends on the markets which are volatile.
You can earn more if you accept higher risks, but Vayn abandoned his own strategy of a high-risk high-profit business that had killed the former Renaissance Capital. Today he means to earn on commission fees only. “When I started this job we decided we would strictly follow a disciplined investment policy in any case; we said we would maintain a certain level of risk, and that is what we do now,” Vayn says. He admits that right before the developments in Crimea he felt the urge, but resisted it.