Goldman Sachs bets on Russia’s rising middle class in bite-size chunks

All the attention on Russia’s delivery of the Winter Olympics 2014 in Sochi has helped to focus minds on the country in general. Spotting an opportunity to make money out of Russia’s burgeoning middle class through a chain of upmarket fitness clubs is multi-national investment banking group Goldman Sachs Group (NYSE:GS).

Goldman’s Special Situations Group, which invests the bank’s own money, has already bought a chunk of the fitness club chain, but is increasing its stake to 50%. It has already made good returns from relatively small acquisitions in the country, as Megan Davies of Reuters notes.

Russian companies that operate in the higher income sector are likely to be more resilient to a downturn. And smaller companies aren’t on the radar of the larger buyout firms. That’s the rationale behind Goldman’s approach here. – JC

Goldman Sachs bets on Russia’s rising middle class in juicy bite-size chunks

A woman takes a picture of the Russki Gorki ski jump venue at the Rosa Khutor alpine resort near Sochi

* Goldman’s SSG unit been investing in Russia since 2006

* Takes minority stakes, does deals around $50 mln in size

* Backed Tinkoff Credit Systems, which recently went public

By Megan Davies

MOSCOW, Feb 3 (Reuters) – Investment bank Goldman Sachs Group Inc is increasing its investment in an upscale chain of fitness clubs founded by a Russian former fencer, betting lifestyle spending will grow despite an economic slowdown and slide in the rouble currency.

Goldman’s Special Situations Group (SSG) has been clinching bite-sized deals in Russia, backing entrepreneurs looking to capitalize on the country’s rising middle class.

SSG already owned 12.5 percent of the chain, called World Class. Under the latest deal, SSG and Russian bankVTB will buy out a stake owned by Alfa Capital Partners, an investment unit of billionaire Mikhail Fridman‘s Alfa Group, and will jointly own 50 percent of the business.

“We like the business, it is an established platform – one of the most well-known brands in Russia and it operates in the premium segment,” said Maxim Klimov, head of Goldman’s European SSG in Russia.

Klimov said World Class has a loyal customer base which would give the business resilience as the economy slows.

“Consumer demand may be (slowing down), but this doesn’t … change the investment thesis – it just makes the bar a little higher and we’re still bullish on the long-term picture across the cycle,” he said.

World Class was founded by former fencer Olga Slutsker, who was inspired to open her first fitness centre in 1993 by visiting a modern club in Spain which contrasted with her experience of unheated and overcrowded Russian gyms. Membership costs around $2,500 a year.


Goldman first invested in World Class in 2006 and its five-strong team has since struck a string of mainly private equity-type deals in RussiaKazakhstan and Ukraine, favouring investments that benefit from consumer spending.

SSG invests the bank’s own money rather than using more traditional private equity structures which raise funds from third parties. That allows it to pursue sub-$50 million deals that would fall outside the purview of larger buyout firms, said Klimov.

“Many (international private equity players) haven’t made inroads here because they have large funds and need to invest large tickets,” said Klimov.

While U.S. buyout group TPG has made successful investments in Russia, rivals such as Blackstone and KKR have stayed on the sidelines.

Small deals can be highly profitable, said Klimov, noting its investment in entrepreneur Oleg Tinkov’s consumer credit firm TCS, which went public in October.

Goldman initially invested in TCS at the end of 2007 in a deal which valued the business at $100 million. TCScurrently has a stock market value of nearly $2 billion.

The bank also recently closed on a follow-on investment in RosEuroDevelopment, a real estate company it first invested in during 2008, he said. Goldman’s other Russian investments include debt collection agency Sequoia.

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