How Russia's entrepreneurs deal with succession and wealth management
The image of Russian entrepreneurs in the popular press may be of rapacious capitalists with a penchant for huge yachts and modern art, but the reality is somewhat more complex according to a new report by UBS/Campden Research, writes Marc Smith.
Unveiled today, Russia's wealth creators: facing the challenges of succession and wealth management, provides a unique insight into the critical issues facing Russia's entrepreneurs, their businesses and their families. It shows that they are still actively involved in their companies and have an appetite for high risk, high return business opportunities, but do not plan for the long term. A majority do not currently involve family members in their businesses and sophisticated wealth management strategies are still in their infancy.
The report is based on exclusive interviews with 25 entrepreneurs who live in Russia or have core businesses there. All were aged in their mid-30s to mid-50s, own businesses with annual revenues north of $100 million and come from a diverse range of industries.
Less than two decades after the fall of communism, these entrepreneurs have shown extraordinary drive to accumulate vast wealth in very challenging conditions. They have also helped to shape their country's industrial landscape, but are now adjusting to the post-global financial crisis world.
"After many years of double digit growth, entrepreneurs are now in consolidation or survival mode," confirmed one 40-year-old entrepreneur. The crisis has only served to reinforce the belief of many Russians that wealth can vanish overnight.
Over half (56%) of Russian entrepreneurs are still keen to expand their businesses within Russia and, unlike many of their counterparts elsewhere in the world, 72% are not considering developing a global presence in the near future.
It is important not to forget that the collapse of the Soviet Union and the rouble crisis of 1998 have left scars on Russia's business elite and fuelled their historical aversion to legacy building. Nevertheless. Russian entrepreneurs are now in jeopardy of seeing their fortunes eroded by the next generation unless they give serious thought to succession and wealth transfer.
The challenges are clear: just 28% said family members currently hold a stake in the business or would be entitled to do so in the future. Key to this is the philosophy of building and selling companies.
"When I am building a business, I want to grow it, run it and find an attractive exit. I don't know if my kids are interested in running it. They are too young and should follow their own interests," said one 41-year-old entrepreneur who built a business from scratch into a $600 million concern.
However, 60% of the overall sample said they would involve family members in their business in some capacity and 32% said they would incentivise their children to become involved. "We have an entrepreneurial spirit in our family," explained one entrepreneur. "I run the business with my two brothers and my oldest son has already started his own business. As parents we have to be role models."
Eighty percent of respondents said their children received their education both in Russia and abroad, with the UK and Switzerland popular destinations. Critically, they are very keen for the next generation to keep their Russian heritage.
When it comes to expectations about their wealth, the picture is complex as most are still actively involved in running their businesses. This was highlighted by the nature of how they view the long term. While 84% said they have long-term private wealth plans, over 90% said the long term represented a 5-10 year timeframe.
"I don't plan for the future. I know I probably should do it a bit more, but that is our culture. Our history has taught us that there is not much point in planning ahead. I think this will only change if our society becomes more reliable," said one respondent.
Sixty-four percent segregate their business assets from their private assets, while 84% split their private assets between offshore and onshore portfolios. The theme of asset protection was mentioned by many respondents who are worried about the unpredictable nature of Russian authorities given several high-profile raids by the tax authorities in particular.
When it comes to investing, local asset classes such as real estate, equities and bonds are preferred by a majority of Russian entrepreneurs. Eighty four percent said they did not acquire luxury assets, while none invested in hedge funds.
There is evidence of a move from wealth creation to wealth preservation. Twenty eight percent said they frequently use wealth management services, while 44% said they use them occasionally. The overwhelming majority said they wanted such providers to focus on asset management. To read a more detailed analysis of the report click here
