Real Assets Q&A: David Amaryan, Balchug Capital

Real assets investing, like all other alternative investment opportunities, has had its fair share of challenges in the past 18 months, but doing it in Russia makes the task doubly difficult. AlphaWeek’s Greg Winterton spoke to David Amaryan, Founder at Balchug Capital, to learn more about the firm’s approach to opportunistic real assets investing in emerging markets.

GW: David, first off, for those perhaps unfamiliar with Balchug Capital, tell us a little bit about the firm.

DA: Balchug Capital started in 2010 in the hedge fund space – we run an event-driven and value specialist strategy that focuses on securities mainly in CIS countries. We also make private equity investments in special situations and now we have begun to make investments in real assets. I founded the firm and it is headquartered and regulated in Armenia and it has an AUM of $2 billion.

GW: Tell us why you decided to enter the real estate investment market – there must have been some kind of catalyst?

DA: As a result of the conflict between Russia and Ukraine, many international investors who hold significant assets in Russia have made the decision to exit the region, which means that the supply of assets coming to market has increased. Not only that, but we’re seeing appealing discounts, and we’ve been in this market for 20 years, and we know the Russian real assets market very well, so we think that the dislocation that we’re seeing now represents an attractive medium term opportunity.

GW: Exactly how can you invest in the region, and what assets have you invested in?

DA: We are an Armenian investment firm and our jurisdiction in acceptable to both the Russian and international authorities, which means we can execute a transaction on both sides, which is necessary for these deals to close. In most cases we are approached by international investors – I spent almost 10 years in the US and have been investing in markets globally for the past 20 years – so we have a good network that we can service due to our being regulated in Armenia.

In terms of assets that we have added to the portfolio, we have bought two landmark commercial real estate assets in Russia - Pulkovo Sky, one of the largest Class A office buildings in St Petersburg, and Metropolis shopping center, one of the largest such malls in Moscow. Both acquisitions were made from international investors who were divesting from Russia. Pulkovo Sky business center, near Pulkovo airport in St. Petersburg, is 76,000 sq.m in size. It was purchased from Finnish investors and Metropolis shopping center in Moscow is 241,000 sq.m in size and was acquired from American investors.

GW: What are your thoughts on the macro and geopolitical environment more broadly? Has business somewhat stabilised, or not, and what opportunities or challenges are on the horizon?

DA: The situation is not getting better both in terms of geopolitics and regulatory environment, and this is the main challenge.

The conflict between Russia and Ukraine is still very active. On top of that, there is the vastly under-reported situation between Azerbaijan and Armenia with regards to Artsakh so, the region is very volatile at the moment.

In terms of the business climate in Russia, although the situation is better than most people in the West think - the unemployment rate is at all-time low, inflation is around 5% and there is still economic growth -, the business environment is getting worse. The Central Bank of Russia has been raising interest rates very aggressively to fight the weakening of the ruble. Currently it is at 13% and if it stays this high for a long period of time, or if it is increased further, it will put pressure on economic activity in the country. On top of that, the regulations regarding the exit of foreign firms from ’hostile countries‘ are getting harsher and more punitive. So, the cost of financing is increasing, and the number of attractive deals is decreasing. That means deep local knowledge is absolutely critical for investors to succeed

GW: Lastly, David, emerging markets investments tend to be near the top of the list for redemptions for western investors during times of market dislocation or distress. What’s your message here? Why should capital allocators stick with their emerging markets managers, whatever asset class they invest in?

DA: The case for emerging markets in general is that emerging markets are where the majority of the world’s growth is happening, and you want to be invested in future growth. There are tremendous idiosyncratic opportunities available that may not be there in developed markets. Capital markets in developing economies are often under-capitalised which means those who allocate often are better rewarded. A lack of analysis and information available internationally can mean that if you have local knowledge and insights, you are very well-placed. And finally, any portfolio gains diversification by investments in emerging markets.

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David Amaryan is Founder at Balchug Capital