The Founder of PIK for RBC: “Margin value is high but your net profit is low”

18 June 2021
The Founder of PIK for RBC: “Margin value is high but your net profit is low”
What is the percentage of your projects in Russia and abroad?
Around 70-80% abroad.

Did you plan to reach such ratio from the beginning? Are you planning to increase the number of projects in Russia?
It wasn’t our plan, I left Russia and made business in England, Europe and the U.S., simultaneously our company managed commercial projects in Moscow. And yes, we are planning to grow here, but it hardly would change the ratio ...

Where your projects have more marginal value: in Russia or abroad? What is the marginal variance between these markets?
In fact, the Russian margin is higher, but it means nothing. If your input $1mln you get $1mln, when you enter with 30 mln rubles, you get 75 mln rubles — simple arithmetic. Besides, you have taxes and as a result project margin is high but net profit is low/your loss is high as well.

The matter is the ruble exchange rate?
Sure, and abroad if you make great deal it gives you real value. Your exit multiple equals 20 or 30 times profit, in Russia — x1-3. This is a huge difference. In comparison with Russia in the West your company value will be higher even if it’s a small business with low revenue. The Russian market is underestimated and this is the main reason of such results.

The reasons for it are ruble volatility and unstable political situation.
Yes, in combination.


In Moscow you have BVLGARI Hotel and Residences. What’s new on the project? What impact has produced the pandemic on sales?
I can’t say the pandemic immensely influenced sales. The project includes 14 residences with apartment status, and half of them has been sold. Every potential customer knows the brand BVLGARI and the project location.

Who are your main customers? Russians?
Yes, people who have understanding of BVLGARI products. I must say that each customer gets BVLGARI approval for purchase.

What do you mean by «BVLGARI approval»?
This project distinguishes by exclusivity; it’s kind of a private club.

You have obtained a new project in Moscow — Praga restaurant on Arbat — and will work on its renovation. Will you manage its operation after construction works completion?
We enter the project as the developer of the project. As for its management afterwards — the question remains open, but we will be glad to bring our service operator company — The Collection. Today the company is undergone branding changes: it will be renamed as Voile d’Or. The Praga project would be a great addition to our collection of properties that is diverse in locations.


Voile d’Or is one of your French projects. It’s through construction stage now, isn’t?
That’s right. We’ve finally got all authority approvals and are ready to start.
Our goal is to extend hotel seasonality in demand to all year round operation. We are thinking of creating a center where people could go in low season and do check-ups, go through detox programs and do different sport activities. Such ideas are very popular nowadays, besides, in the south of France nobody has done such things before.

Why did you decide to rename your company after the project?
First, the name Voile d’Or itself sounds gorgeous (from French «Gold Sail»). We have a lot of projects in France, and our company, service operator, is based in Paris, that’s why we thought about a French name. Second, the brand Voile d’Or boasts a 60 year history, and the hotel has guested a lot of famous people. Moreover, everyone who knows the south of France, especially Cap-Ferrat, well, they definitely heard about the hotel. So, these were the reasons of our choice.

Your projects are mostly concentrated in France. Why?
We depend on our clients and their preferences. We choose locations that our clients choose; mostly they are jet-set destinations. Our target audience is High Net Worth people that prefer to rent over to purchase. The major — 70% are Americans whose one of the most popular destination is St. Barths. And obviously, we have properties there. Partly European, partly French on the American continent.

Do you consider the Asian market? Any plans?
I think someday yes, and most probably we will enter the Asian market with rental schemes. But it also will depend on our clients, there will be most-visited places as Singapore, Hong Kong, Tokyo. Well, we’ll see.

On the Russian market you have projects for sales. Is the Russian premium property market more about the sales than rental?
The Russian market functions differently, usually the property price doesn’t match its rental rate. In the U.S. the situation is clearer: looking at their rentals you can figure out the price per sq meter or per sq ft easily. In Russia it just doesn’t work out, at least today. Here you have two options: either the rental is too low or the price per square meter is too high. And 90% of customers who buy property here, especially of the premium segment, don’t think about their purchase as an investment, they think: «Now I have my own space. Nothing special.»

And abroad they think about investments?
There if you don’t even think about it, you see the price is more or less fair. The price matches its rental rate.

What can change the situation in Russia? Or it’s just one of our market features?
This is marked on dynamic emerging markets. In several decades the market will stabilise and it will look more like others.

Can your foreign project boast of Russian customers?
In the UK 70-80% of our customers are Chinese: from mainland China, Hong Kong, Taiwan. Other 30% are customers from different countries. Russian customers are not interested in this market — maybe because of the pandemic.

And what about your rental programs amid the pandemic?
Great, we are working on large units — residences, villas — they are still in high demand among our customers.
For example, the concept of our New York project 401 West is luxury apartments for long-term renting. It’s important to keep the building as our asset for its further management. New York has no other project like that; we will be the first who bring it on the market.


Hospitality sector has drowned immensely due to the pandemic. But you say that it has nothing to do with you. How is it possible?
Our hotels are not typical. Now every average hotel really suffers from the results of the pandemic. As far as I know the occupancy rate in Paris, for example, is lower 10%. It means 2-3 guests for a hotel. And this situation brings huge loss.

Unlike all these big hotels, our Parisian boutique-hotel Maison Villeroy comprises 11 units. People bored of the pandemic and constant lockdowns just want to go out for a dinner but they are not allowed. Otherwise our Maison Villeroy: they can stay at our hotel, each room includes kitchen and dining area. Moreover, they can enjoy in-room service dinner from our Michelin-star restaurant. I must mention that we got our Michelin star this year, in January, despite that the restaurant was launched a year ago...Thus, a Parisian stays in the hotel to just spend a good time with his spouse or girlfriend, family, to enjoy delicious dinner or lunch. The concept of Maison Villeroy gives them such opportunity while other hospitality giants can’t.

In your last year interview you mentioned about 25% sale of The Collection. Could we expect it this year?
Yes, most probably we put 20-25% on sale. On this we have been working with Bank of America around a year already, we have signed a contract and they represent on the capital market. We trace a certain interest of many investment specialists, including institutional investors, but in general the sector of private equity is not as interesting as it was before the pandemic. First, it needs a special approach to due diligence. People must be physically present on our projects to review them. Today the increase of interest is in public equity, because it doesn’t require physical presence, the choice is based on researches. We and not only we are waiting great increase on the private equity market this September.

Why this September?
Because in summer is vacation time, everybody will travel and recharge their batteries after the pandemic, and September will be the beginning of a new working term. Besides, we don’t have the goal to sell shares at any price. We are looking for a good, valuable investor that would add his /her expertise and value to the company.

Do you consider IPO of your service operator?
Yes, private investor — first stage of capital raising. And as it runs smoothly obviously, in 2-3 years we will go on the public equity market and give an opportunity of exit for our private investors.

What is the value of the company today?
You know, one year before PIK’s IPO there was a very contradictory, unpleased article. It said the PIK owners evaluate themselves in $1 billion (*laughing). After a year we sold our shares for $12 billion. So, to not cause talks it’s better to omit this question. But I will say, considerably high.


With what part of equity are you planning to go on stock market?
It will depend on our strategic partner, his desire to stay in the project or partially leave it or exit. After we clarify these questions, we define our plan for entering stock market.


And what about Wainbridge on the public equity market?
Wainbridge is more about professional developer. In comparison with PIK or LSR the company doesn’t own assets, it provides services. Those projects, which Wainbridge leads as a developer and The Collection — in the nearest future Voile d’Or — further manages, are usually assets of the company — service operator. That’s why from the perspective of capitalization Wainbridge is not very attractive, at least today, but the amount of projects that it has executed, manages and will realize is impressive and valued in billions of dollars. That’s why it’s a matter of discussion right now.

Wainbridge structure has 3 people in the Board — you, Michael Belton and Mikhail Serdtsev. The Collection has the same organization?
In The Collection it’s a different situation, I am the major investor, I own more than 90% of shares. The other part is divided by small investors, including Wainbridge.

We know you make investments in other fields except for real estate. For example, bio protein. You also have oil business in Saratov. RNGK «Saratov» is specializing in oil and gas extraction. Maybe you could provide us with the details about that? How long have you had these businesses? How do you plan to develop them?
Thus, we will talk about real business. (*laughing) Just a joke. I just happened to be in this business. That was probably the last thing I needed. I had licenses that allowed to drill and dig for something. I am an inexperienced in this, but, of course, I tried and I was lucky. It’s a stable company; it has been functioning for 12 years and drilling for 10 years.

Do you think to work on it and develop or to sell it?
I would rather sell it, but as a I have said in Russia the company won’t be evaluated with its real price.

And let’s make a small talk about PIK as the finale of the interview. Let’s talk about the events that happened 10 years ago, when you left the Board of PIK. If in the crisis 2008-2009, when apartment sales market drowned and it had immense impact on PIK, the government had started to provide with preferential mortgages on terms that we have now or had in 2014, how do you think it would have turned out?

I left PIK not because of the crisis or because of lack governmental support to businesses, the reason lays much deeper, and people who are into this, they understand. Moreover, I don’t look back and I have nothing to regret. I think otherwise I would have stayed in PIK and thought only about Russian market. As they say, It is an ill wind that blows nobody good. I got an opportunity to build business abroad and I with my team used it wisely. We became an international developer and now we work on cool projects in the West.

Take it from me there they don’t welcome you warmly. And it’s not my fault or anybody else’s who lives in the West and tries to build something. To go through prejudice and to prove that you cost something is hard. And when you nail it, and they recognize you — this feels great, it’s another level of feeling. I am a businessman and obviously my main goal is to get profit, but I am not just about the money, I really want to do something interesting and significant.

Do you think you broke through this wall of prejudice? Do you see any changes in attitude?
I think yes. What we have done, and this is more than 40 projects in different shapes. Somewhere we did pure development, somewhere we lead management process, somewhere we made investments. The lion’s share of these projects was super successful. I believe that in professional circles in countries such as France, England, the U.S., we are welcomed. There they see professionals in us. Or the Italians, for example, if we talk about BVLGARI. People no longer treat us as Russians who came to do something «on the spur of the moment». We are recognized as a professional team. It’s worth a lot.

Do you watch news about PIK? Does it have anything from the company you created?

Sure, I’m watching, It’s hard not to, because there are a lot of ads. You know, I’m talking this without any sarcasm: though there are different people. They say, if the leader left and everything fell down, it means that he/she was a bad leader. I am very glad that my partner and I left, and the company continues functioning as nothing happened. I think it’s great. This is how a child who has already become an adult but continues learning. I am very happy for the company that it is big, it is a giant, and the fact that I have played not the least role in its development, gave birth to this company — it’s a real pleasure.

Source: https://www.rbc.ru/interview/business/10/06/2021/609e09bc9a7947c65afc861d