People in the Know: Difficulties in Capitalizing on Brains

So, chairman of the board of directors of the company Azary Lapidus, a person with exceptional charisma, talked to Vedomosti about how the work on the reconstruction of the theater is going, what plans for development the company has, why it decided to make a bond issue, his attitude to business and receiving government awards and status.

How was the company created?

Twenty years ago several young graduates of Moscow Civil Engineering Institute organized a research and production construction cooperative at Goskominturist in the USSR. It started with the inspection and creation of design documentation for Intourist premises, which were hotels. By 1989 the cooperative had turned into an enterprise and was called SUProekt. SUI is an abbreviation and stands for Construction, Management and Investments. First of all we were engaged in the design and management of construction. And then during the process of realizing some larger projects we created a general contractor structure. And today it is precisely a working structure, engaged in engineering questions. I am sure that today there is no project that we would not be able to realize.

That’s a bit of a statement.

An example is the most unique reconstruction project of the Bolshoi Theater. I don’t think anything equal to that has been carried out in the world. A lot of what is done in Russia, is an achievement, for example the Federation Tower. But another project such as the Bolshoi Theater, simply does not exist.

Why is it unique?

The idea of this project is to preserve the historical part of the building, which was built more than 150 years ago. And to this you add the creation of new constructions basically underground, where the area exceeds the historical part by almost five times.

What is under construction there?

For example, the historical walls of the Bolshoi Theater. Now under them concrete grillages have been erected, connected to suppressed poles 26 meters deep. These poles rest against a sheet of limestone. Thus, when construction will come to an end, the theater will be kind of put on a stable limestone sheet. There is a problem: how to keep these poles for a long time period? Historically around the theater there were rivers. They periodically come to life and may affect the suppressed poles, damaging the support of the theater. Therefore a decision to make a wall around the theatre with a ground depth of 26 meters, connected at this depth with a strong base plate was made. This will, figuratively speaking, make a "saucepan," inside of which there will be the theatre as though planted on a pole. By virtue of being unable to expand the theatre due to the neighboring buildings the decision to use this protective design to increase the area of the theatre was made - there will be six more underground floors.

Six floors are a lot. What will be located there?

There will be everything: studios, rehearsal halls, an orchestra pit and three stages. Two of the three stages will be mobile and depending on the requirements can be changed in 10-15 minutes. There will be no hour intervals. And under the theatrical area there will be a chamber theatre for 400 spectators. Imagine the acoustics there. We haven’t thought it up, but we will realize it.

What performances will take place there?

Chamber concerts. Nothing similar has been done anywhere in the world.

Is it difficult to restore a historical building, considering its age?

It is very complex. Nobody could have suggested the new problems that arise everyday, when everything just started.

For example?

For example, at a certain place there should be a base depth of 6 meters. We dug out the first three meters and there was no base. It was not laid back then. And during the work of the theatre it was impossible to assume that it wouldn’t be there. And if we continued to dig for a couple more days this wall would develop like a house of cards. Therefore work urgently stopped, and new design solutions were made. And it was like that every time. But that’s not everything. There was an assumption that the theatre was in a pre-emergency condition, and, unfortunately, it was more emergency. And when we uncovered all the plaster, it became clear that a minimum of half a year would be needed to carry out anti-accident measures, otherwise the theatre would collapse. The walls that looked powerful, in actual fact were so rotten and shaky, that it was necessary to strengthen them. It would be better to take down. But we could not even suggest this, as the building is a monument.

How many years more will these works last?

We don’t doubt that the first concert will take place at the end of 2009.

Will there be any more surprises?

There will be surprises every second. For example, we open a zone, which theoretically was fine. And we find out that it isn’t like that. Because during work on the theatre it has been impossible to make the necessary number of preliminary researches. To do this it would need to be closed. But we solve these problems. Five days a week we have designers here with whom each detail is discussed. Constantly here there are also architects, restorers, and those who are engaged in underground space.

How many people are working on the premises?

More than 1,000 people, but in fact the quantity is not important.

Was it difficult to get the contract?

There was serious national competition. I think we were helped by the fact that the company has a history in the management and understanding of the task.

Have there been times when you have become disheartened in your career? Maybe at the start of your career?

I have had such moments and now they emerge when there are difficult projects. In fact by and large in my life I already have everything. And then you start to wonder whether it is necessary to continue? Especially at night when instead of sleeping, you are thinking about when you open the base, will there be limestone or not? And then there is the idea that I should stop and write books for students. But next morning colleagues call and I understand that it is necessary to work.

When you dream about work it is very serious.

It’s not serious, it’s awful. I’ve had it since the very beginning and constantly.

"If the homeland says it is necessary" then it will turn out ok?

Yes.

Are there any global complexities that prevent you from doing business normally? Not on this premises, but in general...

In general you get used to such complexities. When you work for 20 years, complexities become just working moments. Is it difficult to breathe? If a fish gets out of water, then it is difficult. But when you breathe since birth problems do not arise.

You have won some serious awards. The winner of an award of the government of the Russian Federation in the field of science and technology which you received in 2006, and the title of an Honored Constructor of Russia. What do they mean to you?

I am very much proud of them. No matter how it is sounds. But it, of course, is an estimation of our collective and then only me. I received the Honored Constructor award for our work in the field of the construction of Gazprom’s premises, and the state award for the realization of scientific-methodological approaches in the realization of building houses of raised comfort. But the company does all this. Now, sometimes when you hand over a card to rich and successful people of the younger generation, they pull a strange face when they see: professor, doctor of sciences. And for me they were vital stages and achievements in my life. I consider them a big plus for the company.

One of the fields of activity of the company is the management of projects. What large projects are you managing?

If we are talking about management as a service to the technical customer we are realizing significant projects on Sushesky Val (the construction of an office center with a hotel), on Bolshoi Nikitsky (the construction of an office-residential complex), on Kursovy Pereulok (the construction of a de luxe class apartment building), and the construction of a 120 MW power station in the Northern settlement. And for another residential real estate project measuring 500,000 sq.m we are not only the managing company, but also the investors.

Tell me about the thermal power station.

We are now successfully realizing it. It is tangible, it can be seen. Workshops and boilers are standing.

Do you have any favorite projects?

Of those realized, improbably I love the Gazprom project. Soon it will be 13 years since the project was put into operation. I think that now in City something will be completed, that functionally will be comparable to this project. But our project will soon be 15 years since it was conceived. The contract was signed on December 30, 1992. Now all my life is at the Bolshoi Theatre. I can draw it in detail. I spend six days a week there.

Tell me about the other fields of activity of the company. Why did you decide to engage in investment?

The fact is investments were never our main activity. We started engaging in investment from the middle of the 90s. This was connected with the fact that we built something and our customers didn’t always have the money. In this case we simply took it and invested in it.

The funds?

Yes. There a few such premises in Moscow, in Tyumen there is a whole block, and in the Moscow suburbs a cottage settlement. Now we consider investments as an element of our strategy and an addition to engineering. That is to say we have a separate development branch, there is a manager and I think we will be successful in it. But we don’t want to compete with anybody, we have a niche.

What do you mean?

Unusual premises. Unusual by way of engineering. With non-standard solutions.

What share do investment projects have in your portfolio?

Very small. Up to 10 per cent.

What is the capitalization of the company?

This is a fashionable concept now, "capitalization of the company." In engineering companies it is very difficult to calculate. In engineering companies it is the brains. That is to say assets are minimal.

Basically intellectual property?

Well, yes. Of course, it is good computers, good base systems, and the main thing, intelligence and a professional knowledge of the personnel.

And how do you capitalize such a company?

It is obvious that you can’t do it in your head. You have to add any assets. Development or production. It is one of the themes, in which Victor Karpenko (the president of SUIholding) is now engaged in with the team. They are actively working on it. There is now an area in Moscow. We are at the stage of purchasing some more areas in Moscow and also a large are in Tyumen. We have strong presence there.

Was it difficult? Some market participants who try to go to the regions say that they are thankful to national investors.

They have been happy with us. Moreover, they have not put a spoke in any of our wheels. I was in Tyumen for three years once for a project, and Victor Karpenko for four. We have organized a branch there, we have a representative office. But we don’t want to be scattered around, therefore we have decided to stop at Tyumen, Moscow and a few other regions.

So you don’t have a plan for extensive expansion into the regions?

We are an engineering company and value this. If will try to build "somewhere and somehow," we will lose face. We can and will expand. But on a different base. For example, negotiations are now being carried out for the construction of several metal factories and cement manufacturers. We will act there in the traditional role as the manager of these projects. That is to say as developers we will not go to the regions. It is difficult and demands additional resources.

Where will you build?

I can’t say as it is still at the stage of negotiations. But as soon as it is finalized we will let you know.

What’s the market value of the company?

Estimating the value of SUIholding is a difficult procedure. If, for example, we will manage to buy and structure an area for $700-$800 million, our company may be worth more than $1 billion. If we don’t, as an engineering company it is worth $300-350 million. This is an objective estimation. But for this money it is interesting only to people who wish to buy assets in addition.

Until recently the company, as well as you personally, was rather closed to the press. What is connected with this change in information policy?

The fact is that we have a niche. We are not large contractors or developers. But if we tomorrow, for example, should build a large metal factory, and we participate in such competitions, we shall manage. The intelligence of the employees of the company is capable of solving any problem. And for us there was no need to talk about in the market. The company is 20 years old. Our coevals can be counted on our fingers. There is a portfolio of orders guaranteed up to 2011-2012. Few can brag of such employment. We constantly have clients coming to us. But the situation varies. We have looked at the work of our colleagues and we understand that for the development of the company additional money is needed. And we can only attract it when participants of the business community know about us. The first step was applying to issue bond. It has been registered and the company is preparing for its placement. But these are not strategic, but tactical actions.

Why has SUIholding made this decision?

In order to add the purchase of certain assets to our engineering parts so that this capitalization will be tangible. Because it is difficult for engineering companies in any area: construction, scientific research or even hi-tech. It is complex to estimate and capitalize. For example, the company can be capitalized at $3 billion, having given it assets of $1.5 billion

A decision to place securities usually means that a company wants to attract foreign funds. But to enter the international market, it is necessary to be transparent and open.

An international company is now auditing us. Placing a bond, we understand what we are doing. We aspire to transparency.

Tell me about the issue in more detail.

We have registered the prospectus for the bond issue. After registration according to the law we can place a loan within a year. For this, besides registration transparent reporting is necessary. Literally within a month before the end of the year, unlikely earlier, we will have the results of the auditors, which will be announced to international investors. And in the near future we will be ready to place the bond.

What do you expect from the placement?

The attraction of funds to purchase several areas for the development of our development field. Assets are necessary, for example, for an IPO. At the moment our assets are mainly intellectual. Portfolio investors are interested in material assets.

Do you want to attract a lot of money?

Now we want to place a 1.3 billion-ruble loan, this is a bit more than $50 million. But this is quite a good start to purchase 1-2 areas for development. Especially as we already have an area in Moscow. And it is dynamically developing.

In view of the fact that you talked about the company being worth $300-350 million, $50 million is not so much money.

From the point of view of the volume of the loan - yes. But it will help to capitalize the company at a much greater sum.

Some market participants say that the decision to sell some of the company’s shares is not absolutely unequivocal. And not everyone who does this is happy with the result, their quotations have gone downwards. Are you afraid the same will happen to you?

It seems to me, they are cunning. If they are talking about private placements, they give shares to a fund for example, understanding that now this fund becomes one of the managers of the company. When the company issues an IPO, it is an absolutely different matter. If you have 500 investors who become your owners, the most they want from you is to see you on a road show. The report on those parameters which were declared. But portfolio investors do not influence operationally. I cannot understand who is dissatisfied and at what. In the history of the company we have had three or four offers of private placement.

Can you tell me about them in more detail?

We heard an offer from one well-known fund that they would like to look at our company. For us it wasn’t uninteresting. Threads and communications of management would be lost. And $50-$60 million would not have solved our financial questions. And new people will come with the sight at things. Can, our achievement and consists that we have own opinion. On a background of collective in some hundreds person in holding is skeleton from 10-12 person - they in a condition to generate ideas and to make of the decision. To lose it would not be desirable. And as for falling quotations and falling of the companies so to work it is necessary better!

Are you not inclined to allow outsiders in the company?

It is necessary to understand what a stranger wants. If it wants to earn money together with us then go ahead. If it wants to give us management, then let is say who it is. It is necessary to understand what it will give the company.

What are the forecasts for the company?

It is necessary to look at sectors. The forecast for the retail real estate sector is only possible to provide to each specific geographical region. Data on the regions strongly vary, and, by market prices, in many regions saturation of the market is still a long way off. As for office real estate, at least for class A premises, under the most pessimistic forecast no earlier than 2011 will supply and demand will not balance. But as 100 per cent of the announced projects will not be successfully realized, it is possible to build more optimistic forecasts. And there will also be new models. For example, now SUIholding is negotiating for the construction of an office center focused on a specific manufacturer. In particular, a furniture manufacturer. Abroad, such a model is widespread. It is a techno park, but professionally directed. In America they are also quite popular. In each city there a couple of such centers. For Russia this is an innovation. But there are already the first steps. On Novaya Riga there is such a car center. Ten manufacturers are united under one roof. And anyone who wants to buy a car comes and looks round them all. Yes, it is competitive, but the buyer will definitely not leave empty handed. This segment is less full here. It is necessary to fill it.

And other segments of the market?

There is an understanding of investments in industry and warehousing. This business will be only partially touched upon. But it is this area where our company may find use.

Will it develop in this area?

Commercial, retail and logistics real estate is quite predictable. In terms of the fillability of shopping centers there are cities where dead ends are already visible. Kazan, for example.

Market consultants say that many such projects are now being announced but not realized.

They wrongly predict. Analysts at our company are considering models of such projects. I think in three months they have already counted 20 projects. Any effective model is impossible for us in a commercial sense.

Why?

We get offered some kind of product for a certain price, we calculate its efficiency, and it’s not good business in view of discounting. And in a month we call and we say: would you like to drop the price? And they say: no, we have already sold it. Someone buys it.

What parameters does SUIholding require for such a transaction to take place?

Our parameters are very simple. No less than 12 per cent per annum. 15 per cent profitability is the norm. Business is not done for less anywhere in the world. We take returns of 9-10 per cent as the norm for Russia. We do not say that we take high profit, we take practically western standards. But even then it is impossible to buy projects for announced prices.