U.S. private equity investor TPG Capital announced its first foray into Russia on Tuesday, paying $800 million for 50 percent of leading pharmaceutical distributor SIA International.

The companies heralded the deal as the largest private equity investment in Russia. SIA, owned by businessman Igor Rudinsky, provides one-quarter of all medicine to Russian drug stores.

In a previous major private equity deal, Britain's Lion Capital bought a majority stake in juice producer Nidan Soki for around $530 million in October.

TPG's investment is evidence that smaller Russian companies offer opportunities for foreign investors that are as attractive as those in the oil, gas and metals industries, said Roland Nash, equity strategist at Renaissance Capital.

Compared with the natural resources sector, mid-sized companies are a compelling choice because they are less politically charged and they expose investors to less competition with local "oligarchic" money, said Eric Kraus, managing director at Nikitsky Russia Fund.

SIA will inject the money into its working capital and seek to accelerate company growth, the companies said in a statement. TPG will staff half of SIA's eight-member board. Rudinsky will serve as chairman and chief executive.

SIA earned $2.7 billion in revenues last year, accounting for one-quarter of the $12.4 billion market, the statement said. The market grew 16 percent from 2006, it said.

In an unusual turn, TPG financed the deal through equity rather than debt.

"We think we can get a pretty interesting equity return here without putting any leverage on the company," said Stephen Peel, a TPG partner in charge of the firm's Eurasia business.

"This indicates that the returns that you can make from cash investments into Russia more than compensate the risk of investment," Nash said.

Investment risks have come down a long way but remain "pretty high," he said.

With equity financing, the only way for the investor to turn a profit is to make the company stronger, said Ray Tillet, international counsel at Debevoise & Plimpton, a leading law firm on private equity. Normally, private equity investors not only provide money, but also work closely with the company management to improve performance, he said.

Debt financing means that an investor wants a company to pay back the money with interest over time, Tillet said. "This way, you are one step removed," he said.

Private equity investors are not long-term, Tillet added. They leave a company within three years to five years, once they have made a profit, he said.

TPG Capital will look at further investment opportunities in Russia, especially in the growing consumer sector, Peel said.

"Our interest in Russia is really investing in growth at a reasonable price," he said. "Russia overall is one of the less expensive growth markets."

TPG Capital is the global buyout group of TPG, a leading private investment firm with more than $50 billion of assets under management.