If investors were cautious about committing to Russian private equity funds before, the arrest of Baring Vostok Capital Partners founder Michael Calvey and three other employees has done little to quell their concerns.

Fundraising figures for Russia show a steady decline from a high in 2013, when 10 funds raised $6.7 billion, to a low last year of zero, according to PEI data.

Foreign investment into the country has also fallen. There were only 10 companies with backing from international private equity funds at the end of 2016, compared with 27 two years prior, according to the Russian Venture Capital Association.

As Calvey and his colleagues await their next bail hearing in April over a dispute regarding portfolio company Vostochniy Bank, limited partners who have looked at Russian investment opportunities or who have exposure to the country said the developments highlight the uncertainty that the country brings.

“We went to Moscow a few years back to meet with GPs including Baring [Vostok],” said the former head of primary fund investments at a large European asset manager. “We didn’t end up making any commitments because we couldn’t get comfortable with the macro and political challenges.”

“It was more of an intuition thing. We couldn’t get a clear sense of which sectors were free of government control.”

The former LP highlights one of the biggest concerns institutional investors have about investing in Russia: the degree to which the state has control or influence over business. In a Twitter post on Saturday, opposition politician Alexey Navalny said the state’s reach was ubiquitous.

“The guys from Baring Vostok probably thought, ‘This wouldn’t happen to us, we’re about business, not politics.’ I’m not gloating, it’s just important to understand that everyone and everything is about politics now,” Navalny wrote.

Philippe Roesch, managing partner at Frankfurt-based family office advisor RIAM Alternative Investments, said government influence was one of the main reasons why his firm has not committed to Russian funds or made co-investments for its clients over the last six to seven years.

“If the state is interested for strategic or economic development reasons to nationalise some companies, it can change the rules of the game for private investors overnight,” Roesch said, describing Russia as a “difficult” place to invest also due to current political tensions with the West.

For one long-term investor, Calvey’s arrest has set alarm bells ringing. Roland Nash, a partner with Verno Capital, has been working in Russia since 1996. His firm gives investors exposure to Russia and Kazakhstan via actively-managed public and private equity funds. Asked whether he still had the stomach for it, Nash replied: “Yes, I do, but I think this arrest has made everyone, including myself, question what they’re doing in Russia.”

Russian and Eastern European leveraged buyout funds have delivered a 1.34x total-value-to-paid-in multiple and 6.64 percent net internal-rate-of-return since 1991, according to eFront’s Global Private Equity Performance Series 2018. The region displays significant selection risk between the best and worst-performing funds, the report noted.

Baring Vostok’s last flagship – the $1.27 billion 2012-vintage Baring Vostok Private Equity Fund V – delivered 1.1x total value to drawn multiple and a net internal rate of return of 4 percent as of 30 September, according to a spokesman for the firm.

Its predecessor flagship, the 2007-vintage Baring Vostok Private Equity Fund IV, delivered a 1.4x and a 7 percent net IRR as of the same date.

Fund V attracted capital from an array of high quality international investors, including HarbourVest Partners and Pantheon. A spokeswoman for Pantheon declined to comment for this story, but a source familiar with the firm told PEI the investor has not committed to a Russian fund since 2013 and is unlikely to do so in the future.

A HarbourVest spokeswoman said the firm was monitoring the Baring Vostok situation closely and was not able to comment on the litigation process.

“We have invested in emerging and frontier markets to gain diversified and uncorrelated exposure across our portfolio. We continue to evaluate our thesis on Russia just like other emerging markets,” the spokeswoman said, adding that HarbourVest’s exposure to Russia was small.

The MacArthur Foundation and New York State Common Retirement Fund also committed to Fund V, according to PEI data.

Russia and the Commonwealth of Independent States have been identified by LPs as among the least attractive emerging markets for private equity investment over the past five years, according to EMPEA’s LP Outlook for Emerging Markets 2018, which surveyed 107 LPs across 36 countries.

Political risk was cited by 70 percent of respondents as likely to deter them from investing in the region, with a further 36 percent pointing to a challenging regulatory environment and tax issues. LPs wanted to see a higher return premium from Russia and CIS funds than any other emerging market to justify committing.

Sanctions introduced in 2014 due to the annexation of Crimea heightened concerns among LPs about the country’s attractiveness. The US, EU and Canada – among others – placed restrictions on doing business with certain Russian individuals and prohibited the provision of debt exceeding 30 or 90 days’ maturity in particular sectors, including finance, energy and defence, according to law firm Baker McKenzie’s Doing Business in Russia 2018 report.

LPs searching for double-digit net returns appear more comfortable with western developed markets where state control is less of a concern.

If I want 15 percent net IRR, I can find it in the US, in the UK, in the Nordics. I don’t have to go to Russia,” said RIAM’s Roesch.

Another London-based private equity veteran was more explicit.

“To see the founder and three employees detained, you do think, anything can happen,” the veteran said. “Life’s too short to invest in Russia. There are easier places to make money.”

– Rod James contributed to this story.

– This article was updated on 20 February to reflect that the 2007-vintage Baring Vostok Private Equity Fund IV, delivered a 1.4x multiple, not 0.7x as previously stated.