Friday Letter: Risks in Russia

Being linked to a Russian state-backed fund is not the same as deploying capital in that market, but the current Ukraine crisis is a salutary reminder that such a distinction can readily become moot.

This week it emerged that Kurt Björklund, co-managing partner at Permira, has quit his position on the international advisory board of the Russian Direct Investment Fund (RDIF), the $10 billion vehicle set up by the Russian government in 2011 to encourage investment in the country.

News of his departure, on which Permira declined to comment, comes as the crisis in Ukraine continues to intensify; on Thursday the Ukrainian government accused Russian troops of entering Ukraine.

Certainly, Russia has never been a straightforward market, presenting the typical realities of investing in emerging markets (volatile stock-markets, currency risk, regulatory uncertainty); and while it attracted some GPs, others have kept away.

Nevertheless, being associated with the RDIF was – until very recently – not considered a reputational risk. In fact, the RDIF attracted many leading figures from a swathe of iconic private equity firms. International Advisory Board members include Stephen Schwarzman, chairman and chief executive officer at The Blackstone Group; Leon Black, chairman and chief executive officer at Apollo Global Management; TPG’s founder and managing partner David Bonderman; Martin Halusa, the former chief executive officer of Apax Partners; and Joseph Schull, head of European operations at Warburg Pincus.

These veterans are likely to have joined the board, understood to be an informal networking group, to strengthen relations in the world’s sixth largest economy, to find deal opportunities and to attract Russian capital to their funds.

For a large European investment firm like Permira, disconnecting from the RDIF now seems an obvious move though. At a time when both the European Union and the US government continue to impose sanctions on the country, it seems a bad idea to have your co-managing partner’s photo listed on the RDIF’s website, notwithstanding any ambitions you have to invest in Russia or harvest local capital.

It is unclear at present whether other people on the RDIF’s International Advisory Board will follow Björklund’s lead (we contacted Apax, Warburg, Blackstone and TPG who declined to comment, while Apollo did not respond to a request for comment by press time).

But, if they do – will it prompt more institutions to detach themselves from Russia’s buyout market?

Unsurprisingly, the Russian market has already been bearing the brunt of the current crisis. At the end of July, the European Bank for Reconstruction and Development (EBRD) said it would stop all new investments in Russia as a result of what was happening in the Ukraine. One US-based LP tells Private Equity International that it has never invested in Russia and it is now even less likely to consider it.

But while Russia will undoubtedly be a tough sell, it is less politically sensitive to back an independent Russia-focused GP than to sit on the advisory board of a Russian state-backed fund.

On the plus side, two significant exits in the last 12 months can be seen as promising bellwethers of good returns. The London IPO of Tinkoff Credit Systems in October 2013 raised $1.1 billion in an oversubscribed offering that saw shareholders Goldman Sachs and Russia-based funds Baring Vostok, Vostok Nafta and Horizon Capital selling stakes. In February 2014, Russian hypermarket chain Lenta, backed by TPG Capital, the EBRD and Russian banking group VTB, raised $950 million via a Moscow IPO.

In theory, with the news prompting many to shun Russia, there could be some good opportunities in the country’s buyout market. Capital-starved companies, diminished competition, a possibly more accommodating investment environment: there’s plenty to like. The problem is that in practice a politically charged crisis such as the one unfolding in Ukraine is going to make all these arguments shrink in comparison to the big picture. You can’t detach the asset class from its host market and at the moment that means you don’t promote your Russian connections.