From Russia with little love for private equity

The arrest of Baring Vostok Capital Partners‘ US founder and three other employees last week sent shockwaves through the international private equity industry. For some, it cemented the view that Russian private equity is not worth the risk.

Mike Calvey, two partners and an investment director were arrested on 14 February over a dispute related to one of the firm’s portfolio companies. The four, who are languishing in a Moscow prison, were formally charged on Thursday.

The news has made industry participants more aware of the challenges – mostly political – that doing business in the country poses, as we outlined in our coverage this week. The case bears the hallmarks of “reiderstvo“, in which criminal charges are used to pressure owners to hand over assets desired by the authorities, as Bill Browder, co-founder of Hermitage Capital Management, told us on Monday.

Baring Vostok – one of Russia’s oldest and largest PE houses with over $3.7 billion in committed capital – has been transparent with its LPs. In a letter to investors on Monday seen by Private Equity International, investor relations head David Bernstein outlined the details of the case against Calvey and colleagues and said the firm was analysing the relevant provisions in its funds’ LPAs.

The arrests couldn’t come at a worse time: the firm was gearing up to begin fundraising for its flagship Fund VI, according to a source familiar with the firm.

Yet no matter how forthcoming the firm is with its LPs, reviving Russian PE will be a tough slog. Most investors have fled Russian private equity already: fundraising figures for the country dropped from a high of $6.7 billion in 2013 to zero last year, according to PEI data. Just 10 companies with backing from international private equity funds remained at the end of 2016, compared with 27 two years prior, according to the Russian Venture Capital Association.

It’s not as if Russian private equity has delivered stellar returns amid additional risk – far from it. 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 data from eFront published in May. By comparison, French buyout funds delivered 1.51x and 10.2 percent; the UK 1.62x and 15.8 percent.

What is worrying is that even if Calvey and his colleagues are released tomorrow and the charges dropped, it’s difficult to see how institutional investors will look at Russian PE again in the same light. Baring Vostok stated in its letter to LPs that neither the firm nor the rest of its portfolio companies are being targeted, but how does it know for sure?

“Is it going to be more difficult for them to do deals there?” asks a New York-based managing director at a global investment bank. “Is someone going to come up with some other BS on another company, and what happens if they get detained again? As an investor you have to ask, is it worth all the risk factors in that region?”

Calvey has been described as the “cleanest of the clean” and “the go-to guy for Russian PE” by sources we spoke to this week. We hope this will be enough for him and the firm to weather this storm.

Write to the author: adam.l@peimedia.com