The private equity community is assessing how the crisis in Ukraine could impact private markets portfolios.
From export curbs to stiff sanctions that will limit the country’s access to global financial markets, governments around the world are working together to inflict “maximum pain” on Putin’s regime. In the US, lawmakers are drawing up plans to reduce their pensions’ public and private markets exposure to Russian-owned companies in a bid to defund Russia’s military efforts.
The US Treasury’s Office of Foreign Assets Control on Monday prohibited US individuals from engaging in transactions with Russia’s Central Bank, its National Wealth Fund and its Ministry of Finance. It also sanctioned sovereign wealth fund, the Russian Direct Investment Fund.
On Thursday, House Republican Leader Jim Durkin said he plans to file legislation which would require Illinois to divest in all Russian businesses. New Jersey also plans to introduce a similar bill, The Wall Street Journal reported. Colorado’s Public Employees’ Retirement Association said Friday it will “comply with applicable divestment orders” and sell stakes in Russian banks, utilities and oil and gas producers in its portfolio.
Australia’s Future Fund, which has A$200 million ($144 million; €129 million) invested in companies listed on the Russian stock exchange, will be winding down its remaining exposure, the sovereign wealth fund said Monday. Aware Super had also divested some A$50 million of its holdings in Russia in the last week. It is unclear how much of these assets are in private markets.
While most private equity participants Private Equity International spoke to had limited to no exposure to assets in Russia, a cause for concern is that the valuations of underlying companies could take a hit from geopolitical uncertainty.
Robert Knorr, managing partner at CEE-focused MidEuropa, told PEI: “The public markets have been jittery over the past few months, as they grapple with the prospects of interest rate hikes by the central banks in order to stifle inflationary pressure. The prospect of Russian aggression against Ukraine is only exacerbating this volatility.”
Knorr added that while there is no direct impact on its portfolio – which does not invest in either Russia or Ukraine – the underlying valuations of the companies could be indirectly affected.
“However, as we are long-term investors we focus on the underlying performance and long-term prospects of companies we invest in. In fact, the softening of the valuations across the market may create some interesting buying opportunities for us,” Knorr said.
Some direct consequences to the portfolio could also come in the form of higher energy prices, potential supply chain disruptions and capital market developments, a spokesperson for Partners Group told PEI. The first order economic impact to the Switzerland-headquartered firm’s PE portfolio is expected to be “negligible” given its lack of direct exposure to the region, the spokesperson said, adding that its assets could be indirectly affected “via effects such as a decline in consumer confidence and demand”.
“On the markets side, central banks may delay monetary policy tightening. These second and third order impacts will take time to unfold and could spiral in unexpected ways,” the spokesperson said.
KKR is understood to have limited exposure to either Russia or Ukraine as it does not have offices in either country or any portfolio companies headquartered there. A source close to the firm noted that it is continuing to assess the impact and is in regular dialogue with LPs on geopolitical developments and their investments.
For the European Investment Bank Group, which began its operations in Ukraine 15 years ago and has invested more than €7 billion in the public and private sectors in the country, it will “continue to monitor developments closely in order to ensure business continuity”, according to a statement sent to PEI.
“Businesses are a vital part of Ukraine’s economic fabric and the need to continue to help them to grow and thrive remains stronger than ever.
The EIB Group, which also includes the European Investment Fund, continues to support the social and economic development of Ukraine in 2022, with investments in digital transformation of public institutions, water supply and wastewater treatment, metro modernisation, as well as street lighting and infrastructure needs in the areas affected by Ukraine’s transition away from coal.”
EIB is one of the largest investors in Ukraine. Last year it signed €554 million of new loans in the country.
Impact on Poland
Jacek Siwicki, president of Warsaw-based Enterprise Investors, also said the firm does not expect any direct impact on operations or performance, noting that the firm’s portfolio exposure to Russia and Ukraine was “very limited”. He added that none of its portfolio companies have any material exports to Russia, Ukraine or Belarus, nor were they reliant on sourcing from these markets.
He added that a substantial influx of Ukrainian citizens fleeing the country, with many of them choosing Poland for a place to stay, could have a positive impact on the Polish labour market, including its own portfolio companies.
Meanwhile, Maciej Cwikiewicz, chief executive of PFR Ventures, a subsidiary of the Poland Development Fund, told PEI, it was “business as usual” for its PE and VC investments.
“[The] Polish market responds similarly to German or French ones, the PE and VC investments are going very well and we expect about a 20 percent increase this year compared to the last year. At PFR Group we are realising all our investment programme without interruptions. What is more, we plan to increase our commitment to additional PE/VC funds this year.”
PFR Group does expect some volatility if the situation in Ukraine worsens, although the geopolitical situation has not yet impacted deal activity, Cwikiewicz said.