Panel: Fearful LPs shun CEE and Russia

Strong performance from Central and Eastern European and Russian managers has failed to attract the attention of limited partners concerned about the spread of financial crisis throughout the entire region, as well as corruption in Russia, according to a panel at Harvard’s recent private equity conference.

Strong private equity performance in Central and Eastern Europe and Russia has not been able to overcome limited partners’ fears of financial crisis and perceived corruption in the regions, leading to a dearth of capital for those markets, panelists at an industry event said in late February.

Media reports of economic instability in European countries have tainted investors’ perception of the entire region, including the less developed economies in Central and Eastern Europe, preventing LPs from allocating capital in a big way to managers in those areas, said ALPHA Associates managing director Richard Seewald. ALPHA manages over $2 billion for investments in the region.

Seewald was speaking at Harvard Business School’s 17th annual venture capital and private equity conference.
“I think if you asked your [non-European] friends how many positive stories they read about Central and Eastern Europe and Russia…It would probably come out at zero,” Seewald said. “That trickles down to the institutional investors that we go out to.”

Another reason some LPs don’t have a lot of interest in the CEE and Russia regions is the relatively small size of funds, which generally come in at $1 billion or less.

“Those are the biggest funds in the region, and at a billion you can’t get a lot of institutional money,” Seewald said.

While Asian-dedicated funds have been met with a “wall of money” Seewald said, Russian funds have not garnered anywhere near as much interest despite comparable returns.

“Asset managers can’t go to a cocktail party without having invested in an Asian fund or they’d simply be out of fashion, but Russia…is not getting that amount of money [even though] the returns are, on a risk adjusted basis, as attractive and maybe more attractive in many respects,” he said.

Russia’s thriving public markets have also failed to grab the attention of investors, said Michael O’Flynn, managing director at Moscow-headquartered UFG Private Equity.

“The Russian stock market is up 1000 percent in the past decade. It’s absolutely trounced China, trounced Latin America, but nobody cares,” O’Flynn said.

LPs also have fears about corruption in Russia, which has kept them from gaining large exposure to the country.

“[There] is this idea that you can’t trust the books in Russia,” O’Flynn said. “The biggest financial scandals in the world have happened in the US and in India and I’m sure there are some out there in Russia that are waiting to be found…but at the end of the day it creates opportunity.”

The lack of competition for deals is an advantage for the firms that work in the region, according to Pekka Santeri Mäki, managing partner at 3TS Capital Partners, which has offices throughout Central and Eastern Europe.

“Actually we are pretty happy that there isn’t too much money and too many firms chasing all these great companies,” he said. “When you talk about first mover advantage, when I started investing in the region in November 1990, I didn’t think I would be a ‘first mover’ 21 years later.”