EMERGING MARKETS: Changing perceptions

As private equity markets go, Russia is still not a place for the faint-hearted. Concerns about corruption, political interference and corporate governance remain: in Transparency International’s most recent Corruption Perception Index, Russia was ranked 143rd out of 182 countries (by contrast, Brazil was 73rd, China 75th and India 95th).

However, in a time when economic growth is not easy to come by, the outlook in Russia is increasingly appealing. Real GDP growth is predicted to hit 3.7 percent in 2012, according to data provider Euromonitor International, well above most developed markets and even higher than the likes of Brazil.

In October, Baring Vostok closed its fifth buyout fund at its $1.15 billion hard-cap, while it also raised an additional $350 million for its Supplemental Fund V, a co-investment vehicle. That equates to a total of more than $1.5 billion, which Baring Vostok claims is the largest amount of private equity capital ever raised in Russia. Notably, a high proportion of the firm’s limited partners were non-Russian institutional investors, according to a source familiar with the firm (something that was also true of the firm’s previous funds, apparently).

Baring Vostok aims to benefit from growth opportunities in Russia, says senior partner Michael Calvey. “We still have real fundamental growth, and it is not driven by leverage for the most part. We expect more than 40 percent revenue growth across our portfolio this year, and while it will not be sustainable at that rate going forward, strong growth seems likely to continue for the next several years, especially compared to the developed countries,” he says. The firm typically invests in consumer services, natural resources, financial services, media and telecommunications.

Calvey accepts that Russia still has an image problem externally, as the Corruption Perception index shows. However, that does not negate the potential business opportunity, he insists.

“The image of Russia for investment is formed by foreign media attention about Russian political developments, and not about Russian business or investment results. If you are looking at the development of civil society or the development of democratic institutions you can look at the country one way. But when you look at it as an investor just trying to build great businesses and making money for your investors then you can look at it in another way,” he says.

And the government is by no means hostile: in fact, it’s actively trying to promote the industry, most obviously through the launch of the $10 billion Russian Direct Investment Fund, a state-sponsored vehicle that will co-invest alongside foreign GPs in deals involving Russian businesses.

In fact, says Calvey, GPs actually have more freedom to invest in Russia than they do in other big emerging markets. He cites the examples of the retail sector in India and the financial services sector in China, both of which are largely off limits to foreign investors. By contrast, he says, in Russia almost all sectors are open for investment – “except for a specific list of strategic companies mostly in natural resources or defence manufacturing.”

“If you stay out of politics and don’t challenge the strategic interests of the biggest state companies, then you can invest safely and very profitably in Russian businesses,” Calvey argues. “I am not trying to present Russia as an investment paradise, I am just saying that the rule of law has been gradually getting better over the last 15 years, and that’s actually what matters.” ?