At press time, the political crisis in the Ukraine was continuing to escalate, and the international community was still arguing about what its response ought to be – with economic sanctions among the options on the table.
So it’s no surprise that investors in Russian-based funds were feeling nervous about what the possible consequences might be for the country’s buyout market. The Russian stock market had already taken a hit – and with no sign of a resolution in sight, the chances of this affair having knock-on effects for the general business environment in Russia seemed high.
Naturally, GPs in Russia are following developments closely.
“We continue to invest and we are seeing excellent opportunities; however, we are also viewing the situation soberly and see the potential for things to deteriorate further, so we are prepared for this also,” says Michael Calvey, a senior partner at Baring Vostok. “LPs are clearly worried about the situation, and I suspect many LPs will hold back from making new commitments to the region while they wait to see how it plays out.”
Happily for Baring Vostok, it closed a $1.15 billion buyout fund (its fifth) on its hard-cap in October 2012, as well as an additional $350 million co-investment vehicle. So it won’t be needing to tap the fundraising market any time soon.
It’s a different scenario for Da Vinci Capital Management, which is currently in market attempting to raise $200 million for its second fund (it held a $100 million first close late last year). But the firm’s managing partner and chief executive officer Oleg Jelezko the fundraising will not be affected by the crisis in Ukraine. “We are on track to close the fund on our $200 million target in June. Some of our large investors have told us it is business as usual – and their view on investing in Russia hasn’t changed.”
LPs are sophisticated and know the score, he argues. “When LPs invest in Russia, they do [so] with the realisation that some political situations can occur occasionally. I also think everybody is used to the fact that the Russian stock market is highly volatile, and the fact it has been going more down than up in recent years.”
He admits that he has had to field a few questions from concerned LPs – not least because one of Da Vinci’s portfolio companies operates a coal mine in Western Ukraine. “We don’t get lots of calls. But they do ask [what] our opinion [is,] what the potential implications can be and whether we change our strategy as a result.”
Jelezko remains bullish, however. “We tell our investors to be ready for [a] hostile political environment. But at the same time, we are pragmatically looking at good opportunities in Russia. We think the probability of total escalation is very low.” Even if there are sanctions against Russia, it would largely only affect the politicians, not the general business world, he suggests.
In fact, he argues, the current situation might even have an upside in the form of lower prices, which could benefit his firm in the medium term. “[Lower prices would be] great for us since we will be investing our current fund,” he says.
Clearly investors are concerned. And while Calvey et al don’t think they’ll abandon Russia in a hurry – “I don’t expect many LPs to sell their existing positions,” as he puts it – that may change if the situation gets any more out of hand.