Russia: Window slams shut

When the European Bank for Reconstruction and Development (EBRD) announced at the end of July that it was to stop all new investments in Russia as a result of the crisis in Ukraine, it marked the exit of the country’s biggest private equity investor – at a key time for the industry.

The EBRD has been the frontrunner in the development of Russian private equity since the bank was established in 1991: it has committed over €1 billion to 37 Russian fundraisings over that time, 46 percent of which were first-time funds. But in July, the EBRD’s board members – who include all EU member states and several non-EU shareholders – “[gave] clear guidance to the EBRD management that, for the time being, they will be unable to approve new investment projects in the Russian Federation”, according to a statement.

So the cheque book is closed – at least for now, says Anne Fossemalle, director of private equity funds at the bank. “We are continuing to manage our current portfolio and to honour capital calls from existing funds, but we are not signing anything new. We had an active pipeline and we will wait and see what the decisions are going forward.”


The US and the EU have recently stepped up their sanctions against Russia, in response to what the US has called Russia’s “continued destabilisation of Ukraine”. The impact will be hard-felt in a private equity industry that had enjoyed a relatively strong end to 2013 and start to this year. The Blackstone Group is just one of the firms to have reportedly stopped searching for deals in Russia.

Private equity spending in the world’s sixth largest economy remains tiny, with figures from data provider Dealogic recording 17 deals in 2013 with a cumulative value of $1.5 billion. This level of activity is flat on 2012 and down on the two preceding years, in part as a result of a slowdown in economic growth.

However, these numbers mask the fact that the country’s private equity market has been transformed in the last three years by the emergence of government-backed sponsors such as the Russian Direct Investment Fund (RDIF), as the country has pursued a strategic objective of building a local private equity market.

Tomasz Wozniak, a corporate partner in the Moscow office of international law firm Herbert Smith Freehills, says: “The market hasn’t yet had the kind of ‘Turkey moment’ that other countries have had. People have been waiting for the moment when a couple of big deals happen and a couple of Western private equity sponsors are seen to be doing well – at which point people will start piling in. In the meantime, the Russian state has itself tried to boost the private equity market.”

Two significant exits in the last 12 months had been seen as promising bellwethers of good returns. The London IPO of Tinkoff Credit Systems in October 2013 raised $1.1 billion in an oversubscribed offering that saw shareholders Goldman Sachs and Russian funds Baring Vostok, Vostok Nafta and Horizon Capital selling stakes. Then in February 2014, private equity-backed Russian hypermarket chain Lenta, backed by TPG Capital, the EBRD and Russian banking group VTB, raised $950 million via a Moscow IPO. The original investment had been made four years previously.

Fossemalle says: “The Lenta transaction with TPG was quite a remarkable one, but it remains rare to see global sponsors in Russian deals. Maybe international GPs haven’t spent enough time trying to understand this market. Like all emerging markets, you need to spend the time getting to know who you are doing business with, and making sure you have the right partners.”

In the first six months of 2014, 19 percent of the EBRD’s record €3.6 billion-worth of investment was made in Russia, with the remainder across its other 34 countries of operations. Fossemalle says: “The salient point is that, over the 23 years the EBRD has been investing in private equity funds in Russia, we have made a net IRR of about 10 percent, which is good if you look at all industries in an emerging market private equity context. That’s quite a healthy return.”

Another key exit for the bank was the IPO of Yandex in 2011: Russia’s most popular internet search engine raised $1.3 billion, benefiting EBRD-backed local fund Almaz Capital among others.


The EBRD has also committed to three fundraisings by Russian GPs in the last 12 months, helping Elbrus Capital raise $550 million for its second fund and supporting a first close for CapMan Russia II on €97 million in March 2013. In December, the EBRD announced its first investment in a financial infrastructure fund: it acted as a cornerstone investor for Da Vinci Private Equity Fund II, with a $30 million commitment to a fund targeting $200 million.

Today, both CapMan Russia and Da Vinci are still on the fundraising trail; both are suffering from the downturn in market sentiment among foreign investors resulting from the Ukraine situation.

Mounir Guen, CEO at placement agent MVision, worked on the Elbrus fundraising. He says: “The geopolitical dynamic makes it quite challenging for investors to work in the Russian market today. The window was certainly open last year, but the opportunity is more limited this year.”

The year 2013 was actually a bumper one for Russian fundraising, according to Private Equity International’s Research & Analytics division, with $4.1 billion raised by nine funds. In the previous five years, the best year had been 2009, when $900 million was raised.

Admittedly two massive RDIF co-investment funds distort the numbers: a $2 billion joint fund with Mubadala Development Company, the Abu Dhabi sovereign wealth fund, and $1 billion Russian-Japan Investment Platform.

And at the end of 2012, Russian private equity firm Baring Vostok raised $1.5 billion for its fifth fund, the largest amount ever amassed for deals in Russia.

Guen says: “Baring Vostok is one of the best-performing emerging markets funds, and as a result of that fundraising, a lot of investors had a certain awareness of the market last year. Russia was not an area of focus for international investors, but a number of them got interested by Baring Vostok and Elbrus. Now, the GPs that already closed their funds are in an excellent position. For those still in the market, it is very difficult to raise the money.”