Side Letter: Russia and Baring Vostok, secondary buyout risk, emerging markets

Russia's frozen PE scene shows little sign of thaw; plus highlights from the Emerging Markets Special; a big hire in Spain and the truth (according to Adams Street Partners) behind sponsor-to-sponsor deals. Here’s today's brief, for our valued subscribers only.

Just happened

The state of Russia

Michael CalveyRussian Direct Investment Fund head Kirill Dmitriev, told Reuters last week that the state-backed fund would likely commit capital to any future Baring Vostok Capital Partners funds and co-invest with it. Baring Vostok’s founder Mike Calvey (pictured) and other BV employees remain under house arrest on charges of embezzlement – charges the firm has consistently denied. A BV spokesman told PEI the firm will be happy to welcome the RDIF as LPs as soon as the criminal case against its employees is dismissed, adding that the RDIF is not and has never been an LP with the firm.

Whether or not it is possible to invest successfully in Russia without the support of the government is explored in our Emerging Markets Special. Alex Lynn reports that state-backed funds were responsible for 73 percent of investments in H1 2019, and no private equity funds dedicated solely to Russia have closed since 2014, per PEI data.

Other Emerging Markets Special highlights 

To do: make it rain in Spain

bd-capital, an operationally-focused European mid-market shop set up by former Advent International partner Andy Dawson and former Whitbread chairman Richard Baker, is building out its bench with the addition of Alejo Vidal-Quadras de Caralt. The former KKR Spain head – who also spent nine years as head of Spain for 3i – will lead southern European investment activities. The firm’s team is now 15, six of whom are former CEOs. The firm is reportedly seeking €400 million for its debut fund.


Secondaries buyouts chartsPassing-the-parcel: expensive but safe. There is no lack of research into the performance of secondary buyouts. And like much research into private equity returns, conclusions vary. Adams Street Partners has added to this canon and it finds that sponsor-to-sponsor transactions tend to be more leveraged (consistently use 1x to 2x EBITDA more debt than non-sponsor deals at entry) and more expensive (pricing at approximately one turn of EBITDA higher than other deal types). BUT they are also have lower loss rates than other deal types. Carmela Mendoza has the details.

On marking-to-market. FT’s Alphaville column calls into question the value of PE valuations, pointing to EnCap portfolio company Southland Royalty, which has now filed for bankruptcy, having been valued at close to cost at the start of the 2019. Says the FT: “Suddenly, those smooth returns from investments untethered from the realities of price discovery don’t feel as solid as they might have done before.”

He said it

“The belief is often that if you build it, they will come. That doesn’t always happen.”

An anonymous COO urges delegates at PEI’s CFOs and COOs Forum to take a measured approach when raising capital overseas and “be realistic about where you want to raise capital before you build a very expensive structure”.

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Today’s letter was prepared by Toby MitchenallIsobel MarkhamAdam LeRod JamesCarmela Mendoza and Alex Lynn.

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