Ukraine invasion takes its toll: Story of the Year

At the start of the year, private markets participants were forced to assess their Russian exposure – today, the impact of the conflict continues to ripple through the industry and broader global economy.

Most people would agree that one event in particular has stained the past 12 months: Russia’s invasion of Ukraine on 24 February.

As news of the Russian offensive broke, the investment community was forced to assess exactly how the crisis could impact private and public markets portfolios alike, particularly as a swathe of sanctions against Russian businesses and individuals came into play.

In the US, lawmakers quickly drew up plans to reduce pension plans’ exposure to Russian-owned companies. The US Treasury’s Office of Foreign Assets Control prohibited US individuals from engaging in transactions with various Russian bodies, including its central bank, while several US states began the process of filing legislation that would require all stakes in Russian banks, utilities firms and energy producers to be divested.

Other countries followed suit: in Australia, Future Fund – which had A$200 million ($144 million; €129 million) invested in companies listed on the Russian stock exchange at the time of the invasion – announced it would be winding down its exposure to the country. Aware Super, meanwhile, divested some A$50 million of its Russian holdings over the space of a single week.

While this was happening, some private markets participants were also providing help and support for those on the ground. Invest Europe, the industry association that represents European PE, announced in March it would donate €100,000 to support relief efforts in Ukraine. The association said in a statement, “We have equally issued the call to our 610 members to boost this funding further.”

London-based private equity shop Inflexion committed to a donation of £500,000 ($653,000; €596,000) to the Disasters Emergency Committee’s Ukraine appeal, through the British Red Cross. KKR, meanwhile, committed $1 million in support for Ukraine.

Preparing for the worst

In the weeks and months that followed the initial invasion, Private Equity International spoke to many LPs and GPs who said they had little to zero exposure to Ukraine or Russia. Even so, sources widely acknowledged that the repercussions of the crisis could be felt across the wider industry for years to come.

In April, Bain & Co released a list of eight potential disruptors through which the Ukraine crisis could impact the global business environment, and how to navigate them. These included the loss of Russian market and assets; natural resource shortages; cascading supply shortfalls; mounting inflation; financial market instability; real economy slowdown; technological disruption; and geopolitical realignment.

As we examined in our December deep dive into the current macro environment, many of these predictions quickly materialised. “We’ve seen now with the invasion of Ukraine how a unilateral action by a country to take military action against a neighbour can be disruptive to the global economy,” Ignacio Jayanti, chief executive of Corsair Capital, told PEI for the deep dive. “I’ve read estimates where I think economists are thinking that the cost of the Ukrainian conflict [to] the global economy could be in the trillions of dollars.”

Further, Bain & Co’s inaugural Private Equity and Venture Capital in Central and Eastern Europe report in November found that the Ukraine crisis has already negatively impacted fundraising and exit options across the CEE region this year.

The report did note, however, that these effects are likely to be transitory: “In the longer term, the war is likely to lead to structural changes in the region’s economies, including greater military and security spending, which will benefit sectors such as cybersecurity, an accelerated transition to green energy and the potential for long-term involvement in the post-war reconstruction of Ukraine.”