If anyone knows a thing or two about investing in Russia, it is Michael Calvey, managing partner of Barings Vostok Capital. This group has been investing in Russia for the past 13 years and runs four funds worth US$1.3bn. And it has investments in over 48 Russian companies but it has never won an auction – ever.
Despite his obvious love of his work and adopted home of Russia, Calvey expects that private equity returns in Russia will be lower in the next few years than they have been in the past and is warning his investors as such. He expects that the political risk, which is ever present in this country, will increase over the next few years as Ukrainian elections are coming up and tensions are growing in Kosovo which may prompt negative reactions from the international community.
Calvey sensationally revealed that his private equity firm has only outperformed the stockmarket in Russia by 3% over the life of the fund. He said: “I should have put my money in the stock market and gone on vacation.”
However, it is important to understand that the Russian stock exchange is heavily biased towards oil and gas stocks which have been in a boom period for some time. Calvey said that when he plans an exit he uses a dual track approach as many managers do approaching both strategic buyers and exploring an IPO – not that exciting. But what is interesting is the huge variance between the prices offered by trade buyers and those available through an IPO. A Russian IPO offers twice the amount of returns as a trade sale. So why is this? Well it would seem that strategic investors are putting too much risk premium on the political situation in Russia. And portfolio investors are putting too much value on Russia’s growth.
As always the truth lies somewhere in between – hence the lower expected returns for PE in the next few years. Or maybe he is trying to scare you off his patch.