(Bloomberg) — Michael Calvey has spent decades believing in Russia. He made successful bets on technology and consumer businesses as the country emerged from the breakup of the Soviet Union and remained invested after the annexation of Crimea in 2014. Even his arrest and incarceration in 2019 didn’t put him off.
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It helped that funds managed by Calvey’s Baring Vostok Capital Partners skyrocketed in value from $2.6 billion to $9 billion in the 2½ years he fought charges without jail and later house arrest, according to a person with knowledge of the company’s operations, who asked not to be named when discussing the results.
But like much of the world, Calvey was caught off guard by President Vladimir Putin’s invasion of Ukraine. Now its investors, including the California Public Employees’ Pension Retirement System, the John D. and Catherine T. MacArthur Foundation and the General Electric Co. pension fund, are unsure if they will get their remaining money back.
Russian assets are effectively worthless to foreign holders since sanctions prevent them from selling, forcing investors in affected funds to significantly depreciate their value and wait. It’s a problem that affects many companies that have remained loyal to Russia, from specialist fund managers to a dozen of the world’s largest banks, which together have $100 billion in exposure to the country in sectors within and outside sanctions, according to figures compiled by Bloomberg.
“People like Calvey naively thought they could trust Putin,” said Jeffrey Sonnenfeld, a Yale School of Management professor who tracks foreign business responses to the Russian invasion. “Russia is uninvestable for many years.”
A Baring Vostok spokesperson declined to comment.
Calvey, 54, established Baring Vostok in 1994. The company has long been considered Russia’s private equity gold standard, in part due to its 500-fold return from an early bet on the investment giant. internet Yandex NV. His funds raised $3.7 billion in total capital and successfully sold businesses such as Tinkoff Bank and online classifieds service Avito.ru.
Calvey’s notoriety meant his arrest attracted international attention. He and several colleagues were accused of overvaluing a company his funds brought into the capital of Vostochny Bank, a lender then controlled by Baring Vostok. Calvey denied the charges, blaming them on a dispute with the bank’s minority owner.
US President Joe Biden raised the affair with Putin last June, and many Russian business leaders have rallied around Calvey. Eventually, a court handed him a 5.5-year suspended sentence for embezzlement last August. Calvey is appealing the decision.
Throughout his prosecution, during which he appeared in a courtroom cage and wore an electronic tracking bracelet, Calvey remained a staunch supporter of Russia. In September, he told a conference that he would continue to invest in the country.
Then the world changed overnight. Calvey was overseas when the invasion began in late February and has no current plans to return to Russia, according to acquaintances who asked not to be identified in order to discuss Calvey’s personal trip.
Russia’s economy is on track for two years of contraction for the first time since the recession that followed the collapse of the former Soviet Union in 1991, according to a Bloomberg survey, after foreign governments imposed trade and finance sanctions, froze its central bank reserves and cut off many of the country’s lenders from the SWIFT global messaging system.
In response, Russia prevented foreigners from selling assets and restricted the circulation of rubles abroad to prevent further havoc in local markets. In a sign that Russia was not planning to ease restrictions on foreign assets, Finance Minister Anton Siluanov told an April 27 briefing that there was currently no discussion on allowing the return of foreign assets. foreigners on the Moscow Stock Exchange, the country’s main stock exchange.
“We’re seeing selling pressure on anything Russia-related, but we’re not seeing a lot of buyers,” said Gerald Cooper, a partner at private markets advisory firm Campbell Lutyens & Co. Several investors called his company to leave Calvey’s funds, Cooper added. “Baring Vostok has been a very successful private equity fund, but I think you’d be hard pressed to find secondary buyers willing to take on that kind of exposure.”
Although Baring Vostok has not raised new funds in over a decade, many investors are exposed to these latest shocks through their long-term commitments to its existing vehicles. The University of Texas Investment Management Co., which manages money for the University of Texas and Texas A&M systems, invested $50 million in Fund V in 2012, according to public records. Karen Adler, a spokeswoman, said the endowment is monitoring its legal requirements regarding its investment.
The MacArthur Foundation, which invested in the Baring Vostok funds raised in 2007 and 2012, is studying ways to unwind its investments. However, “given the situation, there is no safe way out at this time,” said foundation spokeswoman Kristen Mack.
The California pension fund invested $77.8 million in Baring Vostok’s 2007 Fund IV and has about $15 million left, according to spokesman Joe DeAnda. Sanctions and market restrictions are hurting Calpers’ ability to liquidate its Russian holdings and it is monitoring developments in federal sanctions and actions, according to a March statement. The fund declined to comment on specific investments.
A spokeswoman for General Electric’s pension fund said its investments “were made more than 10 years ago and currently have no market to allow for an exit.”
The European Bank for Reconstruction and Development, which in March announced the closure of its Moscow office, is also part of the 2012 fund. The University of Michigan said it was looking for an exit for its various investments, but no there is no buyer.
“Look how many US public sector pension funds were still invested in Russia, against the best advice of their own government,” said Tim Ash, emerging markets strategist at Bluebay Asset Management. “Maybe it’s just a case of greed overpowering fear or rational analysis.”
The war has drowned out signs of renewed interest in Russian investment. In 2021, Elbrus Capital raised $363 million in commitments in its Fund III, including from U.S. investors, and Russian capital markets had their best year for initial public offerings by value and number of deals since. before Putin annexed Crimea in 2014.
But other private equity investors were already rethinking their exposure. Investor Charlie Ryan failed to reach a deal to sell UFG Asset Management funds last year to VTB Capital due to disagreements over the value of certain assets, according to people familiar with the matter who asked not to be identified as the discussions were not public. A group of UFG AM’s limited partners are demanding that it close and distribute its assets rather than continue to collect management fees, they said.
A representative for UFG AM declined to comment.
A number of Baring Vostok’s portfolio companies face a difficult future. Its fast-growing e-commerce investment Ozon Holdings Plc adopted a cash-intensive business model as it sought to become Russia’s answer to Amazon.com Inc. The company went public in New York in 2020.
But its shares have been frozen since the invasion, pushing $750 million of convertible bonds into technical default as some bondholders demand early redemption.
Plans by Vkusvill, a food retailer focused on healthy products, to hold an initial public offering are on hold with the effective shutdown of Russian capital markets.
“Russia was risky before that and now it’s completely risky,” said Steve Kaplan, professor of finance at the University of Chicago Booth School of Business.
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