(Bloomberg) — Michael Calvey spent decades believing in Russia. He made successful bets on technology and consumer firms as the country emerged from the breakup of Soviet Union, and stayed invested after the annexation of Crimea in 2014. Even his arrest and incarceration in 2019 didn’t put him off.
It helped that funds managed by Calvey’s Baring Vostok Capital Partners exploded in value from $2.6 billion to $9 billion during the 2 1/2 years he battled charges he said were baseless from jail and, later, house arrest, according to a person with knowledge of the firm’s operations, who asked not to be named discussing results.
But like much of the world, Calvey was caught unaware by President Vladimir Putin’s invasion of Ukraine. Now, his investors, including the California Public Employees’ Pension Retirement System, the John D. and Catherine T. MacArthur Foundation and General Electric Co.’s pension fund, are uncertain if they’ll 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 write down their value significantly and wait. It’s a problem that’s affecting many firms that stuck with Russia, from specialist fund managers to a dozen of the world’s biggest banks, which together have $100 billion exposed to the country across industries both inside and outside sanctions, according to figures compiled by Bloomberg.
“People like Calvey naively thought that they could trust Putin,” said Jeffrey Sonnenfeld, a Yale School of Management professor who is tracking foreign companies’ responses to the Russian invasion. “Russia is uninvestable for many years.”
A Baring Vostok spokesman declined to comment.
House Arrest
Calvey, 54, set up Baring Vostok in 1994. The firm was long considered the gold standard of Russian private equity, in part due to its 500-fold return from an early bet on internet giant Yandex NV. His funds have raised $3.7 billion in total capital, and successfully sold out of firms including Tinkoff Bank and online classifieds service Avito.ru.
Calvey’s prominence meant his arrest attracted international attention. He and several colleagues were accused of overvaluing a company that his funds contributed to 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.
U.S. President Joe Biden raised the case with Putin last June, and many top Russian business executives rallied around Calvey. Ultimately, a court handed him a 5 1/2-year suspended sentence for embezzlement last August. Calvey is appealing the ruling.
Throughout his prosecution, during which he appeared in a courtroom cage and wore an electronic tracking bracelet, Calvey remained an enthusiastic Russia booster. In September, he told a conference he would continue to invest in the country.
Then the world changed overnight. Calvey was abroad when the invasion began in late February and does not currently plan to return to Russia, according to acquaintances who asked not to be identified in order to speak about Calvey’s personal travel.
‘No Exit’
Russia’s economy is on course 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 slapped sanctions on trade and finance, froze the reserves of its central bank and cut many of the nation’s lenders from the SWIFT global messaging system.
In response, Russia blocked foreigners from selling assets and restricted the movement of rubles abroad to prevent further havoc on local markets. In a sign that Russia is not planning to ease restrictions on foreign-owned assets, Finance Minister Anton Siluanov said at a briefing April 27 that there aren’t any discussions currently about allowing foreigners back onto the Moscow Exchange, the country’s main stock market.
“We are seeing selling pressure on anything that touches Russia but we are not seeing a lot of buyers,” said Gerald Cooper, a partner at private markets advisory business Campbell Lutyens & Co. Several investors have called his firm looking to exit Calvey’s funds, Cooper added. “Baring Vostok has been a very successful private equity fund but I think you would be hard pressed to find secondary buyers that are willing to take on that type of exposure.”
While Baring Vostok hasn’t raised a new fund for over a decade, many investors are exposed to these latest shocks via 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 2012’s Fund V, public records show. Karen Adler, a spokeswoman, said the endowment is monitoring its legal requirements in regards to its investment.
The MacArthur Foundation, which put money into Baring Vostok funds raised in 2007 and 2012, is exploring ways to unwind its investments. However, “given the situation, there is no prudent way to exit at this time,” said Kristen Mack, a spokeswoman for the foundation.
California’s pension fund invested $77.8 million in Baring Vostok’s 2007 Fund IV and has about $15 million remaining in it, according to spokesman Joe DeAnda. Sanctions and market restrictions are hurting Calpers’ ability to liquidate its Russian holdings and it’s monitoring evolving sanctions and federal actions, according to a statement in March. 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 do not currently have a market to enable an exit.”
The European Bank for Reconstruction and Development, which in March announced it would close its Moscow office, is also in the 2012 fund. The University of Michigan has said it is seeking an exit for its various investments, but has no buyer.
“Look at how many U.S. public sector pension funds were still invested in Russia, against the best advice of their own government,” Tim Ash, an emerging-markets strategist at Bluebay Asset Management, said. “Maybe it’s just a case of greed overpowering fear or rational analysis.”
Troubled Assets
The war has snuffed out signs that interest was again growing in Russian investments. During 2021, Elbrus Capital raised $363 million of commitments to its Fund III, including from U.S. investors, and Russian financial markets enjoyed their best year for initial public offerings by both value and deal count 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’s funds last year to VTB Capital amid disagreements over the value of some assets, according to people familiar with the matter who asked not to be identified because the talks weren’t public. A group of UFG AM’s limited partners is demanding that it shut down and distribute its assets rather than continue to collect management fees, they said.
A UFG AM representative declined to comment.
A number of Baring Vostok portfolio companies face a difficult future. Its fast-growing ecommerce investment, Ozon Holdings Plc, adopted a cash-intensive business model as it sought to become Russia’s answer to Amazon.com Inc. The firm went public in New York in 2020.
But its shares have been frozen since the invasion, pushing $750 million in convertible bonds into technical default as some bondholders seek early repayment.
Plans for Vkusvill, a food retailer focused on healthy products, to hold an initial public offering are paused with Russian capital markets effectively closed.
“Russia was dicey before this and now it’s completely dicey,” said Steve Kaplan, a professor of finance at the University of Chicago’s Booth School of Business.
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