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Russian Firm Pays 400% profits

Note: Kevin Calvey's brother Michael Calvey has been placed under house arrest in Russia for embezzlement.

(Michael) Calvey, a former Salomon Brothers banker, says his (Russian) funds have returned four times their investors' money. He intensively researches companies and monitors them closely.

Business Week/Bloomberg, April 28, 2011
By Anne-Sylvaine Chassany and Jason Corcoran

TPG Capital, the only global private equity firm with a presence in Russia, is finding out just how difficult it can be to do business there. From its base in Fort Worth, TPG manages about $48 billion in assets and counts among its investments Energy Future Holdings, the Texas power producer whose $43.2 billion leveraged buyout in 2007 was the largest in history. Since setting up a Moscow office in early 2007, it has made only one Russian private equity deal: the September 2009 purchase of a 31 percent stake in superstore chain Lenta, and that deal has led to lawsuits and a violent brawl. "There are pros and cons to every emerging market," says Stephen Peel, the TPG partner who oversees the firm's Russian operations. "None of them is perfect."

Russia has attracted less private equity money than other emerging markets-$1.4 billion over the past three years, compared with $28.6 billion for China, $15 billion for India, and $5 billion for Brazil, according to the Emerging Markets Private Equity Assn. "Russia is still perceived as the wild, wild West, and the issues TPG is facing there aren't helping," says Jérémie Le Febvre, a partner at Triago, which helps buyout firms raise money. "Investors much prefer Asia and Latin America right now."

Carlyle, the Washington-based buyout firm, shut its Moscow office in 2005, saying the returns weren't worth the risks. It doesn't plan to try again. "Russia has not proven to be a place where Western private equity investors can have the returns and realize the profits commensurate with the risks they've had to take," Carlyle co-founder David Rubenstein said in Berlin in March.

The Russian government hopes to change investor perceptions. In March, President Dmitry Medvedev announced a $10 billion private equity fund, partly funded by the government, that will make investments in conjunction with international firms. He also created a working group to turn Moscow into a global financial center. It includes Stephen A. Schwarzman, chief executive officer of Blackstone Group (BX), one of the world's largest private equity firms, Goldman Sachs's (GS) Lloyd C. Blankfein, and JP Morgan Chase's (JPM) Jamie Dimon. Separately, state-owned OAO Sberbank, Russia's largest bank, said it planned to work with Credit Suisse (CS) to raise a $1 billion private equity fund.

Michael Calvey, an American who launched Moscow-based private equity firm Baring Vostok Capital Partners in 1994, says foreigners have to adapt to Russia's peculiar business environment. "International firms aren't equipped for Russia," says Calvey. "They usually have a low tolerance threshold for uncertainty and no sense of humor for Russian surprises." Such surprises may include a tax inspector showing up to seize assets because of supposedly unpaid taxes or a regulator announcing that a key license your business needs is going to be reviewed three years before it expires. "You just learn not to panic," he says. "It's routine."

Foreign investors are also deterred by widespread corruption. Russia ranked 154th out of 178 countries-worse than Libya, the Ivory Coast, and Haiti-in the 2010 corruption perceptions index published by Transparency International.

Calvey, a former Salomon Brothers banker, says his funds have returned four times their investors' money. He intensively researches companies and monitors them closely. Calvey's 10 Baring Vostok partners are Russian. In all, the firm has 20 investment professionals, plus four full-time lawyers, three government relations managers, and eight accountants and human resources managers dedicated to the companies in which it has stakes.

TPG, by contrast, has only three investment professionals in Russia. While two are Russian, none are partners. Their boss, Peel, moved from Moscow to Hong Kong in 2008. John Oliver, the operating partner in charge of Lenta, is in London.

Lenta, begun in 1993 as a cash-and-carry warehouse serving small retailers and restaurants, had two stores in 2002. It now owns 39 warehouse-size hypermarkets in 20 cities, selling everything from food and cigarettes to toys and television sets. Sales grew 27 percent, to 70.6 billion rubles ($2.5 billion), last year.

In September 2009, TPG and state-owned Russian bank VTB Group agreed to invest about $100 million in Lenta for 31 percent of the shares, which they bought from Lenta founder Oleg Zherebtsov. TPG and VTB signed a shareholders' agreement to operate Lenta jointly with Svoboda, an investment firm that owns 41 percent of Lenta. Svoboda is controlled by August Meyer, an American-born lawyer.

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