Russian roots

Baring Vostok Capital Partners is one of a cluster of Russian buyout firms making regional investments with global capital. The firm recently raised Russia’s biggest ever buyout fund – a $1 billion (€736 million) vehicle – thereby establishing itself as the foremost private equity player in the country. Baring Vostok’s regional presence and knowledge give it an unmistakable edge over its international competitors, says Michael Calvey, co-managing partner of the firm. “We have a distinct competitive advantage. We can invest in Russia at a significantly lower risk than most firms,” Calvey says.
However, most of Baring Vostok’s competition comes from domestic, not international, players. Explains Calvey: “Ninety-five percent of private equity capital in Russia is indigenous. There is a tremendous amount of individual wealth in Russia, from oligarchs and entrepreneurs, and this feeds into the private equity market.”
So how does the firm differentiate itself from other Russians? One of the most important factors is its hybrid nature as a Russian fund, with an indigenous investment team and a local presence, but with international capital and expertise.
Vostok means ‘east’ in Russian, but Baring Vostok is no longer the eastern extension of Baring Private Equity Partners. Baring Vostok was originally a joint venture between Baring Private Equity Partners (which belonged to Dutch insurance conglomerate ING) and the firm’s management team but it became independent in 2004 when management bought out ING’s shares in the private equity business.
There remains some affiliation with the other Baring spin-outs – Baring India and Baring Asia – but this is more perceived than real. Explains Calvey: “We are not a global firm, more of a global federation. We sit on each other’s investment committees in order to provide a different perspective on investments and to gain insight into each other’s markets.”
The three sister firms do share some of the profits with one another, but this is more to facilitate co-operation than because of a shared ownership structure.
Baring Vostok has further detached itself from the Baring brand by staffing the firm with Russians. Of the 12 partners, eight and a half are Russians – the half being a partner who has a Russian mother and a French father. Says Calvey: “We are unmistakably a Russian fund – and this is how we are perceived in Russia – as a Russian firm with global capital.”

Geographic reach
Baring Vostok’s Russian identity is underlined by the fact that the firm invests about 80 percent of its capital in Russia. The firm is considering expanding on its Moscow office and opening an office in Kazakhstan to make it better-placed to do deals in that country, in which the firm estimates it invests about 20 percent. Says Calvey: “Kazakhstan has become an increasingly important marketplace for Baring Vostok and is now our second most important deal destination after Russia.”
For example, the firm invested in Bank Caspian in December 2006, and two Baring Vostok professionals spend most of their time in Kazakhstan.
The firm previously had an office in Kiev but closed this down in 2002 because deal opportunities did not justify a permanent presence there. “Ukraine is our third most important deal destination but our relationships in Kazakhstan are deeper, and we find more opportunities there,” notes Calvey.
Calvey rationalizes the firm’s concentration on Russia in the context of differing market opportunities in Russia, Kazakhstan and Ukraine.
He says: “Russia is seven or eight times bigger than Ukraine in terms of GDP, and 15 times bigger than Kazakhstan, so the market opportunity is different in each of the three countries. Russian companies usually have the potential to generate much larger sales or assets than Ukrainian or Kazakh companies in the same industries.”
Baring Vostok is not seeking to further expand the geographic reach of its investments. Confirms Calvey: “We would only invest outside of the region if there was a substantial Russian connection.”

Defined responsibilities
While the hierarchy within the firm is quite fluid, responsibilities are very well defined. The team is led by co-managing partners Michael Calvey and Alexei Kalinin. Six of the 12 partners are investment partners. The investment partners are allocated to different sectors – Elena Ivashentseva is responsible for investments in the media and telecommunications sector, Michael Lomtadze is responsible for financial services deals, and Philippe Der Megreditchian is responsible for investments in the consumer goods and services sector.
A typical deal is led by one of the six investment partners, with one of the eleven investment directors.
Government relations activities are particularly important in Russia because the legal system is more ambiguous. Explains Calvey: “Russia is still a country of people rather than laws. Relationships matter more here.”
The firm has three full-time government-relations advisors to establish constructive relationships with local governments and regulatory bodies.
Another relationship angle that matters more in Russia is investor relations. Global investors are less familiar with the domestic market and so need to be persuaded of the upside of investing in Russian funds. “Most LPs are not deeply committed to Russia, and the majority invest in the region only through Baring Vostok, while some do invest in other Russian GPs too,” says Calvey. “LPs generally consider Russia to be riskier and more inaccessible than other major emerging markets, probably with good reason. It is fiercely competitive, both in terms of buying assets and in terms of keeping control of these assets.”
David Bernstein is the director responsible for the firm’s investor relations activities.
The peculiar nature of Russia’s legal environment makes it critical that the firm has its own comprehensive legal team. The firm has six full time in-house lawyers: three Russian and three international.
Says Calvey: “Most of our portfolio companies have limited legal resources so they depend on us for legal activities.”
Another factor that makes Baring Vostok’s legal activities so fundamental is the prevalence of legal disputes in Russia.
Explains Calvey: “About once a year we have a significant legal dispute where we have to defend a portfolio company in court against some hostile claim. We have historically had more than ten such disputes.”
Little is outsourced – the firm takes a hands-on, do-it-yourself approach. The one activity that the firm does outsource, public relations, is not a fundamental component in Baring Vostok’s approach.
Says Calvey: “We don’t really prioritize PR. We don’t need it to raise capital and we like to keep a low profile.”
Lack of transparency in Russian companies makes due diligence another critical process in the country. The firm outsources some due diligence and does some in-house. “A couple of times we decided to pass on otherwise attractive investments when we discovered during due diligence that one of the owners or managers of the target company was engaged in activities in the past which we wouldn’t want to have associated with our firm,” says Calvey.
The professional background of the investment partners at Baring Vostok underlines the entrepreneurial outlook of the firm. Says Calvey: “We are a very entrepreneurially minded investment team – of the six investment partners, five have previously been CEOs of their own businesses. We have created an organization that corresponds to the specific needs and talents of the individuals in it, not the other way around.”
One important future development within the firm is deal size. Having raised a $1 billion fund, Baring Vostok is now looking at deals in the $40 million to $100 million bracket – and this requires a bigger investment team. Says Calvey: “We will shortly add three or four more people to our investment team so that we manage a larger portfolio and continue to take a hands-on role in our companies.”
Bigger investment team aside, Baring Vostok is determined not to become a global buyout fund – it is sticking to its Russian roots, and rightly so.