Russian roots

Baring Vostok Capital Partners has become a dominant force in private equity in Russia due to its identity as a local firm and its six in-house lawyers.

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.?

Baring Vostok

Founded: stake in 2002 to a UK private equity frm, annual sales had increased to
1994 $22.7 million.
location: Burren Energy ? Baring Vostok invested $27 million in this oil business
Moscow in 2000. The business was foated on the London Stock Exchange in
2003. After several partial sales of its stake, Baring Vostok now owns 8
Capital under management: percent of the company’s shares.
$1.8 billion
CTC Media ? Baring Vostok bought a stake in the company in 2002
sectors: and became one of its biggest shareholders. CTC Media is the biggest
Financial services, media, oil & gas, retail & consumer, communications non-state-owned television network in Russia. The business reported
losses of $1.1 million in 2001, but by 2005, it had achieved EBITDA of
Key people: $104.1 million. The company was foated on NASDAQ in 2006.
Michael Calvey and Alexei Kalinin (co-managing partners)
Jean Michel Broun (senior partner) Europlan ? Baring Vostok bought the company in 2003. Europlan
Andrey Costyashkin (partner and COO) operates transport leasing relationships with automobile producers
Elena Ivashentseva, Michael Lomtadze, Philippe Der Megreditchian like Ford, KIA, BMW and Volkswagen. The business bought rival Rolf
(investment partners) Leasing in 2004.
David Bernstein (director of investor relations and fund operations)
Gabbas Kazhimuratov (CFO) Nezabudka ? Baring Vostok invested in this retail chain of grocery
stores in March 2006. The business operates nearly 50 stores in Russia
Funds: and achieved sales of more than $70 million in 2005.
First Regional NIS Fund ? launched in November 1994 with $160 mil-
lion, a hybrid fund with two thirds invested in private companies and ? The business was founded in 1998 and is Russia’s biggest
one third invested in listed assets, the listed portfolio was liquidated in online marketplace. Baring Vostok bought a majority stake for $3
1997, 3.9 times its initial committed capital had been returned to inves- million in 2000. The deal was Russia’s frst example of venture capital
tors by November 2006 investment in the e-commerce sector. Under Baring Vostok’s owner-
ship,’s product assortment increased from 180,000 items in
Baring Vostok Private Equity Fund ? launched in December 2000 2003 to 375,000 items in 2005, and sales increased from $150,000
and closed in December 2001 on $205 million, it has been more than in 2000 to $33.6 million in 2005. Index Ventures recently led a $18
90 percent invested, it became the frst fund for direct investment million investment round in Other investors in the round
in Russia launched after the 1998 Russian economic crisis, invest- included Holtzbrinck Ventures, the venture capital business of one of
ments include Russian television network CTC and fnance provider Germany’s biggest publishers, and Cisco Systems.
PPE ? Founded in 1996, PPE comprises various companies in the dis-
Baring Vostok Private Equity Fund III ? closed in March 2005 on $413 tance commerce sector, including call centre Direct Star and logistical
million, investments include internet search engine Yandex and bill- centre Pro-moPost. Baring Vostok bought an initial stake in 2001 and
board advertiser Gallery Group thereafter gradually increased this stake through additional tranches.
PPE now has about a 40 percent share of the remote commerce
Baring Vostok Private Equity IV ? launched in December 2006 and market in Russia.
closed in March 2007 on $1 billion, Russia’s biggest ever buyout fund
select Baring Vostok investments
Bank Caspian ? Baring Vostok bought a majority stake in this Kazakh retail bank in December 2006. Bank Caspian has more than $1.6 billion in assets, and operates one of Kazakhstan’s biggest retail networks, and has more than 330,000 retail and corporate customers. Sladko ? The company is Russia’s third largest producer of confectionary products and accounts for about 9 percent of the national market. Baring Vostok made an initial investment in 1996 and made several additional investments thereafter. The frm sold its stake in 2004 when the business was sold to Norwegian Orkla Foods.
Borjomi ? Baring Vostok invested about $8 million for a 25 percent stake in this mineral water business in 1996. When the business was bought, annual sales were $5.4 million. When Baring Vostok sold its Yandex ? Founded in 1997, Yandex is a Russian-language internet search engine. Baring Vostok bought a 35.7 percent stake in the business for $5.3 million in 2000. Under Baring Vostok’s ownership, the company’s sales increased from $72,000 in 1999 to $35.7 million in 2005.

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.