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. Last Updated: 07/27/2016

Baring Launches $205M Fund

Baring Vostok Capital Partners on Thursday launched a $205 million fund to manage direct investments in Russia and the CIS, the first such fund to be set up here since the 1998 financial crisis.

The Baring Vostok Private Equity Fund, the third to be run by Baring Vostok in Russia, is a sign that investors are growing increasingly upbeat about Russia's booming economy and equity market at a time of weak global growth, money managers said.

At least four more funds are in the offing this year.

Michael Calvey, managing director of the new Baring Vostok fund, said Thursday that it had not been easy convincing investors to come back after the 1998 crisis.

"We raised the first $102 million already a year ago, and it took us another year to close the fund, $50 million of which is already invested," Calvey said at a news conference.

"We want to give it a try, and if our investors feel comfortable with Russia again, they will commit billions of dollars in the future," he said.

Baring Vostok Capital Partners, a subsidiary of Dutch ING Baring Group, raised the $205 million mainly from U.S. and European pension and insurance funds. About one-third of the money came from the European Bank of Reconstruction and Development.

The fund is targeting oil and gas projects as well as the timber industry, telecoms, mass media, consumer goods and high-technology.

Investments will range from $5 million to $20 million and in most cases involve buying a blocking 25 percent in a company.

Meanwhile, Finartis Group of Switzerland is putting together a $150 private equity fund financed by Russian institutional and private investors for launch by the end of March.

"We are looking primarily at such sectors as food and beverages, consumer goods, pharmaceuticals, financial services, transportation, in contrast to large foreign banks, which prefer to deal with metals, oil and gas," said the fund's CEO, Jeffery Flanagan.

Calvey said Russians spending their money at home is the trend these days.

"The major change we are seeing from 1998 is that local investors are putting their money in Russia now, while they were channeling it abroad before 1998 when foreigners dominated the market," he said.

Several Russian banks also have plans to offer a range of offshore products to both Russian and foreign clients via new funds.

MDM-Bank hopes to set up four funds this year, the first in February, said Slava Rabinovich, head of MDM Capital Advisors.

"The first fund will be a U.S. dollar money market fund," he said. "Several more funds are planned for 2002, including one to invest in hedge and arbitrage strategies and a Russian equity fund to target mainly Western investors."

Despite the renewed interest in Russia, investors should keep in mind that even by emerging markets' standards, Russia remains a risk due to widespread corruption, poor transparency and numerous violations of minority shareholder rights, said Bill Browder, who has managed the $600 million Russia-dedicated Hermitage Fund since 1997.

"Russia is a place where the situation changes very quickly, so when something happens that you don't like you can always sell your stock," he said. "But you can't do that in the case of direct investment."

In terms of performance, Russian equity funds took the lead among international funds last year.

U.S.-based Pilgrim Russia was the best-performing fund in the world, soaring 80.3 percent compared to a loss of 10.9 percent for the average fund.

By contrast, Baring Vostok's first Russia-dedicated fund, the $160 million First Regional Fund, has an annual return of close to 20 percent, having paid out $231 million in dividends to shareholders since its launch in 1994.

"Private equity funds tend to be more interesting when the public market is overvalued and you can buy less liquid assets at a discount to the public market," Browder said.

"In Russia, because the public market is still very undervalued, it makes little economic sense to sacrifice liquidity when you can buy more liquid stocks on average with five times earnings."