Private equity facing more fractured world after invasion of Ukraine

It was a moment of triumph for Kirill Dmitriev in May 2012. Dmitriev — whose CV included stops at Goldman Sachs, McKinsey as well as Harvard and Stanford universities — had been tapped to lead the Russian Direct Investment Fund, a then newly-created sovereign wealth vehicle that envisioned bringing in smart global money to the mysterious but promising frontier market.

Dmitriev had been an invited speaker that spring at the Milken Institute Global Conference in Beverly Hills, rubbing elbows with various Wall Street billionaires who could be courted as partners to the RDIF. Soon enough after that, the likes of David Bonderman, Leon Black and Stephen Schwarzman would become advisers to the fund that had been backed by Russia’s money.

Much has happened over the past decade. Within a few years, the names of that trio had disappeared from the fund’s website listing its international advisory board members after Russia’s annexation of Crimea in 2014 and several other Western luminaries ditched their affiliation with RDIF.

Still, research firm PitchBook Data reports the fund has an active portfolio of 89 investments. And RDIF says it has $10bn of capital under management and has “attracted $40bn into joint funds from 16 different countries”. It says it had helped fund the development of the Sputnik V Covid-19 vaccine.

However, unsurprisingly, the recent Russian onslaught into Ukraine followed by the crushing economic retaliation from the west has perhaps ended any chance that Dmitriev will ever be an acceptable figure in Western finance. In placing sanctions on Dmitriev last month, the US Treasury referred to him as a known ally of Russia’s president Vladimir Putin.

The Treasury went on to sanction RDIF as well as writing that it is widely considered a slush fund for Putin and is “emblematic of Russia’s broader kleptocracy”. Dmitriev did not respond to an email requesting comment but in a recent statement to Forbes said the allegations from the Biden Administration were “defamatory”, adding it was never involved in politics and strictly adhered to the world’s best investment practices.

Western banks, multinational corporations and law firms have become swift in retrenching from Russia as their deep ties to Moscow and its affiliates have become apparent.

In the post-cold war era, such commercial and financial ties were believed to help promote universal political and social values. The Russia crisis, however, shows that the ability of commerce to bridge gaps to be more limited. If that trend continues, the critical relationships that private equity firms have forged around the world in some difficult places may not look so good under this harsher light.

Interestingly, most of the storied private capital firms steered clear of Russia as well. For example a person familiar with Blackstone’s Russia plans told the FT in 2014, “In the good times, Blackstone couldn’t find anything to do and in the bad times, Blackstone can’t imagine doing anything.”

The one exception was Bonderman’s TPG. The firm had acquired a hypermarket chain, Lenta as well a stake in the now-sanctioned bank VTB. The Lenta deal, while challenging at times, eventually proved to be a financial winner. “This was a good deal for TPG but it would have been an even better deal had it not been in Russia,” a person familiar with the deal terms told the FT in 2019.

But while Russia proved to be inhospitable, private equity titans have found warmer environs in other difficult neighbourhoods. The Chinese Investment Corp acquired a tenth of Blackstone before its 2007 initial public offering, a stake it did not fully exit until 2018. Given the rising tensions between Beijing and Washington over the past few years, it would be difficult to imagine such a partnership to surface today.

Gulf money has also been welcome in private equity. The Abu Dhabi Investment Authority bought nearly a tenth of Apollo Global Management in 2007. More recently, another wealth fund from the United Arab Emirates, Mubadala Investment Company, has signed a close partnership with Apollo to help the latter grow its $350bn credit investing business. The UAE relationship with the US has become strained of late as the Gulf monarchy has become cosier with Russia.

“We are moving to a bipolar world with much more segmented capital markets,” said the person who had been a short-term adviser to RDIF. “It seems a lot riskier than 10 years ago.”

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Source: Financial Times