Prosperity Capital, the largest manager of Russia-focused funds, is planning a successor to its Quest portfolio, which provided returns of 3,300 percent over the past 10 years by buying distressed Russian companies.
Prosperity began the original Quest fund in December 1999 after Russia’s $40 billion debt default triggered a financial crisis. The Cayman Islands-based fund’s returns were 3,321 percent for the 10 years to May 31, according to data compiled by Bloomberg. The fund was the world’s best performer for the decade ending Dec. 31, 2009, according to Morningstar Inc. data cited by Prosperity.
Quest II will be run by Prosperity’s chief investment officer Alexander Branis, one of the managers on the initial fund, and director Ivan Mazalov. Like its predecessor, the fund will accept investments in cash or hard-to-trade Russian stocks in exchange for shares in Quest II. The new fund has regulatory approval to list on the Stockholm OMX exchange, Moscow-based Prosperity said in a statement issued to Bloomberg today.
“We’ve done this before; the team which launched and ran Prosperity Quest Fund 10 years ago are launching and running Quest II,” Mattias Westman, the chief executive of Prosperity and a manager of the original Quest fund, said in the statement.
Prosperity, which manages about $4.2 billion, has a target to raise $500 million for the new fund and has $200 million so far.
“They are some of the smartest and most focused guys in the market,” Eric Kraus, a strategist at Otkritie Financial Co. in Moscow, said in a phone interview. “It is going to be very difficult to replicate the spectacular performance of the past 15 years because the market is more rationally priced, but they will almost certainly outperform their market.”
Quest II will be Prosperity’s third listed fund. The company raised $250 million for Prosperity Voskhod in September 2006 and the Prosperity Russia Domestic Fund got $350 million in February 2007. Both are listed on London’s AIM stock market. Quest II will also have a non-traded fund to be privately held.
Prosperity will offer the fund to investors from June 14 in Stockholm and the fund will begin trading on July 16, Prosperity said.
Westman set up Prosperity in Moscow in 1996 with a group of Swedes and Russians. About a third of the firm’s funds under management originate from Scandinavia. The Norwegian Oil fund appointed Prosperity for a Russia mandate last year.
Prosperity’s managers take seats on the boards of companies they own stakes in and demand improvements in governance through a so-called activist approach. Prosperity began building a stake in Lafarge Cement, formerly Voskresensk Cement, in 1999. It sued Lafarge in 2006 for “unjustified” royalty payments to a Lafarge unit. The case was subsequently dropped after Lafarge stopped the payments. The company’s market capitalization has risen five-fold since 2005, Liam Halligan, Prosperity’s chief economist, said in an interview.
“We will combine the stakes of such investors, work to resolve corporate governance disputes, help turn around the underlying companies and seek to add value,” Halligan said. “It was a major source of outperformance in the original fund.”
Prosperity bought a 40 percent stake in Saransk Cable, one of Russia’s largest cable manufacturers, in 2006, after the government approved an $80 billion investment plan for the electricity industry. Prosperity sold its investment to a strategic buyer for a 240 percent return at the end of 2007 as the industry began to consolidate, Halligan said.
“The former Soviet Union is full of little-known corporate names benefiting from company restructuring and sector-based consolidation,” Branis said. “We know of many more such firms that are seriously undervalued, but ripe for such investment.”