Baring Vostok Capital Partners is betting on online retailer Ozon.ru and classifieds website Avito.ru after Russia’s largest private-equity firm earned 500- fold returns on its investment in search engine Yandex NV. (YNDX)
Ozon and Avito “are great Internet businesses” and among a dwindling number of Russian companies offering fast growth, according to Michael Calvey, founder and senior partner at Baring Vostok. “We have high hopes,” he said, declining to comment on possible initial public offerings.
Even as Russia’s economy slowed last year to the weakest pace since its 2009 contraction, Baring Vostok’s portfolio of 20 companies expanded 38 percent on average in dollar terms, according to Calvey. The weak IPO market may even benefit his funds, giving them a pick of companies that in better conditions would raise money directly in public markets.
Some of the “spectacular” returns that Baring Vostok has enjoyed “will never be repeated,” Calvey said in an interview in Moscow. Its second fund, which was formed 13 years ago and made the initial Yandex investment, had three investments that each generated “more than 20 times costs,” he said.
In 2000, Baring Vostok bought into Yandex with a group of partners, acquiring a 36 percent stake at a price that valued Russia’s largest Internet search engine at less than $15 million. It sold part of its stake in Yandex’s 2011 IPO, which reflected a more than 500-fold gain in value to about $8 billion, and $455 million of shares in a secondary offering last month.
“Baring Vostok scored a hole-in-one at the Augusta Masters but the golf course has changed now and they will never ever get that shot again,” Eric Kraus, a fund manager at Nikitsky Capital, which oversees about $215 million, said in e-mailed comments. “Investing in Yandex back in 2000 was certainly one of the best legal investments in Russia of all times -- and in fact, easily beat most of the illegal ones with far less risk.”
Baring Vostok had about 22 percent of Yandex before the 2011 IPO and has gradually reduced its stake to about 10 percent, the search engine’s filings show. Yandex rose 12 percent since a March 12 secondary offering. Baring Vostok may sell more Yandex shares after the lockup period expires in early June, according to Sberbank Investment Research.
Internet, software, health care and financial services still offer growth of 15 percent a year, while “the best companies in these sectors” may expand at twice the average rate, Calvey said.
“It’s all about penetration catchup with the West,” Calvey said. “We can still probably see 10 years ahead when there can be decent growth.”
Ozon increased net sales 55 percent last year to $250 million, having emulated Amazon.com Inc. (AMZN) by expanding from books into products ranging from electronics to shoes, according to a March 28 statement. Ozon raised $100 million in 2011 selling stock to investors including Rakuten Inc. (4755), Japan’s largest online retailer.
Avito, an online classifieds service similar to Craigslist.org, was valued at $572 million, based on the holding disclosed by Sweden’s Vostok Nafta fund last month. In March, Naspers Ltd. (NPN), Africa’s largest media group, folded two classified websites it owned into Avito, gaining a 19 percent stake in the combined company.
Baring Vostok is focusing on expanding the businesses it targets rather than making money from “multiples expansion,” which has become more difficult in the current economy, Calvey said. Industry multiples, such as price to earnings, will probably remain at about the same level for the next five years, he said.
Russian equities are the cheapest among 21 emerging markets tracked by Bloomberg. The country’s benchmark Micex Index trades at 5.1 times its 12-month estimated earnings, compared with 10.7 for the MSCI Emerging Markets Index. Yandex trades at 22.7 times this year’s earnings.
“We are not counting on any miraculous recovery on the global markets,” Calvey said. “We need to make all of our return from organic growth. This narrows things down.”