U.S. Private Equity Board Members To Remain On Russian State-funded Investment Fund Board

Posted: August 3, 2014 in Econ 101, Sanctions on Russia Meaningless

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Private-Equity Deal-Makers Stay on Russian Fund Board Despite Sanctions

David Bonderman, Leon Black, Stephen Schwarzman on Advisory Board

Some of the world’s leading private-equity deal makers including David Bonderman, Leon Black and Stephen Schwarzman continue to serve on an advisory board of a Russian state-owned investment fund, despite wide-ranging economic sanctions imposed by the U.S. and European Union on Russia.

Six private-equity professionals, including Mr. Bonderman, of TPG, Mr. Black, of Apollo Global Management LLC, Mr. Schwarzman, of Blackstone Group ; Joseph Schull, head of Warburg Pincus’s European operations; Martin Halusa , chairman of Apax Partners LLP; and Kurt Bjorklund, co-managing partner of Permira, are still listed as advisory board members on the website of the Russian Direct Investment Fund.

The Wall Street Journal reported in March that Harvard University professor Josh Lerner was reconsidering his role serving on the board of the RDIF after Russia annexed Ukraine’s Crimean Peninsula. Mr. Lerner confirmed via email to The Wall Street Journal on Thursday that he is no longer a member of the board.

For the private-equity professionals, having their names associated with a state-owned fund in Russia won’t sit well with authorities, said John Coffee, a Columbia Law School professor and director of the school’s Center on Corporate Governance.

“Even though there is no legal violation by serving on the board, there can be a reputational cost by winning disfavor from the U.S. government,” Mr. Coffee said. “Reputational penalties are real.”

The U.S. issued sanctions this week, prohibiting U.S. persons from providing new debt financing of longer than 90 days’ maturity or new equity to certain Russian entities. The European Union confirmed similar measures on Thursday, also identifying five state-owned Russian banks that will fall under the sanctions.

In a statement emailed to The Wall Street Journal on Thursday, RDIF said it believes the sanctions won’t affect its operations.

“The sectoral sanctions imposed against certain Russian companies and their subsidiaries affect only specific transactions which relate to long term financing of these companies by U.S. and European entities in the form of equity or debt,” RDIF said in the statement.

“RDIF does not directly attract equity or debt financing but instead invests only its own funds together with co-investors. We have never attracted such direct financing and are not planning to do it in the future.”

Because U.S. and European co-investments are made with target companies, instead of with RDIF, co-investors aren’t affected by the sanctions, either, RDIF said.

Formed in 2011 by the Russian government, the $10 billion fund is mandated to “secure co-investment” into Russia. The fund has invested $1.2 billion to date, while attracting $6 billion in foreign co-investment, its website says.

RDIF’s management company is 100% owned by Russia’s state development bank Vnesheconombank, which is on a sanctions list published by the U.S. Treasury Department.

The bank is also on the EU sanctions list.

Also on both lists is VTB Bank , a Russian bank in which TPG owns an equity interest. Mr. Bonderman resigned from VTB’s supervisory board earlier this year, a spokesman for the firm confirmed.

Private-equity advisers to RDIF are now stuck between a rock and a hard place: Quitting the board risks offending Russian President Vladimir Putin and damaging relationships they have built up in that country. Staying on may be seen as acquiescing to Russia’s foreign policy and risks running afoul of Western sanctions.

“They’re probably taking the view that it would be less damaging to their prospects in the long run to hang on at the moment, and to expect a de-escalation of the situation,” said Philip Hanson, an expert on Russian politics and an associate fellow at Chatham House, an international-affairs research group in London.

Columbia Law School’s Mr. Coffee said the sanctions don’t prohibit Western deal makers from serving as advisers to Russian funds.

“As a general matter, advisory boards have no legal power,” said Mr. Coffee. “These kinds of roles are useful to investment professionals because they give access to meeting important people and to potentially broker transactions in the future.”

SOURCE: http://www.wsj.com/articles/private-equity-deal-makers-stay-on-russian-fund-board-despite-sanctions-1406911976

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