Although Russia is today the world's largest producer of oil and gas,
which is the primary source of its power, we at Blackhawk believe that
multiple challenges in the Russian context presently impede the
development of the private equity industry and will continue to do so
until effective changes take place. The most important of these
challenges are summarized below.
Due Diligence
Private equity involves intensive due diligence on technology, management, markets, contracts, current and future financials, ownership structure, and other matters. In Russia, market culture and infrastructure have sufficiently matured in the past decade to allow us to carry out a significant amount of due diligence. There are challenges, of course, but the most vexing problems tend not to be those fact-finding problems, but judgment on risk taking at the end of a long and intensive due-diligence process. What risks are we willing to take? If we uncover facts related to nonpayment of taxes, should we assume that this was a one-time lapse that is unlikely to recur? Can we ascertain that certain payments made were legitimate, or were they illegal bribes? Can we accept mistakes in a deed, records of transfer payments between companies, and other risks common in the Russian deal marketplace?
Difficult and Unreliable Legal Environment
In the United States, the most common form of private equity securities is preferred stock, which grant certain privileges and protections unavailable to holders of common stock. In Russia, private equity deals largely entail the purchase of common stock, giving minority shareholders inadequate protection. In fact, most laws that have been developed to protect minority shareholders have to do with large enterprises, instead of small and medium-size enterprises that are the domain of private equity. There are also no legally binding shareholders’ agreements, which are the norm in developed markets private equity. Other problems on the legal front have to do with the difficulty of rights enforcement in local courts, corrupt judges, opaque bankruptcy laws, poor corporate governance, and cumbersome regulations. One example of the last of these problems is the requirement that the Anti-Monopoly Ministry register and approve every security issuance, including those by small private companies. This imposes an unnecessary burden on us or any other private equity investor out there and increases transaction costs............ (more)
Due Diligence
Private equity involves intensive due diligence on technology, management, markets, contracts, current and future financials, ownership structure, and other matters. In Russia, market culture and infrastructure have sufficiently matured in the past decade to allow us to carry out a significant amount of due diligence. There are challenges, of course, but the most vexing problems tend not to be those fact-finding problems, but judgment on risk taking at the end of a long and intensive due-diligence process. What risks are we willing to take? If we uncover facts related to nonpayment of taxes, should we assume that this was a one-time lapse that is unlikely to recur? Can we ascertain that certain payments made were legitimate, or were they illegal bribes? Can we accept mistakes in a deed, records of transfer payments between companies, and other risks common in the Russian deal marketplace?
Difficult and Unreliable Legal Environment
In the United States, the most common form of private equity securities is preferred stock, which grant certain privileges and protections unavailable to holders of common stock. In Russia, private equity deals largely entail the purchase of common stock, giving minority shareholders inadequate protection. In fact, most laws that have been developed to protect minority shareholders have to do with large enterprises, instead of small and medium-size enterprises that are the domain of private equity. There are also no legally binding shareholders’ agreements, which are the norm in developed markets private equity. Other problems on the legal front have to do with the difficulty of rights enforcement in local courts, corrupt judges, opaque bankruptcy laws, poor corporate governance, and cumbersome regulations. One example of the last of these problems is the requirement that the Anti-Monopoly Ministry register and approve every security issuance, including those by small private companies. This imposes an unnecessary burden on us or any other private equity investor out there and increases transaction costs............ (more)
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