In response to Russia’s invasion of Ukraine, asset managers and institutional investors have announced their disengagement-some to meet criteria, others to escape penalties. Most global private equity firms abandoned Russia years ago, and those that remain have negligible involvement. Their willingness to invest in Russia has waned over time. In addition to prior restrictions, the Russian economy has been hit by terms-of-trade shocks and currency instability.

A growing ‘Mittelstand’ in the region created the demand for growth capital, and some investors began to respond. Aside from Russian-based private equity firms, about two dozen relevant European or North American private equity firms invest regularly in Russia. Only a few private equity investors work in regulated industries such as energy or financial services, which are the most adversely affected by the current round of sanctions.

Limited exposure

According to investment data company Preqin, the Russian private capital market had assets under management totalling $25bn as of June 2021. It accounts for only 1.1% of the European market and 1.2% of the global emerging market. According to PitchBook, the Russian Direct Investment Fund (now sanctioned) was the most active investor in Central and Eastern Europe last year, investing $1.2bn.

Although most private equity managers I spoke to had limited exposure to Russian assets, they were concerned that geopolitical uncertainty could affect company valuations.

Higher energy prices, supply chain disruptions and capital market events could impact portfolios. Rising oil costs pose considerable inflationary danger. Also, Russia is a major producer of commodities (palladium, platinum and wheat, which Ukraine also produces), which adds to inflationary pressures.

Global supply chains

Russia’s invasion of Ukraine will undoubtedly have significant ramifications for global supply chains in the coming weeks and months. The likely impact on energy and food markets is well known. However, I also see a greater risk of global manufacturing disruption across various sectors. Aside from sanctions, the production of semiconductors, automobiles and medicines could be severely affected by the disruption of legitimate business activities in Ukraine. Ukraine has emerged as a critical supplier of essential metals and raw materials into global value chains in recent years.

Dealmaking can be hampered by uncertainty, especially in Eastern Europe. A wave of panic sales from private equity firms invested in Eastern European countries now closer to a war zone due to the crisis is unlikely. However, I believe new money will flow into the region less, with some institutions departing it.

European Investment Bank

Nevertheless, the European Investment Bank is a significant investor in Ukraine. Last year, it signed €554m in new loans and invested over €7bn in its public and private sectors. The EIB recently told Private Equity International that it will continue to monitor its investments to ensure company continuity continuously. These enterprises are vital to Ukraine’s economic fabric, and supporting their growth and development is critical.

The current market situation makes it difficult for funds investing in Eastern Europe to harvest their investments. A lot more Russian and Eastern European private equity firms may be coming to market in the future years.

However, as long-term investors, private equity investors value underlying performance and long-term potential. Indeed, a market correction may present attractive buying opportunities for certain funds.

PE firms can handle volatility

Due to the PE industry’s unique ability to generate alpha, private equity firms have thrived even during recessions and periods of severe volatility. All of this should help the PE business to continue delivering good returns and performance in the years ahead. However, it is essential to remember that private equity is not generally exposed to cyclical industries. Outperformers have the knowledge, resources, capital and access to good investment opportunities at competitive entry valuations.

Private equity firms typically own companies with competent management teams and well-capitalised general partners. It has also made substantial investments in operations teams, which have paid off in prior crises.

In relative terms, private equity-led enterprises often outperform non-private equity-led corporations.

I want to emphasise that, while predicting the long-term impact is impossible at this moment, public equity markets tend to react more forcefully during times of crisis. In comparison, private equity markets have generally had significantly less volatility during crises.

While the economic and financial impact of the Ukraine crisis on the private equity market is minor in comparison to the human and social consequences of this war, many private equity managers and associations are also contributing to relief efforts in the region by providing much-needed funding and assisting with various relief efforts.

is a private equity analyst. He advises several top quartile private equity and real estate funds in Luxembourg.