*Yandex founded by mathematician and geophysicist
*Listing values Yandex at 500 times its worth in 2000
*Private equity fund Baring Vostok biggest shareholder
By Douglas Busvine
MOSCOW, May 24 Take a helping of Russian genius,
add a portion of risk appetite and stir in a lot of patience,
and you have the recipe for the resounding success of search
engine Yandex's (YNDX.O) U.S. stock market float.
The Nasdaq listing values Russia's leading internet search
engine at $8 billion, an eye-popping 500 times its worth when
private equity investors bought into the company in 2000.
That year the business, founded in 1997 by mathematician
Arkady Volozh and geophysicist Ilya Segalovich, had revenue of
$72,000 and lost $2 million.
Eyeing a long-term prospect, Yelena Ivashentseva of private
equity fund Baring Vostok Capital Partners put together an
investor group that bought a 36 percent stake in Yandex for just
over $5 million.
Talks to buy into Yandex lasted seven months, Ivashentseva
said recently, recalling the horror of the fund's backers over
the deal. "It was really difficult to explain this to our
investors, who en masse demanded that we get rid of the stake,"
she told Forbes magazine's Russian edition.
It turned out to be the only round of fund-raising that the
company did until the initial public offering (IPO), which
featured a slug of new shares. Investors who came into Yandex in
recent years bought stock from existing shareholders.
Yandex went on to richly reward that investment, with the
algorithm driving its search engine -- conceived to scan the
Bible, Russian classical literature and patent texts -- proving
consistently superior to that of rival Google (GOOG.O), whose
co-founder, Sergey Brin, was born in Russia.
The company's home site yandex.ru has a market share of 65
percent in Russia, compared with Google's 22 percent,
capitalising on a boom in online advertising to generate sales
of $445 million last year, up 43 percent, while earnings rose 90
percent to $135 million.
Volozh is a slight man with a quiet manner and, since the
earliest days of the Internet boom, a wry scepticism about the
millions, then billions of dollars flooding into his industry.
"We used to be very conservative, until we started meeting
so many excited people," Volozh joked in 2000.
He resisted the overtures of suitors dangling the prospect
of a huge payday through, telling Reuters in 2005 that bankers
"are promising us a golden future, diamonds in the sky, if we do
Bankers say plans for a long-awaited float were prepared in
2008, only to be derailed by the global financial crisis.
The company's core investors decided to sit out the crash
and Yandex, bucking an 8 percent contraction in the Russian
economy in 2009, delivered top-line growth that year although
earnings shrank by 17 percent.
"The investors waited for long enough and this strategy was
successful. They weren't trying to push Yandex into an IPO as
soon as possible," said Anna Lepetukhina, an analyst at Moscow
brokerage Troika Dialog.
"There were rumours that they were going to do an IPO in
2008. Then the crisis came and they were prepared to wait. They
got a good return on that investment."
For the investors, the Yandex story amounts to proof that
Russia's investment climate is by no means as hostile as many
Baring Vostok, which retains a 26 percent stake as Yandex's
largest shareholder, abides by a few golden rules to avoid the
pitfalls that others have fallen into, founding partner Michael
Calvey told Reuters on Tuesday.
The fund's 19-firm portfolio is weighted towards services,
avoids industries where it might clash with state firms and
relies on equity funding, not debt, to shield its investments
against Russia's often vicious business cycle.
Calvey, an American who founded Baring Vostok in 1994, said
in an interview that the fund's strategy had enabled it to ride
out the 2008-09 crash without having to make any disposals.
"We don't expect there to be any fatalities in our portfolio
as a result of the crisis," Calvey said. He declined to comment
on the Yandex IPO, citing regulatory restrictions.
(Additional reporting by Melissa Akin; Editing by Erica