Funds News

Hermitage fund still invests in Russia

NEW YORK (Reuters) - Hermitage Capital Management, the $4 billion (2 billion pound) activist investment fund focused on Russia, has no plans to pull out of the country even after authorities raided its Moscow offices last month and carted away computers and files, its founder told Reuters.

Traders and analysts from the Moscow offices of Hermitage Capital Management, a top fund investing in Russia, have relocated to London, the firm said on Friday, following an investigation by Russian tax officials. File photo shows Bill Browder, chief executive of Hermitage. REUTERS/handout

The raid, which authorities said was part of criminal tax evasion investigation, came nearly two years after its U.S.-born founder William Browder was declared a threat to national security and abruptly denied a visa to Russia, where Hermitage had been operating since 1996.

Browder has yet to return to Russia but denied market speculation that he’s given up there, even though he has raised a new $625 million fund to invest elsewhere. After the raid, the firm brought its Moscow investment staff to London and they continue to have access to Russia, he said on Friday.

Browder, 43, made a name for himself for taking large stakes in Russian companies and agitating for management and strategy changes, a then-novel strategy in the emerging capitalist nation. The strategy clearly made Browder a target of powerful business interests with ties to the government.

Browder's 1997 campaign at energy giant Gazprom OAO GAZP.MM, for instance, was instrumental in forcing management changes that sent its stock rocketing up 35 times, giving Hermitage a return of 228 percent that year, the best return of any similar fund in the world that year.

Browder’s strategy revolved about a key question emblematic of Russia’s rocky transition to capitalism that decade: the firm sought to determine how much of the former state-owned company’s assets were being siphoned off by former management and cronies.

The market assumed 99 percent, Browder said. Hermitage’s gumshoe investigation found it much lower: less than 10 percent, evidence that the market vastly undervalued Gazprom, prompting Hermitage to buy a large stake.

The campaign put Browder on the map and prompted him to take on nearly a dozen other companies, including Transneft TRNF_p.RTS, Sberbank SBER.RTS and others over eight years. Competitors say it is obvious that Browder alienated powerful people with ties to the government.

“You have to think that someone got upset with something that he did,” said Mattias Westman, chief executive of Prosperity Capital Management, a $4.5 billion activist investment fund in Russia that has had no such problems with authorities. “These troubles that Bill has are not typical.”

During the June 4 raid, 25 officers of the Russian Interior Ministry descended on Hermitage’s Moscow offices and carted away computers, servers and documents related to a criminal tax evasion investigation into OOO Kameya, a Russian investment firm controlled by a Cyprus-based company that Hermitage says it only advised.

The government claims the tax rate for Cyprus investment firms is 15 percent, which would mean that it is owed $44 million. But Browder says Russian investment through Cyprus channels has always been 5 percent, which the firm has paid.

But for Browder, the dispute isn’t about taxes, but about his activist work. He maintains the firm is not guilty of any tax evasion.

“We believe this case is not about taxes, but about retribution for Hermitage uncovering corruption and mismanagement in Russian companies over the last eight years,” said Browder. “Ironically, since the raid, we’ve had some of the best performance in our fund in the last year, up 12.6 percent since June 4.”

The raid didn’t dampen Browder’s enthusiasm for Russia, but the firm is expanding elsewhere with the new $625 million activist fund. Browder declined to say where the new fund is investing but said it has posted a 13 percent return since launching in April.

“As a result of our corporate governance campaigns, we have experienced various types of harassment over the last 11 years and this is just one further chapter in the story,” said Browder in a phone interview from London. “We have thick skin and still think there are great opportunities in the Russian market.”

“We’re not running anywhere,” he added.