Alert over asset seizure in emerging markets

Private equity groups are taking big legal and financial risks as they invest more in emerging markets to escape the US and European credit crunch, buy-out executives and lawyers warn.

Peter O’Driscoll, a lawyer at Orrick in London, said: “Expropriation of foreign-owned assets is on the rise. Not surprisingly, when an investment has done well, local partners have a greater incentive to try to steal it.”

Private equity investment in the Bric countries – Brazil, Russia, India and China – reached almost $17bn in the year to June, up about 80 per cent on the previous year, according to Dealogic.

Paul Fletcher, senior managing partner at Actis, an emerging market private equity investor, said. “We all have scars from falling out with sponsor. You need protection should it break down.”

Mr O’Driscoll said that examples of such risks included the dispute over the investment by Kohlberg Kravis Roberts in Kamaz, a Russian truckmaker, in the late 1990s and a clash over property investments by AIG Capital Partners in Kazakhstan.

Some groups, such as TPG Capital of the US and Lion Capital of the UK, have invested billions of dollars in Russian groups in the past 12 months, drawn by growth in consumer spending.

Others are more cautious. Johannes Huth, head of KKR in Europe, said: “We don’t see an emerging market like Russia as our core focus. Oligarchs are inevitably going to be better connected than us.”

The risks for foreign investors in countries such as Russia have been illustrated by BP’s tussle over its TNK-BP joint venture. The war in South Ossetia has also damped appetite for Russian assets.

Ajay Khaitan, founder of Emerisque, which buys western brands such as Lee Cooper jeans to expand in emerging markets, said: “You cannot count on the efficiency of legal systems in some countries to resolve differences.”

Mr O’Driscoll at Orrick said: “There are emerging market private equity funds that have seen their investments stolen, which is obviously not the exit you would hope for. The favoured technique at present is a collusive lawsuit in which a plaintiff secretly controlled by the local partner sues the foreign investor in a local court.”

While western investors usually provide for contracts to be governed by US, UK or Swiss law and turn to arbitration to resolve disputes, Mr O’Driscoll said it could be hard to enforce rulings in places such as Russia and Ukraine.