Barings Joins Russian Sovereign Wealth Fund In Far East Coal Private Equity Deal, 12.12.2013

This morning the Russian sovereign wealth vehicle, the Russian Direct Investment Fund, announced a joint investment with an offshoot of Barings Private Equity International, one of the biggest names in private equity worldwide. The two will put $48 million into new shares of Tigers Realm Coal Limited, which has coking coal deposits in Russia’s Chukotka province, in the country’s far east.

With every new investment, it’s becoming clearer what RDIF is going to look like. Established only in June 2011, it differs from other sovereign wealth funds around the world in that it is mandated to make its investments within the Russian Federation, rather than diversifying resources overseas. Its model is to make equity co-investments alongside strong foreign investors.

Baring clearly fits the bill, with US$12 billion of capital under management through its various affiliates not just in Russia but in Asia and Latin America. In Russia, it operates through Baring Vostok Capital Partners, which runs six private equity funds in Russia or the CIS; the vehicle that will make the co-investment with RDIF is Baring Vostok Private Equity Fund V. The Tigers Realm investment shows that there is still allure in making commodity investments, even though the commodity cycle, particularly in coking coal, appears to be in decline. Furthermore, it’s an investment in a business that doesn’t yet have much
of a track record: it owns just one asset, an 80% interest in the Amaam Coking Coal Project; and that project is not yet producing any coal, with its most advanced site still in the bank feasibility study preparation phase. Indeed, the reason it needs those funds is to complete that feasibility study and continue exploration works, rather than any actual mining. It is, though, listed on the Australian Stock Exchange, which may perhaps have given Barings comfort. They may also have liked the fact that the deposit is just 30 kilometres from the coast, suggesting relatively easy export potential.

That said, the sums involved are small by sovereign wealth standards; RDIF’s end of the deal is just a $14.9 million commitment, with the Barings venture putting in $33 million. It will make RDIF an 11% shareholder in Tigers Realm. We are likely to see many more deals like this, with modest sums committed to early-stage commodities ventures.