Bill Browder calls himself a value investor - it is fund manager-speak for
someone who looks for latent value in stocks that are ignored, hidden gems -
but value investment barely begins to describe what he does.
In common with other money managers, the chief executive of Hermitage Capital
has a PowerPoint presentation that sets out his strategy, but if you know
anything about Bill Browder, the rehearsed explanation is strangely
unsatisfying; you wonder if you are getting the whole story.
All fund managers, barring those who follow indices and the weird ones who
predict the future from lines on charts, call themselves value investors,
but the Hermitage chief does something altogether different - he pursues
value with a vengeance.
This is not about taking a stake in a dull family engineering company with a
view to prodding the management out of slumber.
On the basis of past performance, Mr Browder's strategy is to target a leading
company with close connections to government and to conduct a forensic
examination of its investments.
Upon discovering fraud and embezzlement, a very public campaign of exposure
and denunciation ensues, followed by partial recovery of funds and huge
stock price appreciation. It finally ends with Mr Browder being chased out
of Russia.
Hermitage Capital's campaign against fraud at Gazprom made enormous amounts of
money for investors, including many who never put their money in Mr
Browder's fund.
He started with $25 million in 1996, achieving almost tenfold gains in 18
months and then raised $1billion from new investors. At one stage the pot
totalled $4 billion and Hermitage became Russia's biggest foreign portfolio
investor.
However, Mr Browder offended someone with great power - he insists that he
still does not know who - and in November 2005 was refused re-entry into
Russia. He has not returned since.
Hermitage is shifting its focus to the Middle East, in particular the Gulf,
where Mr Browder is investing the proceeds of a new fund. He raised $625
million in April last year and is targeting infrastructure companies in
Kuwait and the United Arab Emirates.
His portfolio includes 15 investments at present after a lengthy selection
process from a thousand companies worldwide. He reckons that the Gulf
investment climate is a holiday compared with Russia. “Corporate governance
is so much better [in the Gulf]. In Russia it was all about fraud. We have
never seen anything like that in the Middle East.”
The parallels between Mr Browder's Russian exit and the present rumpus at
TNK-BP (the Russian affiliate of BP, where a power struggle has resulted in
BP's nominated chief executive running the company from somewhere in Central
Europe) are obvious.
“If my experience is anything to go by, BP's problems are only just beginning
... They [BP] should fight back, use everything they have. It's the only
thing that these people understand.”
He ought to know. Although the visa denial put paid to his Russian strategy,
it was trivial compared with what happened next.
In June 2007, while the Hermitage boss languished in London, a
lieutenant-colonel in the tax unit of the Interior Ministry became aware of
Mr Browder's predicament.
Under the guise of a tax inquiry, his team raided the Moscow offices of
Hermitage and its law firm, seizing documents, computer discs and corporate
seals, in the process beating up a Russian lawyer who dared to protest.
Over the next six months there followed an elaborate fraud in which the
ownership of several Hermitage companies was changed and new directors
appointed.
A lawsuit was fabricated against the Hermitage companies, the bogus directors
accepted the claim and “judgment” was awarded for $376 million.
Mr Browder has PowerPoint presentations that explain the fraud in minute
detail and you almost sense that he enjoys pursuing the gangsters through
the shadowy corridors of the Kremlin.
“Isn't it amazing?” he says. It gets more amazing because the crooks failed to
get the money - the Gaz-prom stock held by the companies had been
transferred offshore.
Undeterred, the “police” then pursued another avenue. Having bankrupted the
Hermitage companies with bogus lawsuits, they then demanded repayment from
the Government of taxes legitimately paid by Hermitage, a total of $230
million, to the Russian Treasury. This was duly repaid to the crooks - a tax
fraud perpetrated by tax inspectors.
Why does the Hermitage chief do it? “I went to Moscow hoping to find cheap
stocks.” He was at the time a fan of Vladimir Putin, supporting the
President's programme of reform.
His first confrontation was with Vladimir Potanin, a Russian oil and metals
tycoon, over shares in Sidanco, an oil company later acquired by BP.
Hermitage bought 2 per cent, but the tycoon wanted to assert control.
“He decided to issue shares to a group of insiders, including himself. I had
to go into battle to prevent it being diluted.”
He cuts an unlikely figure as a caped crusader for corporate governance in
this cloak-and-dagger world of post-Soviet corporate gangsterism but talks
about “the good guys” and “the bad guys” in a way that brushes aside the
amorality of Moscow business deals.
His grandfather was Earl Browder, one of the founders of the American
Communist Party, who went to Russia in 1927 and became the party's general
secretary.
During the Second World War he was expelled for arguing in favour of
co-existence with capitalism and during the 1950s communist witch-hunts he
was interrogated by Senator Joe McCarthy but refused to incriminate his
former comrades.
The younger Browder says that he has taken on the role of family black sheep,
embracing capitalism and rejecting academia, the profession of his father,
who is a respected mathematician.
The black sheep initially worked for Boston Consulting Group and got a taste
for investing when he was sent to Poland to sort out a failing bus factory.
The Polish Government was privatising state companies by public flotation. “I
took all my savings, $4,000, and applied for all the privatisations and made
ten times my money.” He joined Salomon Brothers and traded Eastern European
equities. In 1995 he quit to set up Hermitage.
The rebel has a suitably apocalyptic view of the financial world. The credit
crisis has a long way to go, he reckons. “There is going to be huge
attrition in the world of investment. We have been in a 20-year bull
market.”
The fashionable emerging markets will continue to be hit hard. “The Chinese
stock market was trading at 50 times earnings. As the bubble bursts in
China, there will be a knock-on effect, it will be the de-Bric-ing of the
world,” he says, referring to the acronym of Brazil, Russia, India, China
that has became a buzz-word for emerging market dynamism.
The Hermitage boss has his own slogan: “Get off the financial grid.” By this,
he means the world of financial markets, places where capital is consumed,
rather than generated. “You don't want to be in places where capital markets
are active.
If you can't borrow money, who will do badly? Those who need to borrow money.”
That logic drives Mr Browder to the Middle East, where capital is in huge
surplus and there is cultural disapproval of lending for interest.
Local Middle Eastern companies have yet to excite the investment banks, he
says, and money is flowing into Middle Eastern coffers. The income of the
big oil exporters totals $1.3 trillion at an oil price of $100 per barrel -
and it is staying in the Gulf.
“It's the biggest wealth transfer that has ever happened in the world,” he
says.
Hermitage has 18 analysts, mainly Russian, because they are “some of the
smartest people in the world trained in the one of the worst business
environments”. He quotes Frank Sinatra's song about New York: if you can
make it there, you'll make it anywhere.
But he has adopted Britain as his home. He acquired British nationality when
he married and is a huge fan, recalling the support he received from the
British Government when was trying to regain his Russian visa. “This is a
good country. I like the rule of law.”
CV
Born: Chicago 1964
Education: Degree in economics at Chicago University; MBA, Stanford
Business School
Career: Boston Consulting Group, working in the Middle Eastern
Practice; Salomon Brothers, on the proprietary trading desk, specialising in
Russian and Eastern European stocks; 1995: set up the Hermitage Fund
with Edmond Safra, founder of Republic Bank. 2005: his Russian visa
was withdrawn on the ground of national security. 2007: Hermitage
raised $625 million for a new fund focused on the Middle East.
Other interests: serves as chairman of the Russia Task Force for the
Institute of International Finance; member of the Organisation for Economic
Co-operation and Development/World Bank Round Table on Corporate Governance
in Russia
Family: Married with two children
In his own words
“The banking system is the financial circulatory system. If the circulatory
system doesn’t work, the patient dies”
Bill Browder on the credit crisis
“You want to be off the financial grid. It will take a long time to work
this through and all the places that have easy access to financial markets
are going to be hurt. The companies in the Middle East have been off the
grid”
On his present investment strategy of avoiding financial centres
“Over the next 12 months there will be a significant revaluation of pegged
currencies. It will be the opposite of 1997”
On his view that the dollar faces further devaluation
“As the bubble bursts in China, there will be a knock-on effect, it will be
the de-Bric-ing of the world”
On emerging markets’ prospects in a continuing credit crisis
