In the world of investing, few can boast a personal saga as colorful and dramatic as Bill Browder's. The famed fund manager went from being "the largest portfolio investor in Russia" to "one of the biggest enemies of the state," Browder recently told a group at Stanford.
The founder and CEO of Hermitage Capital Management recounted the story of the rise and fall of his Russian investment fund to a packed room at Stanford GSB on Oct. 22. Hermitage has exited Russia and now has an $850 million fund investing in other emerging economies in the Middle East, Asia, and Latin America, said Browder in a talk sponsored by the School's Global Management Program.
Browder soared to fame and fortune investing in Russian equities amid the chaos and corruption of the post-Soviet economy. His hallmark: finding hidden values in Russian companies and driving up their share prices by exposing corporate malfeasance and mismanagement. His widely publicized campaigns for shareholder rights and corporate governance helped propel the Hermitage Fund from $25 million in 1996 to $4 billion a decade later.
But eventually the U.S.-born financier ran afoul of the Russian government, which banned him from the country in 2005 as a threat to national security. Today, Browder says it is Hermitage that has become a victim of the criminal activity and official corruption that still pervade Russia's economy. He has gone public with accusations that Russian fraud artists and high-level government officials colluded to steal companies owned by Hermitage, intimidate or jail Hermitage lawyers, and rob the Russian treasury of at least $230 million.
Hermitage's saga is a cautionary tale of the risks of investing in Russia today, according to a video, posted on YouTube, that Browder showed the Stanford audience. "Anyone who would make a long-term investment in Russia right now, almost at any valuation, is completely out of their mind," declared Browder. "My situation is not unusual. For every me, there are 100 others suffering in silence."
Browder is the grandson of Earl Browder, a union organizer from Kansas who went to Moscow in 1927, married a Russian, and became the head of the Communist Party in the United States. The younger Browder grew up in Chicago, attended the University of Chicago, and later Stanford GSB. "How do you rebel against a family of Communists? I rebelled by putting on a suit and tie and becoming a businessman," he quipped.
Graduating with an MBA in 1989, the year the Berlin Wall fell, Browder decided to pursue opportunities in Eastern Europe. While working in the region for Boston Consulting Group and later Salomon Brothers, he saw how Soviet bloc countries like Poland and Russia were privatizing companies at absurdly low valuations. He soon realized there was a lucrative opportunity for investors to buy in cheaply to the post-Soviet Russian economy.
In 1996, Browder set up Hermitage with $25 million from the late Edmond Safra, a renowned banker. Browder moved to Moscow and focused on undervalued Russian companies overlooked by mainstream securities researchers. By the end of its first year, the Hermitage Fund soared to $100 million. Eighteen months after launching, it was worth $1 billion.
By the late 1990s, a coterie of two-dozen Russian oligarchs controlled many of the oil and gas companies that Hermitage had invested in. They embarked on an unprecedented "orgy of stealing," said Browder, citing practices such as asset stripping, share dilution, and embezzlement. He embarked on his own campaign of digging up corporate abuses and publicizing them through the press. The goal was to create pressure for reforms that would unlock shareholder value. Browder's biggest coup was at the national gas company Gazprom, where he generated a governance scandal that led to the firing of the company chief and contributed to a stock price surge.
Things began unraveling in November 2005, when Browder was denied re-entry at the Moscow airport. What followed was a twisted tale of corporate raiding, Russian style. In June 2007, police raided Hermitage's office, taking away files and records. Criminals used the documents to steal ownership of three companies from Hermitage and to arrange sham court judgments against them.
The judgments were used to create losses that were the basis for getting $230 million in fraudulent tax refunds from the Russian treasury, Browder alleges in legal filings and a publicity campaign. "You can't steal $230 million from the Russian budget without having very, very senior officials involved," said Browder, who now works out of London. "I would hope in my heart that this is an ugly phase Russia is going through and this is not the future of Russia," he added.