FUNDS: Patricia Cloherty - an adventurous venture capitalist

By bne IntelliNews March 13, 2008

Ben Aris in London -

Patricia Cloherty has been running funds since most of us were in nappies. Ranked 63rd in the Forbes Midas list of fund managers last year, she has gone from backing Dolly the cloned sheep to doing a landmark deal that kicked off a financial M&A tsunami in Russia. She talks to bne about her career and Russia.

You know you have met someone unusual when you are dragged outside onto the street to have a smoke with a Californian. Huddling under the awning of a London hotel with the managing partner of Delta Capital Management sharing cigarettes you can't help but be impressed with Patricia Cloherty. She bubbles with enthusiasm discussing the relationship between successful entrepreneurs and people who have both excelled at sport and a hard science, before going inside to join the distinguished panel of guests - all doyens of the Russian private equity business - as the star speaker.

Cloherty is ranked as one of the 100 most influential women in New York's venture capital world and ended up in Russia in the 1990s by accident after being badgered into chairing the US Russia Enterprise Fund by the Clinton administration. She was trying to retire at the time, but once you have spent even a little time with her, you can see how the excitement of plunging into the chaos of building a new economy in the former Soviet Union would have proved too big an attraction to pass up.

After starting out as an analyst at Patricof & Co. Ventures and making partner within a year, Cloherty set up her first private equity fund in 1969 - the US venture capital firm called Apax partners, which then had just $2m under management. "In those days, the VC world had a clubby atmosphere. Everyone knew everyone and everyone co-invested," says Cloherty. "The big change was after AT&T was broken up, as that created a lot of the opportunities for the technology we see today."

The company grew steadily and successfully moved into the UK and France in the 1970s, then Germany, Israel and Japan in the 1980s, and by the early 1990s was mainly investing into technology projects as a pioneer in shaping the emerging technological revolution. Bioscience was an early focus. As such, Cloherty put money into cutting-edge research into HIV inhibitors, as well investing into the rise of microchip-based technology such as mobile phone and PCs. One of her more famous deals was to back Scotland's PPL Therapeutics, which engineered Dolly the cloned sheep (as well as her sisters Molly and Polly).

By the time she left the firm in 2000 - the first of two unsuccessful attempts to retire - she had built up Apax into a multinational fund with more than $10bn under management. The firm is even larger today with $16bn under management. "People keep asking me when I will retire, but I am sure it's only because they want to come to the party - and the last one was really good," she says.

Clinton and helicopters

Cloherty found herself in Russia in 1994 somewhat by accident after she was made the chair of the US-Russia Investment Fund at the invitation of Bill Clinton's White House.

Russia then was in chaos - inflation was in triple digits; then-president Boris Yeltsin had just emerged from a showdown with the communists that ended with the bombing of the white house and his health was failing; and the oligarchs were emerging as a force in the country, while a free market was not. There was a real danger the Communists would regain power in the 1996 general election.

Western governments were united in their efforts to entrench the capitalist mentality flowering in the emerging economies of Central Europe, but had no one to head one of the many initiatives running at the time: the US Russia Enterprise Funds. These are funds backed by US government money that are supposed to invest into small- and medium-sized enterprises and mortgages that have a social aspect that can apply capitalist mores. "I was sitting in my offices on 57th and Park Avenue in New York when I got a call from the White House. 'We need a deliverable on the fund issue for Clintons trip to Russia,' they told me, and asked if I would go over with Clinton to head up the fund," says Cloherty, who was then president of the US Venture Capital Association.

This was real pioneering stuff. It was like setting up a stall in a desert hoping a market will form around you. And the remit went way beyond most fund managers' idea of simply making a return on a punt; thanks to government backing, the Enterprise Funds have access to top-level government officials and are supposed to participate in drawing up the legislation that allows the fund to work. For example, experts at DeltaCredit Bank were also lead advisors in drawing up Russia's mortgage laws. "The Enterprise Funds were like practising in the market," says Cloherty. "You had state money to get going and once you had got it right, you raised private money and started investing."

The results of the Enterprise Fund programme in the region have been mixed. The Polish Enterprise Fund was a huge success and taken as a model by many local funds, though the Czech version was a failure and closed. Whatever else it was, the White House's offer wasn't going to be a walk in the park and Cloherty didn't really want to do it. But she agreed because she understood that, "85% of politics is the press release." She joined Clinton's summit visit on the understanding the administration would replace her as soon someone else suitable was found to take over.

This was a tense time for Clinton, who was embroiled in the Monica Lewinsky scandal. The trip culminated in a famous press conference where Clinton was hounded by the international press corps over his relationship with Lewinsky, while Yeltsin gave monosyllabic answers to questions about a financial scandal that was rocking the Kremlin at the time.

Cloherty avoided most of the scandal and the press release went out. But while in town, Cloherty thought she might as well take a look around to see what was happening, so like any self-respecting fund manager she hired a helicopter. "I flew out to see a few plants and factories, and I could see that there was a real challenge here. It made me curious," says Cloherty. "After the trip to Moscow, the State Department rang again and said things weren't gelling and would I go back. I left the next day. I didn't want to give myself the time to change my mind."

A different game

Investing in Russia is a very different game to venture capitalism in a mature economy. "Most of the investment opportunities I have seen are amazing and cannot be found in mature economies," says Cloherty. "After over eight decades of little-to-no consumer choice, the Russian population of some 143m people has emerged as a strong consumer market, that continues to grow and to diversity. Virtually no category of consumer goods and service is untouched by the increased demand."

"The important characteristic of these opportunities for investors is that no invention is required. In mature economies, science and technological-based companies are the primary sources of extraordinary returns. You take enormous technological risks, but in Russia the risk is in the management and management-related issues. The number of seasoned businessmen (and especially entrepreneurial management) is still quite small, but growing," says Cloherty.

And it was very risky. This was the Wild East and while much of the recent commentary following March's presidential elections has focused on the lack of democracy, commentators seem to have forgotten just how crazy it was trying to do business in Russia until only a few years ago.

Amongst Cloherty's very early deals was an investment into a diesel engine plant; the fund almost immediately lost its invested capital. "I tracked the money to a suitcase that was delivered to Vienna, but lost the trail there. We found the partner but not the money," says Cloherty.

The problems got steadily more dramatic and reached a zenith when in 1998 the city of St Petersburg nullified her fund's majority position in the legendary Lomonosov porcelain factory and refused to compensate her. The entire investment community turned to watch the battle because if the city won, it would set a legal president that could have unravelled the entire privatization process and made a mockery of property rights. Cloherty took the case to court and, surprisingly given the shaky state of Russia's legal system at the time, she won.

It must have been a crazy experience for someone who had pioneered the purebred Californian school of venture capital. The requests for funding came flooding in and ranged from baby toys to intercontinental missile technology. But after a few years things began to settle down. The 1998 financial meltdown was a phase change in the market, clearing out the traders and speculators - both domestic and foreign - and marking the start of a decade-long consumer driven boom, where import substitution took the lead.


Russian investments are growth stories and the trick is not to find something new, but something that should be there in the economy but is still missing. As the success of these ventures is not the idea but the implementation, finding the right management is the key to making a successful investment. "Most companies, like people, never achieve their promise because of poor execution. At the same time, you have to align the interests between the investors and the management so that all the partners benefit," says Cloherty, who recommends stock option programmes as the most effective way of providing incentives for management.

Cloherty is probably most famous for setting up two pioneering banks: Delta Bank, which was early into consumer credit, and DeltaCredit Bank, which helped create the mortgage sector in Russia.

In 2004, Cloherty sold off DeltaBank to GE Capital at 4-times book value. At the time, it was hailed as a spectacular deal as most banks in Central Europe had been sold in the 1990s at 1- or 1.5-times book value. The deal also marked the beginning of a financial sector M&A frenzy in Eastern Europe, with major foreign banks moving in to buy Russian, and within a year Ukrainian, banks at astronomical prices. "It was a good deal. The bank was growing so fast that it was sucking capital out of the fund and it needed a good partner or strategic investor to take it to the next level. It was the right time to sell," says Cloherty.

Not long after, Cloherty also sold DeltaCredit Bank in August 2005 to the French bank Societe General, which is building up an extensive portfolio of banking services in Russia.

Despite the strong economic growth of recent years in Russia, venture capital and private equity buyouts are still only stepping off square one. Cloherty estimates there is a total of some $6bn of venture capital money in the Russian market, which is tiny compared to the size and growing wealth of the population. "You have to remember everyone in Russia was someone else a decade earlier," says Cloherty. "People learned how to do business from watching movies like Wall Street. That is why recreating things that already exist elsewhere can be so difficult. But then look at the growth rates and that in itself is a testament to the Russian ability to learn."

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FUNDS: Patricia Cloherty - an adventurous venture capitalist

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