Russia hedge fund Prosperity Capital quits the UK for Abu-Dhabi

Russia hedge fund Prosperity Capital quits the UK for Abu-Dhabi
Mattias Westman, co-founder of Prosperity Capital, the Russia-focused hedge fund. / bne IntelliNews
By Jason Corcoran in London November 15, 2023

Russia-focused hedge fund Prosperity Capital Management is quitting London as part of move to relocate its operations to Abu-Dhabi, citing Brexit and the UK’s unco-operative business environment, bne IntelliNews can reveal.

The firm’s co-founder and chief executive, Mattias Westman, said the economic and political fallout from the UK’s decision to exit the European Union had triggered the move.

“[The] UK is getting increasingly insular and uncooperative in my view,” Westman told bne IntelliNews. “I guess Brexit was a specific reason to leave and [moving to] Abu-Dhabi is because it’s friendly.”

The winding up of the UK subsidiary, which had a swanky office in London’s West End on Regent Street, is expected to be completed by the end of this year.

The departure of Prosperity, a pioneering Russian hedge fund, from London marks the end of an era. Russian state-controlled investment banks Sberbank CIB and VTB Capital have been sanctioned out of business in the UK, while the future of privately-owned Renaissance Capital in the Square Mile is very much up in the air.

bne IntelliNews had previously revealed that Prosperity had set up an office in France to serve as its European marketing arm. The firm needed an office within the European Union to continue to “passport” its UCITS fund after the Brexit transition period ended.

Prosperity’s Quest fund was the best performer globally for the decade ending December 31, 2009, with a return of 3,300%, according to data from Morningstar.  

The firm, which was set up by Westman and several partners, has a focus on purely Western institutional clients with long-term investment horizons.  Clients in the past have included the largest US pension funds, European institutions such as the $1.2 trillion Norwegian Oil Fund, along with high-net worth individuals and some of the wealthiest family trusts in the world.

Westman, a Swede, has been investing in Russia for 30 years and launched his firm’s flagship Prosperity Fund 27 years ago. Before becoming a stockbroker he served on the Russian desk of the Swedish Ministry of Foreign Affairs, having learnt Russian with the Swedish Armed Forces.

Prosperity, which has blazed a trail investing in Russian equities, was caught napping when severe sanctions were introduced following the invasion of Ukraine.

A week before conflict erupted, Westman wrote to Prosperity’s clients on February 20 to reassure them there wouldn’t be a war, after sensationally visiting the Ukrainian border himself to inspect the build-up of troops.

International asset managers, hedge funds and pensions plans are believed to have about $90bn in equities stuck in Russia’s financial plumbing but Prosperity probably has the largest exposure by proportion of assets under management.

Swedish rival East Capital has less exposure to Russia after diversifying away from the former Soviet Union into China and frontier markets in Africa, the Middle East and Latin America. Unlike Prosperity, its investor base is more from the retail market, with Scandinavian pensioners making up a high proportion of its clientele.

The hedge fund firm's latest earnings released this month to UK Companies House show profits slumped to GBP161,000 ($200,200) last year compared with GBP2mn in 2021.

The firm’s directors said the accounts managed by the group were affected by the war due to their inability to trade Russian securities.

“The investment funds and accounts managed by the group have significant investments in Russian companies, and because it has not been possible to trade those Russian securities after February 2022, the investment funds managed by the group suspended calculations of the valuations of their portfolios as well as the issuance and redemption of shares in those entities,” wrote director Joseph Keane.

Prosperity admitted there remains “a material uncertainty over the long-term future” of the funds they manage due to the war.

The directors of the company have taken steps to retrench the business, including termination of its lease obligations “and some redundancies.”

Westman, who has moved to Milan from London, said the firm has not pivoted away from its core market or Russia since the war erupted with Ukraine. Other emerging market shops with large exposure to Russian equities, such as East Capital, have been diversifying further into other far-flung markets.

“We have a fiduciary duty to work hard to recover value for existing investors,” said Westman.

In the meantime, there may be light at the end of the tunnel for funds like Prosperity Capital after Russia’s President Vladimir Putin signed an executive order on November 8 laying out a preliminary scheme that would allow Russian investors to “exchange” their frozen assets abroad with the frozen assets of foreign companies in Russia.

The mechanism was first discussed in August when Minister for Finance Anton Siluanov said the Central Bank and the government were preparing a draft decree to unlock some of the foreign assets held by Russians in exchange for domestic securities.

Putin’s decree states that deals with foreigners will be concluded via “bidding”. The conditions for conducting such trades and completing transactions will have to be established by the government commission for control of foreign investments in Russia.

Furthermore, the decree states that the Central Bank’s board of directors will establish the procedure for interaction between brokers and clients as well as the identification of “non-residents.” Such accounts will be credited with foreign securities that non-residents will buy from Russians and will be opened in the name of non-resident buyers in Russian depositaries.

Market makers, such as brokers and management companies, will not be allowed to charge Russian investors fees for transactions in foreign securities.

The Central Bank, headed by Putin ally Elvira Nabiullina, will regulate the exchange mechanism and has specified it will initially only pertain to retail investors with an investment threshold of RUB100,000.

Putin has delegated many of the details of the plan to a government commission, meaning that its mechanisms and its feasibility remain yet unclear.

By late August, Siluanov said his Ministry hoped to enable the swap of roughly RUB100bn (about $1.1bn) in frozen assets.

Under the plan in Putin’s order, foreign companies will regain access to some of their frozen funds (now locked away in “Type C” accounts) to buy securities owned by Russian investors frozen in the West.

The Finance Ministry previously this year estimated that the assets of more than 3.5 million Russians worth RUB1.5 trillion were blocked abroad.

However, ongoing sanctions against Russia for its invasion of Ukraine make it uncertain that foreign regulators and international clearing houses will co-operate with Putin’s swap proposal.

“It’s complicated but some form of swaps may be possible,” said Westman, whose firm had approximately $3.5bn in assets under management prior to the conflict.