17 Private Equity
Feygin
Wagner Group as violent PE-firm
Wagner’s success has been in providing a complete package of “authoritarian support services” in the larger context of the many tools of the broader Concord Group. Concord not only provides trigger pullers but other forms of psychopaths like “political technologists” to rig elections and consultants to get your image clean in the West. The other advantage to the Concord Group’s agglomeration effect is it lets other lines of business finance long-term assets that Wagner aquires in exchange for its services, like gold mines, oil fields, etc. These are cheaper than paying them with cash because, as Keynes teaches us, cash now (especially for a poor FX-constrained and politically isolated emerging market) is usually dearer than cash later.
For people coming out of finance or any related economically-based discipline, something of a lightbulb might be going off. The Concord Group might be one of history’s top five most violent private equity firms. What it does is essentially the same as a PE firm but with way more guns (as far as we know). Concord Group has a limited partner (LP)– the Russian state. In a PE firm, an LP is the investor in the project. An LP signs a contract with the PE firm, making them a partner in a venture without management rights but with rights to a portion of the profit generated by a deal. As a partner, the LP is obligated to provide the PE firm (termed general partner) cash to help finance an acquisition. This provides the GP with a lot of free leverage and optionality, thereby letting them buy out assets at a lower cost of financing.
In theory, these would be underperforming firms taken private, improved through some genius (layoffs) or agglomeration effects (combining firms), and then placed back for sale on the public market for a profit. This sometimes happens, especially if the PE firm has a specialized focus. For example, there are some very successful stories of PE firms run by talented engineers and managers in the automotive parts and oil and gas sector buying up lots of small, independent firms that were failing and combining and restructuring them into more efficient vertically integrated operations. However, most of the time, PE firms will use their leverage advantage to buy a firm relatively cheaply, make its financials look better, and then sell it in a relative but not absolute value play. This is one of the better outcomes. A worse one is when the PE firm uses a lot of financial engineering to load a company up with debt and then bankrupt it and write it off for profit – if you’ve seen Goodfellas, this is the legal version of the “bust out” scheme they run on the bar. If you are an outsider interested in an introduction to these issues, the book to read is Eileen Applebaum and Rosemary Batt’s Private Equity at Work: When Wall Street Manages Main Street.
Concord did something like this. Basically, the Russian state was Prigozhin’s LP in the sense that it gave him access to leverage. Prigozhin was Putin’s Chef, having started in food sales and restaurants. Concord continued that line of work, receiving lots of state contracts for catering and food services but not delivering the services to anything near the standard(delivering spoiled food to high schools and the military, for example). These contracts gave Concord a lot of cash to invest in troll farms and mercenaries, which were the real payoff to the state for the cash. In turn, with these services and liquidity, Concord could go to various unsavory governments and offer their services, not for cash but for assets like gold mines and oil fields. Concord could then do a value play where these assets were acquired for a relatively low cost to their yield, even if the yield isn’t great. By having the Russian state behind them ready to issue liquidity (and other hard-to-access resources like heavy weapons, trained commandos, and anti-air defenses), they could keep rolling over the funding as needed and enter new opportunities. It’s a classic PE play!