Yandex Beats Google

Some quick and dirty math indicates that the private equity firms behind today’s blockbuster search-engine IPO are at a 806x return on equity, well ahead of where Google’s backers were on IPO day.

Yandex, the Russia-based search engine, likes to boast that it’s “better than Google.” If you measure the company based on the returns it delivered to its private equity backers, it may have a point.

I have to admit I’d not heard very much about Yandex before its initial public offering on the Nasdaq today. But it could go down as one of the greatest private investments of all time.

The day isn’t over yet, but (my own) preliminary math indicates that the institutional-investor value created by the IPO of this Russia-based search engine is, on a comparative basis, well ahead of where even Google was on the day of its own IPO in 2004. In 1999, the first institutional backers of Google, Silicon Valley stalwarts Kleiner Perkins Caufield & Beyer and Sequoia Capital, bought a 20 percent stake in Google for $25 million. When the company went public in 2004, its $85-per-share debut valued the company at $23 billion, but by the end of the first day of trading shares had risen to $100, boosting the first-day market capitalization to $27 billion. That means that on IPO day the two VC backers of Google managed to turn $25 million into $5.4 billion, a 216x return over roughly five years.

Now let’s look at Yandex. It was founded in 1997 but received a $5 million investment from a group led by Russian private equity firm Baring Vostok Capital Partners in 2000, according to this Reuters article. The $5 million investment reportedly bought the investor group a 36 percent stake in the business.

Today Yandex went public and the company debuted with a market cap of $8 billion, but subsequent trading has boosted that number to roughly $11.2 billion. This means that on IPO day Baring Vostok and partners have turned $5 million into $4.03 billion over 10 years. That’s a. . . (gulp) 806x return.

Is my math wrong? Do I not have all the facts? Did I drink too much coffee this morning? Because a multiple of 806 on your equity is a big, big deal.

Baring Vostok is a private equity division of ING, and its activities in Russia go back to the early 1990s. Interestingly, a co-investor in the Yandex deal was the International Finance Corporation, which has a 6.12 percent stake, now valued at $685 million. The IFC is a division of the World Bank and its mission over the years has been to spur the development of capital markets in emerging economies, including committing capital to funds managed by private equity firms in developing markets. No doubt the IFC’s long relationship with Baring Vostok led to this co-investment.

As a private equity market, Russia has been by far the least popular among the emerging markets, owing in part to an investor perception that it is subject to government tampering, corrupt and even dangerous to visit.

At a recent conference hosted by the IFC and the Emerging Markets Private Equity Association, I spoke with a GP from another Russian private equity firm, who said he was pleased at Russia’s unpopularity – he was happy that so few big international private equity firms were prowling his market. The mind-blowing Yandex story might bring the big GPs back for another look at the Russian opportunity.