A dozen men guard the St. Petersburg offices of hypermarket operator Lenta. This is the muscle it is taking TPG Capital, which owns a stake in the company, to establish a beachhead in Russia.

The company’s $100 million investment in Lenta in 2009, in partnership with state-controlled VTB Group, sparked a brawl in September. Jan Dunning, backed by TPG and surrounded by bodyguards, barged past Sergei Yuschenko, installed as chief executive by rival investors, to reclaim his job running the company. Windows were smashed and punches thrown, all of it broadcast on national television.

Russia’s government, seeking to diversify its economy away from energy, is finding it difficult to lure international private-equity firms, even as investors turn to emerging markets. TPG co-founder David Bonderman is betting that, with the right connections, he’ll overcome a complex legal system, widespread corruption and competition from local oligarchs for assets. Doubters, including the Carlyle Group, aren’t buying.

“Russia is still perceived as the ‘Wild, Wild West,’ and the issues TPG is facing there aren’t helping,” said Jeremie Le Febvre, a partner at Triago, which helps companies raise funds. “Investors much prefer Asia and Latin America right now.”

After raising $1.4 billion over the past three years, Russian private-equity managers are seeking more than $4 billion this year and next as dealmaking is picking up. China, by contrast, attracted $28.6 billion from limited partners since 2008, India $15 billion and Brazil $5 billion as Western pension funds turn to fast-growing economies to meet increasing obligations, according to the Emerging Markets Private Equity Association.

“There will be intense fundraising activity in the next 12 months, and limited partners will take a fresh look at Russia,” said Mounir Guen, head of MVision Private Equity Advisers.

In March, Russian President Dmitry Medvedev announced a $10 billion private-equity fund, partly funded by the government and aimed at investing alongside international firms. He also created a working group to turn Moscow into a global financial center. It includes Stephen Schwarzman, chief executive of Blackstone Group, one of the world’s largest private-equity firms, along with Goldman Sachs’s Lloyd Blankfein and JPMorgan Chase’s Jamie Dimon.

State-owned Sberbank, Russia’s largest bank, said it planned a $1 billion private-equity fund with Credit Suisse Group. The two companies will each contribute about $100 million.

‘Political risk’

Russia ranked as less attractive for private-equity deals than Brazil, India and China, as well as Africa and the Middle East, in the survey. Almost two-thirds of those questioned cited “political risk” as the main reason for avoiding the country.

Corruption in the local authorities as well as a small, volatile universe of fund managers are other deterrents, said Steven Cowan, a partner at 57 Stars, a Washington-based fund of funds investing in emerging markets for pension plans, including the California Public Employees’ Retirement System.

“Russia is tough,” said Alexander Savin, a former investment executive at billionaire Mikhail Fridman’s Alfa Group who co-founded Moscow buyout firm Elbrus Capital. “Those who have cracked it can generate superior returns, but it has been difficult for international firms to do good deals over the long term.”

Elbrus is to seek $750 million this year, sources said. Savin declined to comment.

Carlyle, the Washington-based buyout firm, attempted to set up a team in Russia twice since the late 1990s, only to withdraw. It shut its Moscow office in 2005, saying the returns weren’t worth the risks. The firm has no plans for a third try.

“Russia has not proven to be a place where Western private-equity investors can have the returns and realize the profits commensurate with the risks they’ve had to take,” Carlyle co-founder David Rubenstein said recently in Berlin. The country doesn’t lack capital, especially among oligarchs, he said previously. The firm, which operates in China, India and the Middle East, said recently it hired a team to invest in sub-Saharan Africa.

Russian returns

Anne Fossemalle, director at the European Bank for Reconstruction and Development, the London-based international financial institution created after the Soviet Union collapsed, disagrees. Returns from EBRD-backed private-equity funds in Russia and the former Soviet Union have exceeded those in emerging markets as a whole over five and 10 years, and have averaged 14 percent annually after fees since the mid-1990s, she said.

The EBRD helped start most of the country’s few success stories, mainly firms targeting midsize companies.

Baring Vostok Capital Partners is one of them. The firm, started in 1994 by former Salomon Brothers oil banker Michael Calvey, has made about four times its money for investors on average, Calvey said in his office on Ulitsa Gasheka, a dusty street two metro stops from the Kremlin where Goldman Sachs and the EBRD have also settled. Baring Vostok, whose backers include Calpers and the Pennsylvania State Employees’ Retirement System, might start raising a $1.4 billion fund this year, according to three people briefed on the plans. Calvey, 44, declined to comment.

Of Baring Vostok’s 55 investments in entertainment, oil exploration, banking and confectionary, a quarter delivered more than four times the initial investment, including six “breakout winners” that returned more than 10 times, offsetting six money-losing deals, he said.

A future winner might be Yandex, the Russian equivalent of Google, in which Baring Vostok bought a minority stake in 2000. Yandex is planning an initial public offering on the Nasdaq Stock Exchange.

While Russia is “much more civilized than 15 years ago,” the barriers to entry are high and the learning curve long for foreign companies, Calvey said.

“It’s a do-it-yourself market,” Calvey said. “You can’t rely on outside service providers.”

Besides 20 investment professionals, he employs four full-time lawyers, three government-relations managers and eight accountants and human-resource managers dedicated to the portfolio companies. Calvey was raised in Oklahoma. All his other 10 partners are Russian.

“International firms aren’t equipped for Russia,” he said. “And they usually have a low tolerance threshold for uncertainty and no sense of humor for Russian surprises.”

Such surprises might include a tax inspector showing up to seize assets because of unpaid value-added tax, a regulator announcing that a license for your business is under review three years before it expires or a competitor raiding one of your companies, Calvey said.

Finding a foothold

TPG, the only global buyout firm with a presence in Russia, manages about $48 billion in assets and counts among its investments Energy Future Holdings, the Texas power producer whose $43.2 billion leveraged buyout in 2007 was the largest in history. The firm is finding out just how difficult a market Russia can be.

The Fort Worth firm, investing in a $19.8 billion fund, set up a Moscow office in 2007 and has three investment professionals there, none of whom is a partner. Stephen Peel, the partner overseeing the firm’s Russian operations, is based in Hong Kong, and John Oliver, the operating partner in charge of Lenta, is in London. TPG’s Bonderman met with Prime Minister Vladimir Putin in 2009 and joined the board of VTB after buying a $100 million stake in Russia’s second- biggest lender in February.

TPG dropped its bid to buy Moscow-based drug distributor SIA International in September 2008 and abandoned a plan to raise a joint fund with VTB in the wake of the credit crisis, according to sources. The Lenta deal has spawned lawsuits on three continents and claims of forgery, fraud and violence.

“There are pros and cons to every emerging market,” said Peel, who left Moscow for Hong Kong in 2008. “None of them is perfect. And ultimately, we have to balance the risks with rewards of the specifics of the deal, the institutional investment framework of the country and the medium-term macroeconomic outlook. Lenta was acquired at an attractive price and at the right time.”

TPG’s “Russian surprises” have mostly come from an unexpected direction: a fellow U.S.-born investor. In September 2009, TPG and VTB agreed to buy a 31 percent stake in Lenta and operate it jointly with Svoboda, the grocer’s largest shareholder. It didn’t take long for the relationship to sour.

Svoboda is controlled by August Meyer, a U.S.-born lawyer-turned-businessman. Within three months of the deal, Meyer said he intended to exercise his right under the shareholders’ agreement to replace Dutch-born Dunning as chief executive with Yuschenko, a Russian and former top Lenta executive.

“I didn’t want a CEO in there not speaking Russian and answering to only one shareholder,” Meyer, 48, said.

Ayn Rand fans

He met Dmitry Kostygin, a fellow fan of St. Petersburg-born Russian American author Ayn Rand, a champion of laissez-faire capitalism. Kostygin, 38, put him in touch with Lenta’s founder, Oleg Zherebtsov, and in 2002 Meyer, using family money, bought a stake of about 36 percent for less than $20 million. Kostygin also invested in Lenta.

Lenta, started in 1993 as a cash-and-carry warehouse. It now owns 39 hypermarkets in 20 cities, selling food and cigarettes, toys and television sets. Sales grew 27 percent to $2.5 billion last year.

Zherebtsov and Meyer began to quarrel over strategy in 2008, Meyer said. Zherebtsov sacked Yuschenko, then the company’s chief executive. Meyer opposed the move. The EBRD, which bought an 11 percent stake in 2007, backed Meyer, resulting in the sale of most of ­Zherebtsov’s stake to TPG and VTB. Meyer bought an additional 5 percent for $15 million in January 2010, he said. Dunning was hired just weeks before the TPG deal.

By last May, Meyer and Kostygin wanted Dunning out and convened a board meeting to bring back Yuschenko. TPG walked out of the meeting before the vote and sued to block the change. EBRD has since sided with TPG and VTB.

A British arbitration court in July confirmed Yuschenko’s appointment as interim chief executive and requested the two sides hold a board meeting and look for a new chief executive together to succeed him. Meyer and Kostygin haven’t attended board meetings since.

September melee

Opposed to Yuschenko staying on permanently, TPG and VTB persuaded the tax authorities to recognize Dunning as the chief executive, saying the board meeting where he was dismissed wasn’t valid. He took over again Sept. 14 after the melee at Lenta’s headquarters.

A TPG spokesman said the firm had no direct role in the September scuffle. Tim Demchenko, head of VTB Capital, declined to comment.

Police are investigating Yuschenko for misappropriation of 4.2 million rubles of company funds, according to sources.

“It’s been months now, and I still haven’t seen the documents against me,” he said. “I want this investigation to go to term. My reputation is on the line.”

Dunning, whose chief executive contract expired in October, declined to comment. He is still employed by Lenta as a consultant. Officially, the company has no chief executive, according to TPG.

“Dunning is now irrelevant,” Meyer said. “We’re far beyond that.”

Meyer has offered to buy TPG and VTB’s stake for $806 million, or about eight times their investment in 2009. TPG rejected the bid, proposing the two sides hold an auction with a starting valuation of $2 billion. Meyer’s latest offer is to sell his 41 percent for $1.17 billion.

Baring Vostok’s Calvey said all the drama misses the lesson.

“The real story is that TPG is going to make a big profit,” he said.