London’s Alternative Investment Market (AIM) has long been the exchange of choice for eastern Europe’s small-cap and mid-cap companies wanting to list. But the sheer number of companies inundating the AIM means that some from the region are starting to look to the vibrant Polish bourse, where they hope to benefit from being big fish in a smaller pond.
The AIM has scooped up the majority of smaller initial public offerings (IPOs) from the Commonwealth of Independent States (CIS) in the past few years. But the Warsaw Stock Exchange (WSE) is starting to cut the AIM’s lead, as owners complain about the UK market’s high costs and lack of post-IPO trading wearing down their share prices. Not everyone is unhappy but several issuers listed in London are talking about a dual listing with the WSE or even about moving wholesale to the Polish market.
The star CIS issuer has been Peter Hambro Mines, which listed on the AIM in 2002 and whose market capitalisation rise to £1.1bn (€1.4bn) as of the start of this February. The company has done so well that it is even talking about moving to the London Stock Exchange’s (LSE) main market. “It’s a fabulous market,” says ebullient CEO Peter Hambro. “We have no complaints whatsoever.”
Far from investors
However, Mr Hambro’s operation has its headquarters in London and is in constant contact with investors. Companies based in the CIS itself have much less to do with investors and say that they suffer as a result. Out of sight is out of mind and leads to lower volumes of trades in their stock; share prices suffer from attrition as traders gradually mark the share price down in an effort to generate some turnover in the stock.
Ukrainian real estate company XXI Century and Russian marketing company IMSG are based in Kiev and Moscow respectively, and are listed on the AIM, yet both have explored the possibility of moving to the WSE.
“Three years ago, the AIM was really the only choice, but its international reputation is slipping,” says IMSG chairman Greg Thain. “Liquidity is appalling. Recently, we had 3000 shares [at a price of £1.50] sold, and that dumped our share price by some 10%, which is totally unacceptable. We would expect any professional market maker to buy in small amounts of stock, but the reality is that brokers do not make money from market making.”
Some critics say the problem is that the AIM is not sufficiently focused on emerging markets and, as a result, companies such as IMSG are lumped in with their UK peers (in this case, media companies) and do not gain enough exposure.
As of the end of 2007, there were 1694 companies listed on the AIM, of which 336 were foreign, drawn to the market from all over the world. But the market has, to some extent, outgrown the needs of those foreign firms, especially the smaller companies from the CIS, which do not have the profile to attract investor attention, still less to hold onto it.
Premium is ignored
Mr Thain laments that many of the investors in London are not following the CIS closely enough and have never been to Moscow or any other emerging market.
“As a stock, in 2007 we outperformed AIM and UK media shares,” he says. “Media companies have been walloped in the first month of 2008, but our shares have stood out because they have held their value better than any other media company on the market thanks to phenomenal growth prospects in the region. There is an emerging market premium that is not being reflected on AIM or on UK markets in general.”
European funds investing in emerging markets make up about 80% of IMSG’s investors and Mr Thain claims that all of its investors based in Copenhagen, Frankfurt, Geneva, Moscow, Stockholm and Vienna are urging the company to move to a market that is closer to the action.
“We’re looking at the possibility of a move to being dually listed on Warsaw and Stockholm,” says Mr Thain. “Warsaw is very active – it is not as large as the AIM, but there is good trading and it is about the same size as Vienna. Stockholm is more focused on the CIS than the AIM. There are already 20 Russian or Russian-facing companies listed there.”
This is a reminder that Sweden is also putting the AIM under pressure. The Swedish bourse, OMX, has already snapped up all three of the Baltic state exchanges. It also bought the Armenian bourse in November 2007, continuing its expansion in the region, although it failed to close a similar deal in Slovenia in the same month.
Gert Tiivas, managing director of Sweden-based East Capital Explorer AB, which listed on OMX in November, says that the company looked at both Stockholm and the AIM when choosing a venue for the flotation.
“AIM is where many similar private equity funds are listed, but there have been problems with liquidity,” he says. “We opted for Stockholm for liquidity and accessibility. Whereas institutional investors can trade stock around the globe, for retail investors it is so much easier to access their home market. As we have a large retail investor base in Sweden and we believe this to be a very positive factor for liquidity, Stockholm was the natural choice.”
Jaroslav Kinach, a board member of XXI Century, is less unhappy with the AIM but admits that the company is also looking into a dual listing in Warsaw. “We love the AIM and we have done very well on it. We highly recommend it, especially for any CIS company looking to go public,” he says. “But life moves on and we always saw the AIM as an interim step in a larger company development strategy.”
Towards regulation
XXI Century carried out its IPO on the AIM in December 2005, raising $139m. It had wanted to list either in New York or London but, due to the London’s geographic proximity and Ukraine’s long-term intention to be part of the EU, it decided on the AIM.
The next step in the company’s strategy is to move from the AIM – a “gently regulated” market, as Mr Kinach puts it – to a more regulated market such as Warsaw and then, perhaps, as the company grows beyond its current $1.3bn market cap, to move onto the main board at the London Stock Exchange.
Overseas owners find that small is beautiful
The Warsaw Stock Exchange (WSE) had a bumper year in 2007 with its market capitalisation up 40% year-on-year to top the PLN1000bn (€280bn) mark for the first time. It had 81 IPOs last year alone, raising a record-breaking PLN18.2bn. And a dozen foreign companies debuted on the market in 2007, compared with the nine that listed the year before, bringing the total to 36.
With a market value of about €830m, the foreign companies already account for a little less than a third of the WSE’s total capitalisation.
“Warsaw has developed into an active and attractive regulated market. It also appears to be a great platform for real estate companies operating in the region,” says Jaroslav Kinach, a board member of Ukrainian real estate company XXI Century.
By comparison, The Alternative Investment Market’s (AIM) market capitalisation was £97.6bn (€130.4bn) as of the start of this year, with the 336 overseas companies accounting for £34.4bn of the total, the same proportion as on the WSE. However, the difference is that all the foreign companies listed in Poland are from eastern Europe, whereas the foreign companies on the AIM are from all over the world.
“A foreign company listing on the AIM is no longer big news as it was two years ago, whereas a foreign company listing in Warsaw is still a major event,” says Mr Kinach. “It is great for us in terms of visibility. We will be a major real estate company in Warsaw and therefore on the radar screen of many investors and research analysts.”
That is the advantage, say owners who are considering a move to the WSE from the AIM: as one of only three dozen names, these companies are much harder to forget than when they fade into the crowd in London.
The WSE’s management is aggressively trying to extend its lead in the Commonwealth of Independent States (CIS) and to that end it set up an office in Ukrainian capital Kiev at the end of 2007. This promises to be a fruitful source of fresh paper, along with flotations of companies from Lithuania and Bulgaria.
Jon Edwards, CIS senior manager at the London Stock Exchange, admits that Warsaw is becoming a competitor to the AIM, particularly for mid-sized Ukrainian companies. Yet he maintains that the AIM remains the market of choice for Russian firms, providing ample liquidity for companies with a market cap of about $500m to $1bn.
