Russia had a bumper year for initial public offerings (IPOs) in 2007 and there is every sign that the express is going to accelerate this year. Russian companies raised a whopping $27bn in 2007, of which floats by Russia’s two leading state banks accounted for $17bn. However, this year is the turn of the commercial banks and they are being joined by an increasing number of companies from all the sectors of the economy as owners start to tap their equity as a source of financing.
Despite the record crop of IPOs last year, analysts are expecting this year to be even better, partly because the huge volume of shares depressed growth of the domestic bourse. While other emerging markets’ stock markets soared in the first half of 2007, Russia’s market took in only $5bn of fresh money. Existing investors sold shares to buy the two banks’ issues and the leading RTS index was more or less flat as it struggled to absorb the two huge issues.
Cheapest stocks
However, being left behind by the other emerging markets in 2007 means that Russian companies now have the cheapest stocks in all of the global emerging markets. While stocks in the likes of China and India trade at price-to-earnings (P/E) ratios of more than 19 times, Russia is at the bottom of the table with an average ratio of just over 10 times.
“By December, attention was already swinging round Russia’s way,” says Chris Weafer, head of strategy at UralSib. “We had record inflows of new capital at the end of the year, while the other BRIC countries [Brazil, Russia, China and India] all saw outflows. This should be an excellent year because now it is Russia’s turn.”
The $27bn that Russian companies raised in 2007 is equivalent to 17% of all the money raised by companies in emerging markets and 7% of the year’s global IPOs. That is up from $17.6bn in 2006 (including the float of state-owned oil company Rosneft, which raised $10.7bn by itself) and $4.9bn in 2005.
Public listing on international bourses accounted for $11bn, companies listing domestically accounted for $4.5bn and those that raised additional funds through rights issues made up the remaining $17.6bn.
Structural change
The large volume of IPOs also significantly changed the structure of the Russian stock market, giving investors access to several new sectors for the first time. Oil and gas companies have long dominated the stock market but after 2007 banks and real estate companies are now well represented, accounting for 82% of the issues, and the share of oil in the make up of the RTS index has fallen from 80% to 50%. Metals companies’ share of the index rose to 13%, electricity companies reached 10% and banks climbed to 13%.
Russia’s two largest banks, Sberbank and VTB Bank, led the charge, raising a total of $17bn with their floats. Banks shared the top position in the offering-volume ranking with electricity companies, which also sold $17bn worth of equity. Private offerings accounted for the bulk of this sum. The real estate sector (PIK Group, AFI Development and LSR Group) finished second in terms of IPO turnover, raising a total of just over $4bn.
Volume prospects
Another 86 companies have publicly said they want to undertake IPOs this year and about 290 companies plan to tap the market in the next three years. The 30 biggest companies with definite plans for IPOs would alone raise an estimated $36bn in 2008 if they all go ahead. However, most of these IPOs are expected to come in the second half of the year because the market is still reverberating from the shock caused by the brouhaha on US credit markets.
“Everyone is cautious,” says Roland Nash, head of research at Renaissance Capital. “The IPOs will go ahead but we are not expecting many in the first quarter because the consensus is that there is still more pain to come in the US. Everyone is holding off until the worst of the credit crunch is clearly over.”
Banks in the vanguard
Banks are likely to be in the IPO vanguard again this year as the commercial banks follow their state-owned peers into the market. At least four banks have publicly announced that they want to float in 2008. The quasi-state-owned Gazprombank put off plans to float last year so as not to clash with the Sberbank and VTB Bank offerings but will probably go ahead in the first half of this year.
Zenit Bank is likely to be the first commercial bank to float; it has already done all the groundwork. Leading regional bank Ursa Bank has also said it wants to float. And financial services bank KIT Finance has already mandated international investment banks to organise its IPO in the final quarter of the year.
So far, most banks have been relying on issuing debt to fund the expansion of their loan books, but most are starting to run up against the ceiling of maintaining their capital adequacy ratios, which are falling by about 1% a year and need more capital.
| “Eurobond markets open and close,” says KIT Finance’s deputy CEO Sergey Grechishkin. “But equity markets are more stable. Eurobonds are relatively short term and they do not contribute to the capital of the bank. We currently have a reasonable level of capitalisation but we are growing so fast that we need to access Tier 1 capital, and equity is the only way to do that.” |
KIT Finance plans to raise $1bn in the final quarter of this year but Mr Grechishkin says that the amount of shares that the bank will sell will depend on the evaluation of the bank, and that will depend on market conditions at the time. “We have seen different valuations prepared by different banks. We want to raise $1bn to secure the growth strategy of the bank. We are still a year away and watching the market conditions. If they are not good as we get closer to the float we will wait, but we still need to get ready now,” he says.
Kremlin game plan
The Kremlin is getting into the game, seeing equity markets as a leading source of capital to finance the expansion of the state-owned national champions it has been setting up. Although president Vladimir Putin has been roundly criticised for what some have called a back-door renationalisation of strategic industries, such as oil, the head of the so-called ‘siloviki’, the shadowy security services Kremlin faction, says that the state intends to float everything it owns on stock markets in the next five years.
The state-owned arms export agency, Rosoboronexport, has become a de facto holding company and holds the shares in most of the national champions as well as several key companies such as Lada-maker Avtovaz. Standing on the sidelines of an air show in August, Sergei Chemezov, the boss of Rosoboronexport, told reporters: “All Rosoboronexport companies will hold IPOs. I think they will all do so by 2012.”
If it happens, this will be an impressive portfolio of some of Russia’s most attractive companies. State-owned titanium producer VSMPO-Avisma signed off on a billion-dollar deal to supply Boeing with metal in December. The recently founded United Aviation Company started production of Russia’s SuperJet in the final quarter of 2007 and already has a stuffed order book for several dozen planes. And the Kremlin has stakes in shipping, steel, media, agriculture, utilities and rail, to name just a few. The state’s plan includes selling more shares in VTB, whereby its stake will eventually be reduced to about 50%, according to official statements.
Reputation hurdle
Selling so many stakes in such big companies is going to be hard, though, because the Kremlin has botched all three of its big IPOs so far.
Rosneft’s IPO in 2006 was a disaster after many international investors boycotted the float, because owners of bankrupted oil company Yukos promised to pursue them with legal action if they bought the shares (Rosneft won the bulk of its production assets in a controversial bankruptcy auction of Yukos assets in December 2004). In the end, the Kremlin had to strong-arm international oil companies into buying the shares to rescue the float.
Likewise, the state bungled the marketing of the second public offering of Russia’s biggest bank, Sberbank, early last year, which raised $8.8bn. This time the Kremlin leant on friendly oligarchs to put up several billion dollars to bail out the float.
The IPO of state-owned VTB Bank in May went more smoothly and raised $8.2bn. It was billed as ‘the people’s IPO’ as Russia retail investors were encouraged to invest. Thousands did and almost immediately regretted it. Following the debacle on the US subprime market in August, VTB shares fell to about 20% below their IPO price by the end of the year, leaving the Kremlin with egg on its face again. A group of disappointed minority shareholders banded together and asked the state to buy back their shares at the IPO price.
Now the Kremlin has a serious reputation problem and will find it even harder to raise money from the population during the raft of IPOs it is planning.
FUNDS' LISTING TREND CREATES OPPURTUNITY FOR SPECIAL VEHICLES
A new trend began in 2007: a string of funds listed on international markets. The double-digit returns from eastern European markets in the past decade are attracting an increasing number of investors, and the investment banks and fund managers that are earning these returns have seen the number of projects into which they are investing grow exponentially. The business has reached the point at which rather than hunt down co-investors to finance the bigger projects, the number and size of projects mean that it makes more sense to create a special vehicle and list it.
Ukraine’s real estate market is a classic example. Property prices have more than doubled since the Orange Revolution in the winter of 2004, and real estate has attracted a big chunk of the billions of dollars of foreign investment that has flooded into the country since then.
Ukraine’s dominant investment bank, Dragon Capital, raised $208m by listing the first ever fund specialising in Ukraine on London’s Alternative Investment Market (AIM) on June 1, 2007. The Dragon-Ukrainian Properties and Development (DUPD) fund targets the booming real estate sector and returned just over 30% in the first six months of its life.
DUPD quickly disbursed most of its funds into larger real estate projects and followed on with a secondary public offering – mostly taken up by the existing investors – to raise another $100m in November.
| “Our real estate investments have been very successful: investments into developing or redeveloping business centres, retail, warehouses and so on, which were earning triple-digit internal rates of return,” says Tomas Fiala, co-founder and managing director of Dragon Capital.“But as the projects got bigger we were constantly looking for co-investors and it got to the point where it simply made sense to set up a vehicle and list it. This appeals to the investors too because it gives them more diversity.” |
Similar logic drove the region’s leading fund management company, East Capital, to float a vehicle called East Capital Explorer AB on the OMX Nordic Exchange in Stockholm in November. Strong demand led East Capital to increase the size of the IPO by 40% from €260m to €365m. Swedish retail investors bought just under two-thirds of the issue and institutional investors bought the rest.
East Capital has a string of funds dedicated to the region that make a mix of equity and private equity in all of the countries of central, eastern and south-eastern Europe. In total, the company has about €6bn under management. When the company was founded, it targeted Swedish retail investors but as it has grown it has picked up an increasing number of international institutional investors.
East Capital Explorer AB will invest into all of the company’s funds, including the bigger funds such as the Financial Explorer fund that targets banks, which had a minimum $1m entry price tag.
“The idea of the fund is to give investors access to sectors and opportunities that are usually hard to reach,” says Gert Tiivas, who manages the fund. “Usually the barriers to funds are high, especially for retail investors, and there is a long lock-in period. The advantage of a listed fund is that there is daily liquidity and the hurdle is low for retail investors who want to invest.”
