Thursday, 13 March 2008

Final Day (III) of the Ukrainian Investment Summit, London. Taking stock

Wednesday was the third and final day of the Ukrainian investment summit in London: and Adam Smith Conferences did an excellent job overall. This was the most interesting conference I had attended in years.

The session I will highlight today - and the topic, really, on everyone lips for the last three days: Spotlight on the growth in Ukrainian IPOs.

Some useful statistics from Ernst & Young’s Michael Lynch-Bell and Oleksandra Dubovyk:

- About 80 Ukrainian companies will seek IPOs between 2008 and 2012, says E&Y
- About 20% of these will be financials and about 38% will come from retail and the consumer-facing sector
- Of expected IPOs, about 23% prefer the Warsaw Sock Exchange – Exile says is the right choice for smaller-larger and larger-medium-sized firms, much cleverer than AIM which Exile loathes – and about 11%+ will go to Frankfurt. Overall, though, about 66% will chose London (and 45% overall, will go to AIM). Exile would gently opine that AIM is what *the advisers* want you to choose, because they - and their cost-base, are based in London and need London-based fees, but on a IPO+5 years basis, Exile thinks vendors and CEOs will look back and wish they had chosen Warsaw; IMHO.

Actually, if there is one theme yours truly detected this week, it is the slightest disconnect between the surge of advisors into Kyiv, and the true underlying fundamental health of the new issues market.

Now, says Exile, from a cost, secondary market liquidity and practical POV, London may not be right for loads of CEE and Eurasian firms, especially when you start to compare Warsaw or Frankfurt, inter alia, to AIM.

Elsewhere yesterday, Andrey Pivovarsky gave a very interesting presentation – and overall I think Dragon Capital really impressed at this conference: very bright, very eager, professional and – actually - nice guys. Pivovarsky showed stats that the January and February new equity bookbuilding had been – as I think we all suspected – pretty ghastly. But he remains confident across the whole of 2008.

Nonetheless, while underlining that firms undergoing IPO this quarter raised much less – or the same at much lower valuations / a bigger slice of equity – than they initially planned for; certain themes are emerging to make an IPO a success. Now, I have to say, these are not rocket science and, if anything, show that some rational thinking has come to the emerging markets equity scene; but they are worth repeating even so:

- Investors will shun new issues where the free-float is too small (e.g. even below 3o%)
- High growth plays preferred over merely ‘domestic market sector stalwarts’ (PS: some of the Ukrainian financial-industrials groups will find themselves being penalized over their commodity-price vulnerable staples, says I, and should perhaps talk more about the wizzier parts of their portfolios).
- *Transparency* is everything. Dodgy history; less than stellar corporate governance structure or arrogant vendor-oligarch as CEO-God – forget it. You might have got such an IPO away even 9 months ago. In today’s still somewhat shell-shocked market; you may not.

Then Pivovarsky said something for which – football-player-stylee – I wanted to run on the pitch and hug him – the glory days of the last two years were over, he said, “and those who can, might be better to wait” a year or two, for the best equity valuations.

As he pointed out: investors want a ‘guaranteed’ (sic) 30% annual rate of return on new Ukrainian issues; given that there are now, globally, bond products out there – with arguably much less risk – offering 20% annual return.

One speech particularly caught my interest. Although densely argued, Clive Cook, from the London corporate governance team at Baker & Mackenzie, trotted through the difference between the obligations of firms listing on AIM, versus the main market.

Although AIM toughened up the rules applicable to AIM market-listed companies, and their NOMADs, it still strikes me that, if I were an institutional investor, I would always want a risk discount on an AIM-quoted company compared, for instance, to one quoted on Frankfurt.

PS: at one point, he argued that the London market(s) had the advantage because of the inclusion it gave you in the FTSE indices. Um…not so much. GDRs are not included. FTSE International was, for eons, a client of mine. It is a teeny-tiny technical point, but for firms like Ferrexpo (which, you may recall I pointed out issued Ords in London, and not GDRs), they get a liquidity boost, which *does* benefit share price, from being main market companies. Being part of, as I think Ferrexpo now is, the FTSE350, means that index tracker funds, set to that index, *have* to own the stock. As I said, it is a teeny-tiny point but, over five+ years, it *does* positively enhance share price performance.

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