Pre-IPO Funds in Russia

THIS POST WAS ORIGINALLY PUBLISHED JULY 09, 2007

Pre-IPO Funds in Russia

Over the last year a couple of pre-IPO funds emerged in Russia that proved to be a good investment vehicle. Generally speaking pre-IPO financing is a hybrid instrument that combines features of both Private Equity and IPO financing. Over 90% of all companies that complete IPO experienced private placements, and pre-IPO financing is an extremely useful instrument to accelerate Initial Public Offering. The most acceptable candidates for such transactions are the ones that are considering IPO, but lacks expertise and/or resources for its preparation. Generally speaking, most of the pre-IPO funds have the following characteristics:

- Investment between 24 months and 12 months prior to IPO;

- Usual stake does not represent more than 2% - 20% of the equity;

- Investments are in cash, in return for equity, with an agreed security package as a fall-back plan, should the IPO fail;

- Control of the Company is not one of the Investor’s objectives

The most successful as to my knowledge is the Renaissance pre-IPO Fund. The Fund is seeking two types of investments:

•Acquisition of equity of unlisted companies with “private equity” type structuring and exiting in two–three years (higher upside)

•Acquisition of equity from RTS board, OTC or RTS B in case a formal IPO is upcoming on a Russian or overseas trade floor (lower upside)

•Free cash to be placed in deposits with maximum time/interest ratio and exposure both to USD and RUR

The Fund is listed on Bermuda’s stock exchange and with shares trading on the IOB at the LSE. The firms are aiming to list on public markets, mostly in Russia. 

According to Fund’s Director Natalia Ivanova “we prefer new-economy companies like technology, media and telecoms (TMT), where the return cannot fall so much as well as consumer companies and banks.” While the fund is investing in long-term holdings when compared to some hedge funds, its investors can buy and sell shares in the special structure with Renaissance Capital acting as market-maker. The fund with an independent administrator offers a daily NAV calculation and Ivanova strives to offer investors as much information on investee firms as possible.

The Fund was a proven success and you may see its major characteristics (as of March 2007) on the following graphs

Source: Renaissance Capital

Some other funds that operate in Russia:

- Zimmerman Adams International Ltd (London) and First Mercantile Capital (Moscow) pre-IPO fund to provide financing for Russian and CIS companies

- UFG Russia Alternative Fund launched 1 November 2006 to operate in Russian and CIS market

- Some time ago I wrote about PIO Global Asset Management is mulling establishing a pre-IPO Fund that would invest in SME shares that are preparing for IPOs. One of the options is to domicile the pre-IPO Fund in Russia and legally form it in a closed mutual fund scheme. According to Russian securities laws, it is not permitted to form a Fund’s portfolio exclusively with the low liquidity shares. Thus one of the solutions would be to include some blue chips in it

- Troika Dialog is establishing $ 300 million pre-IPO fund with proposal from EBRD to provide $ 150 credit for it.

With the continuing upstream of Russian IPOs (the latest update you may find at this Reuters news feed), I guess that in the next few months we will witness emergence of more and more funds of that type.

NOTE. In further experimenting with my blog, I shall try a new approach: instead of making weekly reviews I will publish from time to time random comments on what is going on.

And my best regards to my new Russian friend Maxim Lesine in Italy who randomly translates my posts in Italian and puts them on his blog. Although he does not mention the source, but WELCOME ON BOARD, Maxim !!!