Russian IPOs – Review of 25th Week of 2007

THIS POST WAS ORIGINALLY PUBLISHED JUNE 23, 2007

Russian IPOs – Review of 25th Week of 2007

This week was full of events and significant news regarding Russia and investments. Renaissance Capital, one of Russia's leading investment banks, held its 11th Annual Investor Conference "Russia: Investing in Prosperity." I posted earlier some information on the speeches of Renaissance Capital CEO Stephen Jennings and former U.S. Secretary of State Colin Powell. The American Chamber of Commerce held two of its regular breakfasts for members, with guest speakers Robert Kimmitt, Deputy Secretary of the U.S. Treasury Department, and Bill Bradley, former U.S. Senator and presidential candidate. Basically all mentioned events tackled the issues of investments in Russia, and most of them did it on the positive wave. A whole array of research papers and surveys were released this week.

Merrill Lynch Tops the Russian Stock

Dow Jones reports that Merrill Lynch (NYSE:MER) on June 21 released a research report on Emerging EMEA (Europe, the Middle East and Africa) that shows Russian stock at the top of ML’s list of preferred stocks.

Ernst & Young Report

This week E&Y released "Globalization: Global IPO Trends Report 2007" report that is one of the best current overviews of what is going on the IPO market. Globalization is the driving force behind many IPO trends throughout 2006 and Q1 2007 – is the major highlight. The growth of cross-border trading has obliged local exchanges to become more liquid and stringent. According to the survey, most IPOs are held domestically because companies have most of their client base inside their countries — 90% of the world’s companies choose to list in their primary market. Russia continues to drive the growth in the European markets. Some interesting points of the report are:
· Growth-hungry investors hunt for higher returns abroad, especially in emerging markets.
· As global capital expands its horizons with more world-class financial centers, Hong Kong and London lure the top global IPOs.
· Global bourse rivalry leads to transatlantic NYSE Euronext merger, and more exchange alliances expected soon.
· Europe’s IPO markets rose to an all-time high in 2006, and remain high-flyers in 2007, bolstered by beefy deals, cross-border listings in London, and private equity.
· As the region’s high-growth story, Russia drives European IPO activity.
· London has become the top listings destination for cross-border issuers seeking relatively quick and easy capital.
· Europe’s junior exchanges, including London’s AIM, the Euronext’s Alternext, and Deutsche Borse’s Entry Standard, are thriving with small-cap activity.
· The ballooning growth in European private equity is leading to more IPO exits, and sizeable public-to-private transactions.

The report notes that more international investors have begun to set up branch offices in Moscow to enable local capital fundraising, especially with smaller deals. “Regardless of where a company lists, in London or in Moscow, 80% of the buyers will be the same, mostly the large international names, and all are set up to buy shares both locally and internationally. There are only a handful of international names that still require London listings to buy Russian shares,” notes Anton Cherny, Managing Director, Head of Equity Capital Markets, Renaissance Capital. But another expert - James Klein of the Capital Markets Group, Ernst & Young, Russia, says most investors would still rather deal through London, as the Russian exchanges still lag far behind London for execution, costs, and transparency.
Russian Stock Market – Changes Ahead
Almost simultaneously with the release of E&Y report VEDOMOSTI DAILY published a detailed overview of the Russian stock market by Oleg Vyjugin, a former head of the Russian Federal Financial Markets Service (FFMS), who is now the Chairman of MDM bank. I guess there is no other expert in Russia that knows the subject better. Now when Mr. Vyjugin is not on the government service, he is open to express his views to the public. It seems that these two reports were tuned in time and expressed the same thinking. One of the key ideas, expressed by Mr. Vyjugin is that over the last 10 years the Russian stock market had undergone profound changes – the assets of the Russian companies are attractive indeed even for the most conservative investors – but the exchange technologies are still at the old level – not acceptable for major foreign players. Moreover, instead of thorough evaluation and introduction of new solutions in technology, both major Russian exchanges are involved in competitive struggle within one and the same exchange instruments area for one and the same clientele base. This distracts the Russian exchanges from the genuine development tasks that are now in place regarding global competiveness of stock exchanges. And, as Mr. Vyjugin names it “a game of insane rivalry”, plays well in the hands of LSE, that “willingly receives with success a lined up succession of Russian issuers, gaining commissions that otherwise would be used to develop Russian exchanges”. The fundamental reason for stagnation of the Russian stock market infrastructure according to Mr. Vyjugin is inadequacy of its corporate structure and corporate management. And the first hand solution is to make assets of the stock exchanges available to public through IPO or sales to strategic investors. It is obvious that international stock exchanges may express strategic interest in Russian infrastructure.
The views of Mr. Vyjugin to a great extent were supported at the meeting of the MICEX Stock Exchange Committee, where the new FFMS Chief Vladimir Milovidov made his first public appearance. The meeting was attended by the top Russian bankers and stock exchanges officials. The key question in discussion – the competitiveness of Russian stock market and ways to increase it. The projected scenario in the view of FFMS is the merger of RTS and MICEX.

More Russian IPOs in Autumn

IPO market shall witness a constant inflow of new transactions from Russia. This was expressed once again by Anton Cherny of Renaissance Capital, in his interview with RBC-TV. Q1 and Q2 IPOs resulted in certain investor weariness, but autumn will be the time for another big flow. Cherny thinks that these would be the companies from finance and real estate sectors. Regarding anxiety over the 2008 elections, he noted that this factor would greatly affect international investors that are dealing with much politicized sectors, e.g. energy. Those sectors that are in majority privately owned would not be affected.

There are some interesting news feeds on the Russian economic situatrion
The Economist Intelligence Unit ViewsWire released Russia's booming economy - It's not about just oil and gas: “…in the context of the near stagnation of hydrocarbons output, Russia’s growth performance is surprisingly robust and well above the long-term trend rate. “I would also recommend to read a notable article in the Newsweek International by Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management: “Investors who have looked beyond the sensational headlines in the international media have made extraordinary gains in Russia. China and India may have registered faster growth rates, but companies catering to domestic demand in Russia have been able to achieve higher profitability, as the reduced hype surrounding Russia has resulted in less intense foreign competition on the ground compared with the opportunity presented by the economic boom."

More Investments

The Volvo Group (NASDAQ:VOLV) is investing a total of SEK 935 M in an assembly facility. The new facility, located in the city of Kaluga will have a capacity of 10,000 Volvo trucks and 5,000 Renault trucks per year. It is scheduled to be completed in 2009. It is interesting to note that the demand for used trucks from Western Europe has been strong in Russia (about 5,000 used Volvo trucks were imported in 2006). Volvo Trucks recently invested SEK 100 M in a wholly-owned service facility strategically located just south of St. Petersburg on the expressway to Moscow.

Russian Equity Market and US M&A Grand-Dad Coming to Russia

The E&Y report that is mentioned above briefly tackles the Russian Equity market that is way underdeveloped. “Currently, Russia’s private equity industry is under development — it’s not the traditional private equity industry seen in the West, and there are no leveraged buyouts,” says Anton Cherny, of Renaissance Capital. “But there are quite a few local and international players who are happy to take private risk, and buy into unlisted assets.” Cherny considers the Russian universe of private investors to be wider than in the West. These private investors are not traditional LBO shops, but include hedge funds, venture capitalists, asset managers with private equity “arms,” and in particular, oligarch industrialists and their vehicles who have private equity concentrated in their hands.

This was quite nicely illustrated by this week announcement. Two co-sponsors: JER Partners, the global real estate investment arm of the J.E. Robert Companies, and Alfa Capital Partners, the Moscow-based private equity and real estate investment group affiliated with Russia’s Alfa Group, announced the final closing of the Marbleton Property Fund. The Fund will focus on investments across all property sectors in Russia and Ukraine and will purchase existing properties as well as participate in development. The European Bank for Reconstruction and Development is an anchor investor in the Fund. Other limited partners which have invested include institutional and private investors from around the world. Marbleton has completed agreements for transactions in Moscow and St. Petersburg and has several transactions under exclusivity. The Fund was commenced in 2005 and since that grew from $ 200 to $321 million.
Raiffeisen Investment AG and Lazard Ltd (NYSE: LAZ) announced a joint cooperation agreement for merger and acquisition (M&A) advisory in Russia and the Central and Eastern European (CEE) region. This is beneficial for both sides: Lazard is receiving “the key” to Russian market and Raiffeisen Investment hopes to boost its activities, which so far are really modest (for 1H 2007 it has deals of $ 150 million). According to the Announcements the new joint venture would look into the deals of at least $ 200 million.

RBS and Renaissance Capital Bank to establish Russian JVRoyal Bank of Scotland (LON:RBS) and Renaissance Capital Bank are planning to jointly establish an investment bank in Russia. The bank will be owned 50/50 and is expected to commence operations by the start of 2008.

THIRD IPO CONGRESS – REFLECTION OF CHANGES IN THE WORLD EQUITY MARKETS

THIS POST WAS ORIGINALLY PUBLISHED APRIL 15, 2007

THIRD IPO CONGRESS – REFLECTION OF CHANGES IN THE WORLD EQUITY MARKETS

This year it was the third venue, but as usual it lacked management expertise and showed very little interest from the top government and industry officials. In fact of all declared officials (Federal Financial Markets Service, Regional Banks Association, the Duma, etc.) the only one present was the Deputy Head of the Bank of Russia. This low key government participation resulted in equally low key press coverage. However, such deficiency was surmounted by some interesting reports and events.

I am not sure whether the news media will discuss it, but here it was the first time when management of the leading stock exchanges met together in the in the new, perspective for them environment. For some of them – this is new exploration territory, for others – somehow familiar. Everyone was surprised with conspicuous absence of familiar faces. I guess, Paulina McGroarty, Managing Director, NASDAQ, lost an interesting opportunity to have a nice debate with NYSE-Euronext representative. Maybe we will see this on the upcoming Emerging Markets Private Equity Conference (EMPEC 2007) ? Notable absence was for the London Stock Exchange/AIM and their U.S. counterparts. LSE/AIM is, I think, resting on their laurels with 2006 results (?) – Or they are involved in a flurry of popular activities? Austrian philosopher Ludwig Wittgenstein noted: “Resting on your laurels is as dangerous as resting when you are walking in the snow. You doze off and die in your sleep.” True to this saying we witnessed a substantial effort from the competitors.

Shaping up my brief report at the conference, I found some interesting stats about latest developments in the world’s stock exchanges scene.

In recent years everyone notes rapid changes and adaptation of the stock markets to these environments. This is about the so called emerging markets and their needs. In my view, we will see more and more in the next 2-3 years. While the patriarch-stock markets are making these adaptations in a tad slow pace (it took about 10 years for AIM to gain its current position), we found new instruments that are appealing to emerging markets and SMEs (small and medium enterprises). Of course, the United States with its refined stock market experience is the first to my knowledge in introduction of new trading platforms. I would point here to Entrex and to the Unified Market Financial Information Exchange Network (UMKT). This, I guess is an excellent direction for the future. In 2005 World Federation of Stock Exchanges counted 35 alternative investment markets (unfortunately, it seems to be extremely bureaucratic entity – it is impossible to get fresh data – they do not answer e-mails); another researcher SME Capital Markets counted 35 this year, but excluded a number of them worldwide. However, in its investigation SME notes that 29% of the stock exchanges have their junior markets – I would assume that on the world basis there are about 40-45 of them. This means that the competition in the world is stepping up, and true to this - we see junior markets in such exotic places as Malawi, Botswana and Papua New Guiney.

This overall feeling of competition is present in Moscow too.

Each of the representatives of exchanges made their best to persuade the audience that their exchange is the best. However, Euronext representative Aaron Goldstein (who is an extremely eloquent campaigner) put it very simple: What are the points that any company is looking for in listing: (i) best valuation; (ii) best liquidity; (iii) widest shareholders possible.

Summarizing the reports:
- Ms Medvedeyva, MICEX Vice-President, provided vital statistics for the exchange and reiterated the idea that time is ripe for the Russian companies to list domestically;
- Mr. Shatsky, RTS President, noted that we are awaiting for IPO boom, that may happen this year. His speech was followed by a report of Ms Derisheva, RTS Listing Department Head, who repeatedly stated that “There was no IPO boom in the past, and none at present time. What we see – a heightened interest towards IPO”. I do agree with this – indeed, when we will have tens of IPOs each quarter, only than we may speak about it ;
- Mr. Paul Chow, Hong Kong Exchanges, Chief Executive. It was the first appearance of such high level official of the exchange in Russia, although its representative spoke last November at IPO Congress-Tatarstan, which was supplemented at one of the Moscow based conferences in March this year. The great success of the HK Exchange in 2006 certainly makes us thinking about this opportunity. As Mr. Chow put it: “Hong Kong has a complete freedom of money, people and information”. He also informed that the stock exchange will open a representation office in Moscow very soon;
- A nice presentation was made by representative of another city-based (vs. country-based) stock exchange – the Singapore Stock Exchange, who stressed that Singapore is the “Asian Gateway”, and his bourse is very good in post-IPO support;
- Mr. Aaron Goldstein of Euronext was indeed silver-tongued. He showed all positive sides of listing on Euronext versus on LSE, and that was very convincing. However, all this is rather cognitive, but what about NYSE Group Chief Executive John Thain’s remarks? I asked this question, but Mr. Goldstein replied that that my question is based on biased and out of context citations. OK, here it is: “Thain outlined an international strategy for the combined exchange group focusing on Asia which he described as "the logical next step". NYSE Euronext will specifically target business in Japan, where it has an alliance with the Tokyo Stock Exchange, India where it owns a 5% stake in the National Stock Exchange, and China.” What about Russia????
- Mr. Rainer Riess, Managing Director, Deutsche Börse, was very convincing in his overview of the advantages of German listings versus LSE, especially on the Post-IPO liquidity. Everyone was fascinated with the table that showed per cent of trading days with zero transactions: for AIM-listed companies – 25%, for DB Prime Standard – 0%. I think we will see a lot more activity of DB with May of this year planned opening on their office in Moscow.

Happy hello from a toddler

THIS POST WAS ORIGINALLY PUBLISHED MARCH 18, 2007

 Well, it has been only two months of my blog existence, and is evolves on.

First, I want to make clear several things:

WHY. Over the last five years I have met a number of businessmen, presumably form investor banking community in the USA that were absolutely unaware of what is currently going on with investment business in Russia. They asked a lot of questions, some of them were really naïve. At that time I became “pregnant” with the idea of producing a newsletter on the subject. I did, though we never advertized it, but surprisingly enough, we got some feedback. With the advent of blogosphere - that idea materialized due to excellent opportunity that Google provides. I guess that these two Google Russian geniuses put a substantial effort to changing of the world. Financial and stock market blogs are certainly becoming a widely read alternative source of business news and opinion. I guess, I may add something to it.

WHAT. So, I am writing my personal views (ref: Disclaimer) on what is going on here in Russia. I do not pretend to provide a comprehensive overview of investment events in the country, rather make some comments on the situations and happenings that attracted my attention.

WHO. I am not hiding behind anonymous fancy names and anyone who wants to contact me may do this freely using provided coordinates. One of the mysterious anti-Russian blog, hiding its real name, calls me March 17 as “a Russian stock broker trying to tout the wonders of investing in the Russian market”. I am not touting at all (I guess, I need to put in an investment banking disclaimer type note – the one that is extremely professional at GS web-site: “GS expressly disclaims any implied warranty of merchantability or fitness for a particular purpose, including any warranty for the use or the results of the use of the services with respect to their correctness, quality, accuracy, completeness, reliability, performance, timeliness, or continued availability”. That is 100% for me. I am not either Russophobe or Russophile, and I do not want to be engaged in any political discussions (though I do understand the sacred notion of Communist theory: “Politics is the concentrated expression of economy”)

TARGET. So, my target audience is the investment banking professionals that might be interested in what is going on here.

POLICY. I have absolutely no objection of usage of my posts anywhere (unless I shall change my mind sometime in the future). I do not get a penny from no one for this blog posts, nor am I dreaming to be cited in the financial press.

HAPPENINGS. Although I do not want to be involved in any political games, I was amused to read the verbal “battle” of La Russophobe with the Russia Blog. I have no idea why they decided to involve me, I have no idea what is the purpose of it, but one thing I like of the Russia Blog – it has the names and addresses of real people, while the other opponent is hiding behind Internet anonymity.

Due to the excellent service of StatCounter I have a very good opportunity to track who is visiting my blog and from where. I do not boast to be “a popular source”, but each month sees twofold increase of visitors. And I am happy and content that:

- Visitors mostly come from the USA and UK, however there were some exotic parts of the world too

- For the last two days the hits came from the offices of Google Inc, NYSE, Citicorp, Salomon Brothers, Goldman Sachs, PwC, E&Y, Parex Bank, Mellon Bank, Troika Dialog Uk Ltd. and many others.

- Each week I notice the increase of returning visitors.

What next???