A good turnout and excellent panels at this morning’s annual conference. I came across quite a few listed companies, including TBC Bank with whom I had the pleasure of working on their London IPO and subsequent conversion to a Premium Listing. There were perhaps fewer future candidates than in previous years. Nevertheless, the quality of the panel discussions was higher than ever, and covered several topics of interest for both primary and secondary markets.
Pulling together the themes I noted from across the event:
1. Prospects may be brightening for EM
Interesting discussion by Caesar Maasry, EM strategist from Goldman Sachs. Looking at the past 50 years, the EM/DM growth differential has been closely correlated with EM equity outperformance. And given recent slowdowns in DM, and a (slow) pickup in EM, this could be the start of the fourth great phase of EM outperformance.
He went on to say that while EM assets aren’t cheap relative to their historic levels, they are cheap relative to DM and have a better yield story. The key will be the pace at which quantitative easing is lifted. And that of the main sectors, history indicates that earnings for domestic cyclical sectors benefit the most.
Underpinning all of this on an individual country level, is that national GDP growth is essential to raise investor interest. So SEE countries entering a growth phase are positioned well, while Russian equities may continue to struggle given low single digit GDP growth.
2. Pipeline is not broad, and expected issuance is midcap.
Issuance is still sporadic. The same 2-3 recent transactions were mentioned many times. In the pipeline, 2-3 Russian IPOs were expected before the summer, and in the rest of CEE the most visible deals were Hidroelectrica, NLB, and HEP – all privatisations. And these are all anticipated to be low hundreds of $m transaction sizes. It’s an improvement on the trend of recent years, however is still not a wave of issuance.
3. Attracting global EM funds to new equity issues requires larger deal sizes than seen recently, as well as an international listing.
Where will the investors come from? The relatively small size of the pipeline deals was raised as an issue by several commentators. The global EM funds require deal sizes of $1bn+ to participate. Below this level, companies need to rely on a smaller pool of specialist investors, plus (if they are fortunate) a developed domestic savings industry or active retail investor community.
And an international listing is often a useful complement to local listings, particularly on smaller markets. Investors and local brokers highlighted that in less popular markets, international investors may not be set up to trade, so the international listing will add investors and liquidity rather than cannibalise it.
4. Actively listening to investors is increasingly important for listed EM companies.
An important feature was the increased investor relations professionalism of the listed companies from even a few years ago. The battle for investor attention has obviously had some positive effects and raised the bar for investor relations work. Some thought provoking quotes:
“It’s important to have an IR department. We have been investing in roadshows for two years already, before our IPO.” [Forthcoming issuer]
“We wished we had listened harder to investors and research analysts before, on what information and data they required on top of the regulatory disclosure” [Recent issuer]
“Kazak potential issuers are focused heavily on corporate governance, they are very aware of needing to avoid the mistakes of the past” [Primary markets advisor]
“We are encouraging clients to do more roadshows and see more international investors” [Local broker]
5. Russia is still about the oil price and sanctions
No surprises there. The recent Detsky Mir IPO was welcomed as a rare positive event. Although investors agreed that even a retail stock’s future earnings will be heavily dependent on the oil price impact on the broader economy.
As one panellist said, it’s extraordinary that a country with a population of 143 million has not created more small, mid and largecap companies. There was broad frustration among the Russian specialists, at one point agreeing across the panel “We have been trading the same 20 stocks between ourselves for the past decade”.
And, it appears, the average Russian listed company is being left behind when it comes to corporate governance and investor relations activity. The investors were keen to be part of the drive to change this. But for their efforts to be effective, they emphasised that their roles as efficient capital allocators which stimulate growth and good governance, needed to be more welcomed by decision makers. Rather than being dubbed capitalist vultures there only to make a quick turn.
6. Nobody mentioned Greece
Greece appears to be in an investor limbo ever since the move from DM to EM in the MSCI indices. Which could be either a poor investor relations outcome, or a sign of efficient capital allocation. Time will tell.
As always, if you have questions, The Deal Team is here to help.
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