The Securities Market
#4, 2008
The IPO Market: Focus on Internal Demand
Interview with Gennady Margolit, Deputy CEO of the MICEX Stock Exchange
In 2007, Russian issuers attracted a record volume of investments through initial public
offerings. At the same time, the world liquidity crisis that broke out in summer and the
decreased activity of investors forced several Russian companies to cancel or put off their
planned IPO’s. Deputy CEO of the MICEX Stock Exchange Gennady Margolit talks about the
current trends in the Russian IPO market and its future.
К-Э: Mr. Margolit, what main trends were observed in the market in 2007?
G.M.: Last year was very successful for the IPO market. Talking about the quantitative
characteristics of the market, one should note significant growth of the value of the IPO market
as compared with the previous year and the number of companies which made their placements.
In 2007, in the course of initial and secondary placements, Russian companies raised about 31
billion dollars, almost 2 times more than in 2006. Taking into account placements made in the
electric power industry, Russian companies raised 44 billion dollars.
The fourth quarter was very indicative. Under difficult market conditions, issuers raised 4 billion
dollars through several of IPO’s.
Speaking about qualitative changes that took place in the market, I should note the
transformation of the sectoral structure of the market: there was a shift from the oil and gas
sector to a wider range of sectors represented in the market. The sectoral structure of placements
made in 2007 shifted to the consumer sector and the banking sector, as well as transportation and
development. In the 4th quarter of 2007, the proportion of these sectors amounted to 62.8% (89%
for the whole year). The proportion of the raw materials sector has declined. This trend is very
important for the Russian economy in terms of the country’s long-term interests. At present, the
structural reform of the economy is a key challenge for our state.
The IPO market is gradually returning to Russia. Today, to raise funds through IPO’s, companies
use the possibilities of the Russian infrastructure more actively than the possibilities offered by
the Western infrastructure. The current global trend is such that regional companies prefer to
choose local floors, and we are following this trend. In 2007, about 38% of the total volume of
placements (about 11.7 billion dollars) was accounted for by Russian floors. This figure
considerably exceeds the results of 2006, when the volume of placements in the domestic market
reached only 1.2 billion dollars.
There were quite a few so-called dual IPO’s, when companies make their placements on both
Russian and Western floors. In 2007, the volume of dual IPO’s reached about 16.2 billion
dollars.
Despite the unfavorable market conditions, most placements were made at prices close to the
upper limit of the price band. The reason was relative stability in the financial markets and
oversubscription for most issues. However, in the second half of the year, most issuers placed
their securities at lower prices.
I would like to make a special note of Sberbank’s secondary public offering, which was made in
the domestic market only. Before, it had been thought that it was almost impossible to make a
successful placement in Russia if the volume of the placement exceeded 300-500 million dollars.
Sberbank demonstrated that today, major placements can be successfully made inside the
country.
К-Э How, do you think, will the global liquidity crisis affect the planned IPO’s and the value of
shares of companies that have recently made their IPO’s?
G.M.: In 2007, a certain revaluation of Russian companies took place. The aftermath of the
mortgage crisis in the United States and the destabilization of the global financial market resulted
in the decline of the value of Russian companies’ stocks. As far as Russia is concerned, on the
one hand, we are in a somewhat privileged position, because Russia has all prerequisites for
further stable economic growth, and the stock market mirrors the state the economy. On the other
hand, we are part of the global financial market and we are influenced by events occurring in the
world. Hence, the revaluation of Russian assets. Issuers who counted on certain price levels have
to put up with the ongoing price drop.
The saturation of the market with Russian assets also affected the valuation of domestic
companies’ stocks by international investors. At present, there is no rush demand for companies
which were not represented in global funds’ portfolios before. However, Russian companies
have great potential which comes from the development of internal demand for their assets. The
problem of Russia is lack of sizeable demand on the part of institutional investors inside the
country. However, the situation is gradually changing: the pension reform is underway, the
capitalization of insurance companies is growing and the industry of collective investments is
developing, helping to increase demand on the part of this category of investors. Special mention
should be made of the rapid development of the sector of retail investors. At present, there are
about 430 thousand unique accounts of individual Russian investors. This is very little for a
country such as Russia, but the speed at which the population is getting involved in the stock
market is very high. Despite today’s increased volatility of the stock market, about 2500
individuals begin to participate in trading on the MICEX Stock Exchange each week. Thus, the
size of the investment base doubles in one year. This year, jointly with Public Opinion
Foundation, we have conducted a study which showed that in the near future up to 5 million
individual Russian investors can enter the stock market. Domestic investors will be investing
primarily in the Russian market, where they are protected by the law and the regulator against all
kinds of legal risks and where they know the companies in which they decide to invest. This
means Russian issuers have a very powerful incentive to make their placements in the domestic
market. When entering the London Stock Exchange, for example, the issuer gets access only to
institutional investors who are prepared to invest in global depository receipts. In Russia, the
issuer gets access to the same international institutional investors plus Russian institutional and
individual investors. Currently, the main floor trading in Russian securities in the form of
depository receipts is the London Stock Exchange, but there is no retail trading on the London
Stock Exchange, so only institutional investors can trade there. Therefore, Russian companies
must be prepared to make their placements inside the country, as Russian floors offer issuers
more opportunities than Western exchanges. Today, about 70% of the total volume of onexchange trading in Russian assets is accounted for by the MICEX. The remaining 30% is
accounted for by the LSE, NYSE, Deutsche Börse, NASDAQ and the RTS. Thus, the main pool
of liquidity is inside the country and, since liquidity attracts liquidity, the incentive to place
securities in Russia becomes obvious.
К-Э: In 2007, over 40 companies announced their intention to make an IPO in 2007 or early
2008, but because of the crisis, most companies rescheduled their placements for 2008-2009.
Will these placements be made and how can they affect the market?
G.M. The current situation in the financial market is difficult. There is increased volatility
combined with the downward trend. It is still unclear how the situation is going to change.
Russia, as I said, is in a privileged position. However, there is a certain threat for the Russian
market. If the United States experiences serious recession, the American market will fall
noticeably. Global funds will be more inclined to buy familiar assets than Russian securities.
This, in turn, will lead to the reduction in the value of Russian securities. However, I think that
the situation in the world market will stabilize and there will be no substantial revaluation of
Russian companies. Naturally, given the current situation, some issuers who were planning to
make an IPO this year will put off their placements, expecting a more favorable situation in the
global market.
I think that in 2008 there will be quite a few initial placements. One of the reasons is the
impossibility for companies to attract debt financing. Therefore, for second- and third-tire
companies, an IPO will be almost the only way to attract financing. They will be forced to enter
the public share capital market. One can also assume that companies will not put off their IPO’s,
fearing further deterioration of the situation in the world financial market.
As a result, in 2008, a considerable number of planned placements will nevertheless be
postponed and the expected market volume will be 1.5-2 times smaller than planned. Meanwhile,
a number of large and medium-sized initial placements will still be made. In particular, in our
Innovation and Growth Companies Sector, we are now actively working with several relatively
small and mid-cap companies, and we expect them to make their planned IPO’s in 2008.
К-Э: Is there any correlation between the industry which the issuer belongs to and the possibility
of making an initial placement? In what sectors are IPO’s viewed as the most promising way to
raise funds?
G.M.: Today, the most interesting and promising industries are those oriented towards the
internal demand, as they are less dependent on the external situation. Currently, Russia is
developing in the context of macroeconomic stability and growing domestic demand, which
encourages the development of industries oriented directly towards the consumer. These include
the food industry, retail and wholesale chains and banks. The banking sector is among the most
interesting and promising ones. In terms of banking products, Russia is significantly behind other
countries. This is why this sector is developing rapidly. The only problem that hinders banks’
placements is the current legal regulation of banks’ IPO’s. St. Petersburg Bank, which made its
IPO in 2007, had to implement its program of depositary receipts in London only to start
secondary trading immediately after the placement, as the Russian legislation does not allow an
issuer to launch trading during 2 weeks after the placement. As far as other sectors are
concerned, the state-supported infrastructure seems quite interesting. IT companies also seem to
be promising. In 2007, two IT companies, Armada and Finam, made their initial placements. We
also expect several placements in 2008. These placements will be of interest for Russian and
Western investors.
К-Э: What do you think about the possibility of creating an international financial centre in
Russia?
G.M.: I believe that Russia, especially Moscow, has a good chance to become a new
international financial centre. By a number of measures, Moscow is very similar to London and
New York. Today, global finances are concentrating in Moscow. Much will depend on the
development and the efficiency of the Russian stock market infrastructure. We have made great
progress in this area. The technological base is developing rapidly. At the same time there are
certain problems hindering further development of the Russian infrastructure. The absence of the
central depository and the central counterparty is the reason why efficient clearing can not be
ensured. Global investors do not feel protected. As soon as we resolve these problems, global
investors will begin to actively enter the Russian market.