How to make money on IPO expectations
Russian companies that have launched IPOs in the last two years have not always pleased investors. "The main problem of investors who participated in the IPO is that after the initial public offering, the shares fell in price," says Andrey Bondarenko, deputy head of the Collective Investment Department of FC Uralsib. In almost half of the cases in the first months of trading, the shares of companies traded below the placement price. Until now, securities of not only issuers that have gone "people's" IPOs (VTB), but also a number of other companies – Sitronics, Polymetal, Nutrinvestholding - are traded below the placement price. Meanwhile, based on the prices of the over–the-counter market, investments in shares of companies preparing for an IPO – NPC Irkut, Bank Saint Petersburg, Novorossiysk Commercial Sea Port - at the stage preceding the placement turned out to be very profitable. Quotes grew by tens of percent, and sometimes at times. The sale of shares in Russian companies (Amtel, Kuzbassrazrezugol, IBS, Rosbank) at IPOs and private placements of such major international players as Templeton, Merrill Lynch, JP Morgan, Citibank, also testified to the profitability of such investments. So the investment idea of investing in a company in preparation for a public offering makes economic sense. According to investment bankers, next year the volume of IPOs of Russian companies will exceed $ 50 billion.
In the Russian market, the idea to invest in shares of companies preparing for an IPO has been implemented so far only in the Pre-IPO fund managed by Renaissance Investment Management. It was formed in August 2006, its volume was $130 million. Judging by Western experience, the investment terms of pre-IPO funds do not exceed two to three years, based on the minimum preparation for an IPO of six months to a year. Such funds are closed: after formation, the fund does not issue shares and does not buy them back. Managers often withdraw such funds to exchanges where secondary liquidity is supported by market makers. The share of fund investments in the company should not be too large, since it is not easy to implement a large package. "Investors will be aware of the fund's desire to sell these securities, which will not contribute to the growth of their quotations," explains Anatoly Milyukov, Vice President of Gazprombank. Therefore, such funds are minority and passive investors. As explained in Renaissance Asset Management, the volume of investments in one project is usually $ 5-10 million, and the largest package does not exceed 10%. As Leyla Aliyeva, the manager of the Pre-IPO fund, explained, in this case there are fewer difficulties when entering an IPO.
The main risk of pre-IPO funds is the lack of guarantees that the IPO of companies will be held. It is not uncommon for an issuer to refuse an offering in favor of, for example, selling shares to a strategic investor. According to Leyla Aliyeva, a built-in put option is used by managers to protect against a possible rejection or delay of the IPO. The Fund enters into an agreement with the main shareholders of the company, under which, in the event of a failed IPO, the stake owned by the fund is redeemed at a fixed price within a certain time. However, this is not the best scenario, since the return on the fund's investments in this case will be lower than when implementing an IPO. In addition, it is not possible to conclude such agreements with all issuers. In case of cancellation or postponement of the IPO, funds cannot sell a block of shares on the open market due to lack of liquidity.
Nevertheless, managers consider this line of business attractive: such funds are going to be created by Pioglobal Asset Management, Troika Dialog, Gazprombank Asset Management. According to Anatoly Milyukov, one of the risks of creating such a fund is the lack of interesting projects for IPO. Therefore, Gazprombank, for example, plans to create not a pure pre-IPO fund, but a fund with private-equity elements, with the possibility of investing in low-liquid stocks. This will expand the room for maneuver if the project is not implemented in the expected time frame.
The article was published on the Rockefeller website
Portal "Eternal youth" www.vechnayamolodost.ru
12.12.2007