Heiner Klemm in Berlin -
Listing on the London Stock Exchange's Alternative Investment Market (AIM) has scooped up the majority of small to mid-sized CIS companies looking to raise capital. However, the Warsaw Stock Exchange (WSE) is starting to cut into AIM's lead as the default exchange for these companies, which are increasingly complaining of the high costs and lack of post-IPO trading on London's alternative market.
Tellingly, in the last year or so Warsaw's appeal has attracted an increasing number of CIS companies. Ukraine's leading sugar producer and agricultural, Astarta Holding, was the first foreign company to choose the WSE over AIM with an IPO in August 2006 that raised $31.7m for a 5% stake. More recently Kernel, a fellow Ukrainian agricultural company focusing on edible oils, did an IPO in the middle of November, raising $218m for a 33% stake. The shares started trading November 23.
The reason for Warsaw's appeal is the very fact that it's a smaller, albeit well structured, market; small companies from the CIS that listed on AIM complain they are getting swamped by the sheer number of similar stocks from around the world and without sufficient post-IPO trades, their shares price are slowly eroding - if no one is buying a stock, market makers gradually mark down the price to bring in some business irrespective of the company's success of failure.
The WSE is quickly emerging as the leading exchange within Central Europe. It had a banner year in 2006, listing nine new companies from outside Poland, taking the number of foreign companies to 20 out of a total 298. But with a market value of some €78m, the foreigners already account for more than half of the WSE's total market capitalization of some €216m.
And the WSE's management is aggressively trying to drum up more business, having recently set up and office in the Ukrainian capital of Kyiv. A further 10-20 foreign companies are expected to follow suit in 2008 and, according to a WSE spokesperson, the list will include companies from Lithuania, Bulgaria and Ukraine.
Crucially, companies already listed on AIM are now actively looking at the option of moving to the WSE or at least organizing a dual listing: the Ukrainian real estate company XXI Century and Russian marketing company IMSG are both listed on AIM, yet both have explored the opportunity of moving nearer home.
"Three years ago AIM was really the only choice, but its international reputation is slipping. Liquidity is appalling. Recently we had 3,000 shares [at a price of GBR1.5] sold and that dumped our share price by some 10%, which is totally unacceptable. We would expect any professional market maker to buy in small amounts of stock, but the reality is brokers do not make money from market making," says IMSG chairman Greg Thain.
Not emerging enough
Some critics say the problem is that AIM is not sufficiently focused on emerging markets and, as a result, companies like IMSG are lumped in with UK media companies and simply don't gain enough exposure. Having grown to about $100bn in size with around 1,750 companies listed, AIM's phenomenal growth story is also part of the problem, as CIS companies, especially the smaller ones, simply don't have the clout to grab the investor's attention - and hang on to it.
Thain laments that many of the investors in London are not following the CIS closely enough and have never been to Moscow, or even any other emerging market. "As a stock this year, we have outperformed both AIM and UK advertising and media, but in emerging market terms we are underperforming. There is an emerging market premium that is not being reflected on AIM, or on British markets in general," says Thain.
European funds investing in emerging markets make up about 80% of IMSG's investors and Thain claims that all of its investors based in Copenhagen, Stockholm, Vienna, Geneva, Frankfurt and Moscow are urging the company to move to a market that is closer to the action. "We're looking, therefore, at the possibility of a move to being dually listed on Warsaw and Stockholm. Warsaw is very active - it's not as large as AIM, but there is good trading and it's about the same size as Vienna. Stockholm is much more focused on the CIS than AIM. There are already 20 Russian or Russian-facing companies listed in Stockholm," says Thain. IMSG, together with its investors, will examine the issue closely next year and whether the company will even remain listed in London is still unclear.
Board member of Ukrainian real estate firm XXI Century Jaroslav Kinach is less unhappy with AIM, but admits the company is also looking at a dual listing in Warsaw. "We love AIM and we've done very well on it. We highly recommend it, especially for any CIS company looking to go public. But life moves on and we always saw AIM as an interim step in a larger company development strategy," says Kinach.
XXI Century carried its IPO on AIM in December 2005, raising $139m. At the time, the company was looking to list either in New York or London, but due to the geographic proximity of London and Ukraine's intention to be part of the EU, it decided on AIM.
The next step in the strategy is to move from AIM, a gently regulated market, to a more regulated market such as Warsaw and then, perhaps, as the company grows beyond its current $1.3bn market cap, to move on to the main board at the London Stock Exchange (LSE). "We will be a major real estate company on Warsaw and, therefore, on the radar screen of many investors and research analysts," Kinach says. "In addition we will get used to the complexity of satisfying Warsaw's and the EU's regulations."
"Warsaw has developed into a highly active and attractive regulated market. It also appears to be a great platform for real estate companies operating in the region," says Kinach. "A foreign company listing on AIM is no longer big news as it was two years ago, whereas a foreign company listing on Warsaw is still a major event so it is great for us in terms of visibility."
The initial visibility should be backed up by liquidity, since the peculiarities of investment law in Poland also mean that many investors, such as pension funds, are obliged to invest in Polish-listed securities resulting in strong demand for good companies. "A listing on Warsaw should result in increased visibility and liquidity, which we expect will be positive for our share price," Kinach concludes.
Jon Edwards, CIS senior manager at the London Stock Exchange, admits that Warsaw is becoming a competitor to AIM, particularly for mid-sized Ukrainian companies. Yet Edwards maintains that for Russian companies, AIM remains the market of choice and provides ample liquidity for companies with a market cap of around $500m to $1bn.
As well as the WSE, AIM is also feeling the heat from Stockholm's exchange, which has already snapped up the three Baltic Exchanges and is now focusing more on the dynamic markets to the east. The leading fund in the region, East Capital, with some $6bn under management, chose Stockholm to IPO its latest vehicle, East Capital Explorer AB in November, which raised €365m on high demand. The stock began trading on the OMX Nordic Exchange Stockholm November 9.
Gert Tiivas, managing director of East Capital Explorer, says that the company looked at both Stockholm and AIM when choosing a venue for the flat. "AIM is where many similar private equity funds are listed, but there have been problems with liquidity. The reasons we opted for Stockholm were liquidity and accessibility. Whereas institutional investors can trade stock around the globe, for retail investors it is so much easier to access their home market. As we have a large retail investor base in Sweden and we believe this to be a very positive factor for liquidity, Stockholm was the natural choice," Tiivas says.
Karine Hirn, co-founder of East Capital, adds that Stockholm "turned out to be a wise decision, as East Capital Explorer got 13,500 shareholders, against the average 200-300 that similar vehicles have."
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