Ben Aris in Berlin -
East Capital, the leading fund manager in Central and Eastern Europe, broke new ground with the first listed fund targeting investment in all of emerging Europe. In November, the firm raised €391m by listing East Capital Explorer AB on the OMX Nordic Exchange in Stockholm. Strong demand led East Capital to increase the size of the IPO by 40% from the originally planned €260m.
East Capital has grown exponentially since it was founded in 1998 and its funds under management today stand at about €6bn compared with the initial €60m. East Capital got its start selling funds to Swedish retail investors who wanted exposure to Eastern Europe's recovery. However, as it has grown, some of the funds that East Capital has launched since then are inaccessible to the core retail clients that still account for two-thirds of the company's clients.
For example, the hugely successful Financial Explorer fund that buys minority stakes in up-and-coming regional banks with a consumer bent had a minimum investment of $1m - well beyond most retail investors' reach. Part of the philosophy behind the IPO, therefore, was to create a vehicle that would allow the retail investors to get a piece of even these larger institutional funds.
"Why did we do it this way? Usually, the barriers to funds are high, especially for retail investors - the minimums are several tens of thousands and there is a long lock-in period. The advantage of a listed fund is that there is daily liquidity and the hurdle is low for retail investors who want to invest," says Gert Tiivas, who manages the East Capital Explorer AB fund.
Strong retail showing
Swedish retail investors bought just under two-thirds of the IPO, with institutional investors buying the rest. Altogether, East Capital Explorer AB has about 13,500 shareholders, which is double the usual 600-800 investors that listed funds usually attract in an IPO.
East Capital Explorer AB will invest into all of the company's funds as well as some new vehicles. A quarter of the IPO money raised will be invested into East Capital's Bering funds - a string of private-equity vehicles that target places like Ukraine, the Balkans and Central Asia, as well as the bank fund.
Another quarter will go into the utilities fund that was launched on December 5, which is also a hybrid private-equity/portfolio fund. And the rest will be invested into new private equity funds that the company plans to set up.
Tiivas says that the retail investor base is a key part of the company's success and the company has been surprised at the resilience of retail investors during the rollercoaster ride that investments into Eastern Europe have had in the last decade. At the same time, institutional investors have unexpectedly taken up investments that were designed for the retail clients and visa versa.
"For example, the financial fund is a classic private-equity structure," says Tiivas. "There was also a consortium structure that allowed retail investors to come in. We were surprised to find that many of the institutional investors came into the fund via the consortium structure because it gives the liquidity. The fund is not listed but there is significant trading [over the counter] and the institutional investors liked having the option of being able to come in and out of the fund."
The company is keen to maintain its retail investment base, as the average Swede seems to have more stomach for the bone-jarring fluctuations than the professional. "We set up the Russian fund a few months before the 1998 financial crisis broke. You would have thought that the retail investors would be the first to pull their money out and the institutional investors would have a stronger stomach," says Tiivas. "In reality it worked just the other way round. The retail investors believed in the story and left their money in, while many of the institutional investors made for the door."
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