INTERVIEW: Croatia's activist investor

By bne IntelliNews April 12, 2012

Guy Norton in Zagreb -

It speaks volumes about Croatia's topsy-turvy transition from Yugoslav-style socialism to Western European-style capitalism that a casual stroll along any high street in the soon-to-be EU state reveals an inconvenient truth: namely, you're far more likely to walk past a string of sports betting shops before you happen upon a stockbroker's office.

Your average Croatian, it seems, still places more faith - and more importantly his/her hard-earned cash - in the ability of Barcelona's superstar footballer Lionel Messi to deliver them better financial returns than the chief executives of the country's leading corporates or its mutual fund or pension fund managers could ever do.

No surprise then, that the country's narrow clique of stock market enthusiasts, much less the successful ones, are often viewed as being more financially suspicious figures than members of Croatia's betting mafia who regularly make headlines with their match-fixing activities around the globe. Nobody more so than Nenad Bakic, arguably the country's most successful share punter, whose investment acumen has helped to propel him into the ranks of Forbes magazine's top 50 richest Croats.

In most countries that performance would rank as an accolade, but truth be told he's often widely portrayed in parts of the Croatian media as being analogous with the notorious Miroslav Kutle, the politically well-connected Herzegovinian-Croat businessman who asset-stripped his way through the Croatian economy in the 1990s with the gusto of the proverbial plague of locusts. Kutle's criminal activities - he's currently a fugitive from Croatian justice in neighbouring Bosnia-Herzegovina - left tens of thousands of Croatians facing financial Armageddon and the dole queue. They're also arguably why many Croatians have so little faith in privatisation, which in the 1990s at least resulted in economic devastation rather than development.

In contrast, Bakic, a former maths professor at Zagreb University, contends that an equal number of his fellow countrymen and women will ultimately enjoy both monetary rewards and job security from his pioneering activist investor activities. "I don't want to be the only winner from my investments, I want everyone to be a winner," he says, claiming that the well-run, profitable companies he wants to see emerge from his investments will ultimately benefit the country as a whole and not just a select moneyed elite, himself included.

Nevertheless, as he freely admits, "Probably 99% of Croats still think that investing in stocks is a worse gamble than sports betting."

Suspicious wealth

Casually sipping a Coke Zero on the terrace of Gradska Kavana, an upscale café bordering Zagreb's Ban Jelacic central square, Bakic cuts a confident figure, totally unfazed by the media mauling he has received of late. His crime, in the eyes of certain sections of the Croatian press at least, is to have the temerity to suggest that historically poorly managed and loss-making state-controlled companies such as fertilizer firm Petrokemija should be auctioned off ASAP at the highest possible price to private sector bidders, so as to ensure that they are managed far more efficiently and profitably in the future.

That investment thesis, a reasonable enough call in many countries around the world, still widely ranks as the equivalent of financial heresy in Croatia where the economic orthodoxy still largely extols the questionable benefits of state ownership. But it's an idea whose time may have come, as the centre-left government that came to power at the start of this year seems to agree with Bakic and is reported to be contemplating the sale of at least part of its 51% stake in Petrokemija.

That almost revolutionary development, which Bakic says is nothing more than Kismet, has exposed him to widespread opprobrium. And not just from union leaders defending the cushy status quo at Petrokemija, but also from sections of the country's business media as well, which claim that Bakic is simply intent on pursuing short-term personal financial gain at the cost of the long-term economic interests of Croatia as a whole. "The mindset in Croatia is still generally that making a profit is bad, but that making a loss is good," says Bakic, for whom investing in Petrokemija is emblematic of what he terms his "deep-value activist shareholder approach."

Value investor

While some observers dismiss Bakic's terminology as nothing more than neo-liberal capitalist claptrap, he claims that his allegedly selfish aims are at heart simple, equitable and transparent ones. Namely, buy into a cheap, underperforming stock and then make enough of a nuisance of yourself so that the company's management actually makes the required changes in terms of both improving corporate governance and financial results so that other investors are willing to co-invest into the company, thus driving the share price up. "I typically take a 1-5% stake, looking for a minimum 300-400% return," says Bakic, adding that while he unashamedly hopes for a quick-fire payback on his investments, he's more than willing to tough it out over a number of years in order to see a return on his cash. "I always hope that my investments will prove profitable quickly, but I have a lot of stamina when it comes to fighting for my rights."

Bakic proudly boasts that in contrast to the country's often passive pension fund managers, he has no qualms in defying convention and firing off volleys of awkward questions at annual general meetings, which traditionally in Croatia have consisted of five minutes spent rubberstamping management decisions before everyone heads off for the day to quaff gallons of the local brandy and stuffing their faces with spit-roasted lamb.

Having bought a 4% stake in Petrokemija in 2008 at an average price of below HRK150 a share, Bakic has reaped a rich return from his bloody-mindedness. The stock trading was at HRK340 in early April, on the back of a return to profitability and the now widespread expectation that at least a part of it may be sold off to a foreign bidder that would vastly improve its financial performance, which has traditionally been a profit margin average of just 2-3% of total turnover. "I've been handsomely rewarded for swimming against the tide," says Bakic.

And it's this kind of return, he claims, that's attracting other Croatians to his cause. His blog Eclectica now regularly attracts 20,000 visits a day, which he says indicates there is now a growing public interest in his allegedly self-interested approach to playing the Croatian stock market.

INTERVIEW: Croatia's activist investor

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