Brad Wells of Concorde Capital -

Today we are far, far removed from the heyday of the modern Ukrainian IPO. Those of us around in 2007 remember it as a year of plenty, with listing aspirants and bankers revelling in the spoils of this newfound capital-raising mechanism; the year saw an unprecedented (and never repeated) flood of more than 20 IPOs that raised over $1.77bn. But that spigot of fast and easy money closed. Now potential new market entrants face a dramatically different reality and the good news is that they are rising to the challenge.

Back in 2007 and early 2008, the perception was that management looking to place a stake in their company simply had to follow a set list of expectations that included having financial reports, a placement prospectus, a road show and a pulse. Investors knew they were taking a big gamble on Ukraine, but at the same time nobody wanted to miss the big return bandwagon either. After all, Ukraine was the world's second best performing equity market in 2007, returning an eye-popping 135%!

What we have seen in 2010-11 and think will also be true going forward is that Ukrainian companies that want to list have to be an entirely different kind of animal. To even have a shot at raising money on equity capital markets they need to be much more fluent in investor-speak and demonstrate they have mechanisms in place to both respect the rights of minority shareholders and keep them informed.

The good news for international investors - Ukrainian companies seem to be getting the message.

Championing corporate governance

Let me back that up with some numbers. We released a report in October that rated corporate governance practices in 114 listed Ukrainian companies. The nine new market entrants we rated for the first time this year had an average score of 8.8 (on a 10-point scale), well above our overall survey average of 5.2. Two-thirds of those nine received our highest rating, 'Quality'.

What does this look like in practice? Well, the typical company we assigned a 'Quality' rating to publishes financial results according to International Financial Reporting Standards (IFRS), discloses its ownership and corporate structure, has low risk of dilution and strategic risks, and makes an effort in terms of investor relations. The sad reality is that while these are givens in other markets, they are still relatively rare in Ukraine.

Overall, we gave 13% of Ukrainian companies 'Quality' ratings this year (13%), which is twice as many as before the financial crisis, and at the same time we gave 23% companies a 'Poor' rating, which is nearly twice as few as in 2007.

The field of Ukrainian companies is still striking in terms of its diversity. On the one hand, there are these fresh faces that are truly setting the gold standard and adopting listing homes in Warsaw and London. But on the other hand, there is this unsettling number of bad apples typified by pocket Oligarch-controlled assets and companies unwittingly skupka-ed by investment banks into the market seemingly eons ago.

Ukraine's reputation for poor corporate governance is in many ways well-earned. Recent years have seen investors burned by the owners of such now-infamous companies such as Zaporizhstal and Sumy Frunze, to name just a few. Unsurprisingly, of the 114 companies we reviewed, we gave 25% of them our lowest rating, 'Poor'.

Assuming that the decline in 'Poor' ratings was due to upgrades in governance is incorrect and naive. Rather, the lion's share of attrition can probably be chalked up to the global financial crisis - the vast majority of the 'Poor' companies in our 2007 report were excluded due to delisting, bankruptcy, mergers or reductions in liquidity such that we no longer deem those companies' stock investible. As for the middle group ('Above Average', 'Average' and 'Below Average'), we assigned 34% of them the exact same rating as we did in 2007, another 34% moved up just one rating level, 24% of them were downgraded and only 8% moved up two levels. Quite underwhelming.

Are we entering a new age of accountability?

Clearly, the temptation to take advantage of a lax and malleable system of legal and judicial checks and balances, to push through decisions disadvantageous to minority shareholders, or to simply remain ambivalent is still present. A long listing history, in most cases, actually worked against the majority of companies we looked at.

While management and owners are keenly aware today that corporate governance is necessary to enter international equity markets, we still do not know whether those commitments will get relaxed or forgotten when it suits them. That these companies are listing in London or Warsaw, where compliance with corporate governance codes is mandatory or done on a comply-or-explain basis, should help. Only time will tell.

But at least in the next few years the stream of quality issuers making offerings should continue to talk about and promote high corporate governance standards.

Our full corporate governance report is available in both English and Russian languages on the Concorde Capital website (http://rs.concorde.ua/research/corporate-governance).

Brad Wells is the Corporate Governance Analyst at Concorde Capital