FUNDS: Fondul Proprietatea pushes for reform in Romania

By bne IntelliNews August 8, 2014

Clare Nuttall in Bucharest -


Since taking over management of Romania’s Fondul Proprietatea (Property Fund), Franklin Templeton Investment Management has been fighting to raise corporate governance standards and improve performance at the fund’s portfolio companies. As the fund prepares for a secondary listing on the London Stock Exchange, the fund’s managers are also pushing for reform on the domestic exchange.

Fondul Proprietatea, which was originally set up to compensate Romanians who had lost property and other assets under the former communist regime, currently has a total of over €3.4bn under management. The 58 companies in its portfolio include Romania’s largest oil and gas and power generation companies. After a series of IPOs – including Romania’s largest ever IPO of Electrica in June – some 20 of its portfolio companies, representing 60% of the portfolio value, are now listed.

Since Franklin Templeton became manager of Fondul Proprietatea in 2010, the investment firm has been working to improve corporate governance, through pushing for reforms to Romanian legislation as well as changes within its portfolio companies. “As a minority shareholder in most companies, our challenge is to protect and increase the value of the company. Better corporate governance helps to improve the operation of companies and as a result their value should also increase,” Grzegorz Konieczny, CEO Romania at Franklin Templeton Investment Management, tells bne.

“We use all the legal tools we have as a minority shareholder to influence the decision-making process, and make sure the boards and management of these companies are acting in the best interests of the company - not in the interest of other minority shareholders,” he says.

Along with the International Monetary Fund (IMF), Franklin Templeton was one of the strongest advocates for Romania to adopt a law on corporate governance for state-owned enterprises, which requires the government to appoint independent directors and put in place a transparent selection process for company managers. “We faced resistance at all levels, but in most cases we were successful in enforcing positive changes,” Konieczny says.

Bonus schemes and share options are also being used to incentivise board members and managers to act in the interests of their companies. Grzegorz Konieczny gives the example of electricity transmission company Transelectrica, the first of Fondul Proprietatea’s majority state-owned portfolio companies to introduce share options, which resulted in a speedy upturn in both the company’s performance and its share price. “Transelectrica has been listed for eight years, but after the incentive scheme came into effect there was a very fast and dramatic change in the attitude of management,” he says. “It was very encouraging. Even we were surprised that it happened so quickly.”

Resistance to change

Despite the example set at Transelectrica, Fondul Proprietatea’s managers continue to struggle against opposition from within the government and their portfolio companies. This was highlighted at shareholder meetings at Romgaz and Nuclearelectrica in July, when proposals for incentive schemes based on best international practice were voted down. However, Franklin Templeton is “still hopeful this mindset will change,” Konieczny says.

The other challenge for Fondul Proprietatea is “the size of the fund in comparison to the size and liquidity of the local market,” Konieczny says. As a result, Franklin Templeton has been looking for ways to contribute to the development of the Bucharest Stock Exchange (BSE).

With trading volumes at around €10m a day – compared with some €200m a day on the Warsaw Stock Exchange – the BSE is still a long way behind the region’s dominant exchange. However, Konieczny hopes the BSE could catch up with the Czech and Hungarian exchanges, which typically see daily trading volumes in the region of €20m-50m, within the next two years.

Since 2010, Franklin Templeton has already attracted €1.3bn of new investments into the Romanian market – the largest inflow of foreign funds in the BSE’s history. Foreign institutions are now the largest investors in the fund, accounting for 55% of total investment up from just 14% in December 2010. Meanwhile, the Romanian ministry of public finance has exited its shareholding and the share owned by Romanian individuals has dwindled from 31% to 21%.

Despite the progress in attracting international investors, Konieczny says it is still important to make the market easier for both domestic and foreign investors to access. A set of measures intended to make the BSE more competitive is currently being considered.

Plans for a secondary listing of Fondul Proprietatea on the London Stock Exchange are now in progress. According to Konieczny, “from our side we are ready to go after the summer,” but the fund is waiting for changes to the BSE’s regulations that will allow companies already listed on the BSE to make secondary listings abroad. “This will open the fund to many new investors without holdings in Romania,” Konieczny says. It is also expected to help bring down the fund’s large discount to NAV (net asset value), the reason for the lack of new investments over the last three years.

When new investments are made, Konieczny says, they will stick to the local market. Romania is now seeing a recovery in local consumption that is set to become a second engine for growth alongside industrial production for export. “Fondul Proprietatea is unusual in being a single-country fund rather than one of many East European investment funds,” Konieczny says. “Our focus is on Romania.”


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